IRS Takes "Reasonable" Approach on Yield Curve

In a  special edition of IRS Employee Plan News , the IRS explained that result in noting that it would “not challenge a reasonable interpretation of an applicable statutory provision under §§430 or 436, as amended in 2008” (see  IRS Issues Interim Rules for Pension Funding Relief )- and also clarified that the yield curve can be used for any “applicable month” rather than the month preceding the plan year (as the American Benefits Council notes had previously been suggested in proposed regulations).   These rules now conform to the funding procedures required under the Pension Protection Act of 2006.

In the special issue, the IRS noted that final regulations are being drafted concerning interest rates to be used to value pension liabilities under §430, and that those final regulations generally will not be effective for plan years beginning before they are issued.   In accordance with Part 3 of Notice 2008-21, for plan years beginning before the effective date of the final regulations, plan sponsors must follow applicable statutory provisions and can rely on the proposed regulations for compliance with those statutory provisions.

“Therefore in selecting which month’s yield curve is permitted to be used for purposes of valuing pension liabilities in order to determine funding obligations for a plan year that begins before issuance of final regulations, employers may rely on a reasonable interpretation of the funding rules,” the IRS noted, going on to say that “Determining the plan’s liabilities for such a plan year using interest rates under the corporate bond yield curve (determined without regard to 24 month averaging) for any applicable month represents a reasonable interpretation of the new funding rules in the statute.”   Thus, for a calendar year plan with a January 1, 2009 valuation date, the IRS said it will not challenge the use of the monthly yield curve for January 2009, or any one of the four months immediately preceding January 2009.

The IRS said it anticipates that the final regulations will provide approval for any change in an interest rate election under §430(h)(2) for plan years beginning in 2009.

The Special Edition of the Employee Plan News is online at http://www.irs.gov/pub/irs-tege/se0309.pdf