Benefit Restrictions for Underfunded Pension Plans, 50544-50577 [07-4262]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 72, Number 169 (Friday, August 31, 2007)]
[Proposed Rules]
[Pages 50544-50577]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 07-4262]



[[Page 50543]]

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Part V





Department of the Treasury





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Internal Revenue Service



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26 CFR Part 1



Benefit Restrictions for Underfunded Pension Plans; Proposed Rule

Federal Register / Vol. 72 , No. 169 / Friday, August 31, 2007 / 
Proposed Rules

[[Page 50544]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-113891-07]
RIN 1545-BG72


Benefit Restrictions for Underfunded Pension Plans

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations providing guidance 
regarding the use of certain funding balances maintained for defined 
benefit pension plans and regarding benefit restrictions for certain 
underfunded defined benefit pension plans. The proposed regulations 
reflect changes made by the Pension Protection Act of 2006. These 
regulations affect sponsors, administrators, participants, and 
beneficiaries of single employer defined benefit pension plans.

DATES: Written or electronic comments and requests for a public hearing 
must be received by November 29, 2007.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-113891-07), room 
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. to 4 p.m. to CC:PA:LPD:PR (REG-
113891-07), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC, or sent electronically via the Federal 
eRulemaking Portal at https://www.regulations.gov (IRS REG-113891-07).

FOR FURTHER INFORMATION CONTACT: Lauson C. Green or Linda S.F. Marshall 
at (202) 622-6090; concerning submissions and requests for a public 
hearing, contact Kelly Banks at (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act

    The collections of information contained in this notice of proposed 
rulemaking have been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)). Comments on the collections of information should be 
sent to the Office of Management and Budget, Attn: Desk Officer for the 
Department of the Treasury, Office of Information and Regulatory 
Affairs, Washington, DC 20503, with copies to the Internal Revenue 
Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, 
Washington, DC 20224. Comments on the collection of information should 
be received by October 30, 2007. Comments are specifically requested 
concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the functions of the Internal Revenue Service, 
including whether the information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information;
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collections of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of service to provide information.
    The collection of information in this proposed regulation is in 
Sec.  1.430(f)-1(f) and Sec. Sec.  1.436-1(f) and 1.436-1(h). This 
information is required in order for a qualified defined benefit plan's 
enrolled actuary to provide a timely certification of the plan's AFTAP 
for each plan year to avoid certain benefit restrictions. In addition, 
these proposed regulations provide for several written elections to be 
made by the plan sponsor upon occasion. This information is voluntary 
to obtain a benefit. The likely respondents are qualified retirement 
plan sponsors and enrolled actuaries.
    Estimated total annual reporting burden: 60,000 hours.
    Estimated average annual burden hours per respondent: 0.75 hours.
    Estimated number of respondents: 80,000.
    Estimated annual frequency of responses: occasional.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    This document contains proposed Income Tax Regulations (26 CFR part 
1) under sections 430(f) and 436, as added to the Code by the Pension 
Protection Act of 2006 (PPA '06), Public Law 109-280, 120 Stat. 780.
    Section 412 contains minimum funding rules that generally apply to 
defined benefit plans.\1\ The minimum funding rules that apply 
specifically to single employer defined benefit plans (including 
multiple employer plans within the meaning of section 413(c)) are set 
forth in new section 430.
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    \1\ Section 302 of the Employee Retirement Income Security Act 
of 1974, as amended (ERISA) sets forth funding rules that are 
parallel to those in section 412 of the Code, section 303 of ERISA 
sets forth additional funding rules for defined benefit plans (other 
than multiemployer plans) that are parallel to those in section 430 
of the Code, and section 206(g) of ERISA sets forth funding-based 
limitations for defined benefit plans (other than multiemployer 
plans) that are parallel to those in section 436 of the Code. Under 
section 101 of Reorganization Plan No. 4 of 1978 (43 FR 47713) and 
section 302 of ERISA, the Secretary of the Treasury has interpretive 
jurisdiction over the subject matter addressed in these proposed 
regulations for purposes of ERISA, as well as the Code. Thus, these 
proposed Treasury regulations issued under sections 430(f) and 436 
of the Code apply as well for purposes of ERISA sections 303(f) and 
206(g), respectively.
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    Section 430 generally provides that the minimum required 
contribution for a year is the sum of the target normal cost for the 
year and the shortfall and waiver amortization charges. Under section 
430(f)(3), certain funding balances referred to as the prefunding 
balance and the funding standard carryover balance are permitted to be 
used to reduce the otherwise applicable minimum required contribution 
for a plan year in certain situations. Under section 430(f)(7), the 
funding standard carryover balance is based on the funding standard 
account credit balance as determined under section 412 for a plan as of 
the last day of the last plan year beginning in 2007. Under section 
430(f)(6), the prefunding balance represents the accumulation of the 
contributions that an employer makes for a plan year that exceed the 
minimum required contribution for the year. Thus, an employer that 
makes additional contributions for a plan year is permitted in certain 
circumstances to use those excess contributions in order to satisfy the 
minimum funding requirement in a subsequent plan year.
    The treatment of these balances under section 430 reflects 
congressional concern with the treatment of a funding standard account 
credit balance under the section 412 rules in effect prior to PPA '06. 
Accordingly, section 430(f)(3) sets forth new limits on the ability of 
a

