IRS Provides Guidance on Alternative DRC Notice Requirements

May 7, 2004 ( - Plan sponsors electing the alternative deficit reduction contribution (DRC) have received guidance from the Internal Revenue Service (IRS) regarding the proper notification of plan participants, beneficiaries and the Pension Benefit Guaranty Corporation (PBGC).

Affected plan participants and beneficiaries must be provided with written notice about the election, which explains the context behind the announcement, the IRS outlined in  Announcement 2004-43 .   To assist plan sponsors, the IRS provides a template for explaining the context of the notice, which reads:

As permitted under a new law called the Pension Funding Equity Act of 2004, Pub. L. 108-218 (“PFEA’04”), [enter name of corporation] has made a special election that reduces the amount of contributions that are required to be made for [enter plan year] to [enter name of pension plan]. The election was made on [enter date of election]. The following information is being provided to you pursuant to the new law.”

Additionally, the notice to plan participants and beneficiaries must include details regarding:

  • the due dateof the Alternative DRC and amount by which required contribution is reduced;
  • a description of the benefits under the plan that are eligible for guarantee by the PBGC.

The announcement required for the PBGC requires similar notification, with statements about the date and amount of the contribution in addition tothe number of years it will take to restore the plan to full funding if the employer only makes the required minimum contributions.   Also to be included in the PBGC notice is the amount by which the plan is underfunded and the capitalization of the employer making the election.

DRC Provisions

As the rules stood prior to the passage of the Pension Funding Equity Act,companies that offer defined benefit pension plans were required to make additional contributions when they are less than 90% funded.  DRC rules require companies to close an underfunded gap on an accelerated basis, but that acceleration in funding flows can also impose a significant cash flow burden on a financially troubled employer since, during this period, they are also required to make their normally required pension contributions in addition to those imposed under the DRC requirements. 

The Act, which was passed on April 10, permitted alternativearrangements to satisfy DRC requirements   (See  Whew! Bush Signs Pension Relief ).   Outlined in the Act, Section 412(I)(12) of the Internal Revenue Code (IRC) was amended allowing certain employers who are required to make additional defined benefit contributions under Section 412(l) to elect a reduced amount of those contributions for certain plan years.   More specifically, the alternative arrangement applies to airlines and steel and iron manufactures.  Additionally, multiemployer plans that can certify a likely funding deficiency would be eligible to defer accounting for some investment losses and thereby avoid payment of excise taxes for underfunding

Companies that receive DRC relief will be required to contribute at least the amount necessary to fund the expected increase in current liability that results from benefits that have accrued during the year.   An election to make the alternative DRC for any plan year must be made by the end of the first quarter of that plan year.

Further guidance on how to make and file the election with the IRS and the Treasury Department were in announcement 2004-38, at