IRS Issues Proposed Rule Relating to DB Plan Funding Calculations

December 31, 2007 ( - The Treasury Department and the Internal Revenue Service (IRS) issued proposed regulations that provide employers sponsoring single-employer defined benefit plans with guidance regarding the measurement of pension assets and liabilities under the new funding rules enacted as part of the Pension Protection Act (PPA).

According to an IRS news release, the proposed regulations, together with proposed regulations related to mortality issued in May, proposed regulations relating to funding balances and funding-based benefit limitations issued in August (See IRS Issues Guidance on Benefit Limits for Underfunded DB Plans ), the yield curve guidance issued in October (See IRS Issues Guidance on Yield Curve to be Used for PPA Funding Rules ), and guidance on lump sum determinations issued in November will assist plan sponsors in determining the contribution requirements that apply to their defined benefit plans for the first year that the new funding rules apply. 

The regulations are proposed to be effective for plan years beginning on or after January 1, 2009.  However, the IRS said plan sponsors can rely on the proposed regulations for purposes of satisfying the requirements of section 430 for plan years beginning in 2008.

The proposed regulations would provide that the determination of the funding target and the target normal cost for a plan year is not permitted to take into account any limitations or anticipated limitations under section 436, the publication said. Also, the proposed regulations provide that plan administrative expenses paid or expected to be paid from plan assets for a plan year are not taken into account in determining a plan’s target normal cost and funding target for that plan year.

With respect to benefits provided by insurance, the proposed regulations would provide that, in general, a plan must reflect the liability for benefits that are funded through insurance contracts held by the plan in the plan’s funding target and target normal cost, and must include the value of the corresponding insurance contracts in plan assets. An alternative rule is provided whereby a plan is permitted to exclude benefits funded through certain insurance contracts purchased from an insurance company licensed under the laws of a state from the plan’s funding target and target normal cost and to exclude the corresponding insurance contracts from plan assets.

The proposed regulations would require all currently employed plan participants, formerly employed plan participants (including retirees and terminated vested participants), and other individuals currently entitled to benefits under the plan to be included in the valuation. The IRS has proposed that any reasonable technique can be used to determine the present value of the benefits expected to be paid during a plan year, based on the interest rates and mortality assumptions applicable for the plan year.

The publication includes other provisions of the proposed regulations and examples.

Public comment on the proposed regulations must be submitted by March 31 to: CC:PA:LPD:PR (REG – 139236 – 07), room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,

Washington, DC 20044, or sent electronically via .

The IRS said it intends to issue guidance in the near future indicating that the proposed effective date for these regulations should also apply for the proposed regulations relating to employer-specific mortality tables issued in May and the proposed regulations related to funding balances and funding based-benefit limitations under sections 430(f) and 436 issued in August. 

The proposed rule as published in the December 31, 2007 Federal Register is here .