IRS Issues Guidance on Yield Curve to be Used for PPA Funding Rules

In addition to providing guidance on the corporate bond yield curve and the segment rates required to compute the funding target and other items under § 430 of the Internal Revenue Code (IRC) and § 303 of the Employee Retirement Income Security Act (ERISA), Notice 2007-81 provides guidance on the interest rates for determining minimum present values as required under § 417(e)(3) of the IRC and § 205(g)(3) of ERISA. The guidance implements changes to the funding rules and minimum present value requirements made by the PPA.

The notice states that section 302(b) of the PPA amends the IRC to provide that the interest rates used for the determination of minimum present values are segment rates as computed prior to the PPA, but determined without regard to yield curve rates from the preceding 23 months. However, for plan years beginning in 2008, 2009, 2010, and 2011 these segment rates are blended with the applicable rate prior to the PPA in effect for plan years beginning in 2007.

The Secretary of the Treasury will publish each month the corporate bond yield curve and other required rates, as well as a description of the methodology used to determine the yield curve and rates in sufficient detail to enable plans to make reasonable predictions regarding the yield curve and rates for future months.

The notice explains that the minimum required contribution for a single employer plan is the sum of the plan’s target normal cost and the shortfall and waiver amortization charges for the year. A plan’s target normal cost is generally equal to the present value of all benefits expected to accrue or be earned under the plan during the plan year, and a plan’s funding target for a plan year is generally equal to the present value of all benefits accrued or earned under the plan as of the beginning of the plan year.

The notice says present value is generally determined using three interest rates (“segment rates”), each of which applies to cash flows during specified periods. Each segment rate is, for any month, the single rate of interest determined by the Secretary for such month on the basis of the applicable corporate bond yield curve for that month, taking into account only that portion of such yield curve applicable to that segment.

Prior to the PPA the Secretary prescribed a corporate bond yield curve applicable for each month as a yield curve which reflects a 24-month average (the average of the yield curve values for the preceding month and the prior 23 months) of the yields on investment grade corporate bonds with varying maturities and that are in the top three quality levels available.

IRS Notice 2007-81 details the methodology used by the Treasury in producing the yield curve and provides the full yield curve and various segment rates for August 2007 together with the 23 months of historical segment rates extending back to September of 2005. 

The notice is here .