[[Page 50545]]

poorly funded plan to use the prefunding balance and the funding 
standard carryover balance for a plan year. In addition, section 
430(f)(4) requires that the prefunding balance and the funding standard 
carryover balance be subtracted from the value of plan assets for 
certain purposes (including the determination of the plan's funding 
target attainment percentage (FTAP), as defined under section 
430(d)(2)) and section 430(f)(8) requires that the prefunding balance 
and the funding standard carryover balance be adjusted for actual 
investment return on the plan assets. In order to give employers the 
opportunity to minimize the impact of the requirement to subtract the 
prefunding balance and funding standard carryover balance from the plan 
assets, section 430(f)(5) permits an employer to elect to reduce the 
balances.
    Section 401(a)(29) requires that a defined benefit plan (other than 
a multiemployer plan) satisfy the requirements of section 436. Section 
436 sets forth a series of limitations on the accrual and payment of 
benefits under an underfunded plan. Under section 436(g), these 
limitations (other than the limitations on accelerated benefit payments 
under section 436(d)) do not apply to a plan for the first 5 plan years 
of the plan, taking into account any predecessor plan.
    Section 436(b) sets forth a limitation on plant shutdown and other 
unpredictable contingent event benefits in situations where the plan's 
adjusted funding target attainment percentage (AFTAP) for the plan year 
is less than 60 percent or would be less than 60 percent taking into 
account the occurrence of the event. For this purpose, an 
``unpredictable contingent event benefit'' means any benefit payable 
solely by reason of (1) a plant shutdown (or a similar event) or (2) an 
event other than attainment of age, performance of service, receipt or 
derivation of compensation, or the occurrence of death or disability. 
Under section 436(b)(2), the limitation does not apply for a plan year 
if the plan sponsor makes a specified contribution (in addition to any 
minimum required contribution). If the AFTAP for a plan year is less 
than 60 percent, then the specified contribution is equal to the amount 
of the increase in the plan's funding target for the plan year 
attributable to the occurrence of the event. If the AFTAP for a plan 
year is 60 percent or more but would be less than 60 percent taking 
into account the occurrence of the event, then the specified 
contribution is the amount sufficient to result in an AFTAP of 60 
percent taking into account the occurrence of the event.
    Under section 436(c), a plan amendment that has the effect of 
increasing the liabilities of the plan by reason of any increase in 
benefits (including changes in vesting) may not take effect if the 
plan's AFTAP for the plan year is less than 80 percent or would be less 
than 80 percent taking into account the amendment. Under section 
436(c)(2), the limitation does not apply for a plan year if the plan 
sponsor makes a specified contribution (in addition to any minimum 
required contribution). If the plan's AFTAP for the plan year is less 
than 80 percent, then the specified contribution is equal to the amount 
of the increase in the plan's funding target for the plan year 
attributable to the amendment. If the plan's AFTAP for the plan year is 
80 percent or more but would be less than 80 percent taking into 
account the amendment, then the specified contribution is the amount 
sufficient to result in an AFTAP of 80 percent taking into account the 
amendment. In addition, under section 436(c)(3), the limitation does 
not apply to an amendment that provides for a benefit increase under a 
formula not based on compensation, but only if the rate of increase 
does not exceed the contemporaneous rate of increase in average wages 
of the participants covered by the amendment.
    Under section 436(d), a plan is required to set forth certain 
limitations on accelerated benefit distributions. If the plan's AFTAP 
for a plan year is less than 60 percent, the plan must not make any 
prohibited payments after the valuation date for the plan year. If the 
plan's AFTAP for a plan year is at least 60 percent but is less than 80 
percent, the plan must not pay any prohibited payment to the extent the 
payment exceeds the lesser of (1) 50 percent of the amount otherwise 
payable under the plan and (2) the present value of the maximum PBGC 
guarantee with respect to a participant. In addition, if the plan 
sponsor is in bankruptcy proceedings, the plan may not pay any 
prohibited payment unless the plan's enrolled actuary certifies that 
the AFTAP of the plan is at least 100 percent. However, section 436(d) 
does not apply to a plan for a plan year if the terms of the plan 
provide for no benefit accruals with respect to any participant for the 
period beginning on September 1, 2005, and extending throughout the 
plan year.
    Under section 436(d)(5), a ``prohibited payment'' is (1) any 
payment, in excess of the monthly amount paid under a single life 
annuity (plus any social security supplements that are provided under 
the plan), to a participant or beneficiary, (2) any payment for the 
purchase of an irrevocable commitment from an insurer to pay benefits 
(an annuity contract), or (3) any other payment specified by the 
Secretary by regulations.
    Under section 436(e), a plan is required to provide that if the 
plan's AFTAP is less than 60 percent for a plan year, all future 
benefit accruals under the plan must cease as of the valuation date for 
the plan year. Under section 436(e)(2), the limitation ceases to apply 
with respect to any plan year, effective as of the first day of the 
plan year, if the plan sponsor makes a contribution (in addition to any 
minimum required contribution for the plan year) equal to the amount 
sufficient to result in an AFTAP of 60 percent.
    Section 436(f) sets forth a series of rules under which the 
limitations of section 436 will not apply to a plan. Under section 
436(f)(1), an employer is permitted to provide security to the plan (in 
the form of a surety bond, cash, or other forms satisfactory to the 
Treasury Department and the parties involved) that is treated as an 
asset of the plan for purposes of determining the plan's AFTAP. Under 
section 436(f)(2), if an employer uses the option in section 436(b)(2), 
436(c)(2), or 436(e)(2) to make the specified contribution that would 
avoid a limitation under section 436, the specified contribution must 
be an actual contribution and the employer may not use a prefunding 
balance or funding standard carryover balance in lieu of making the 
specified contribution. In addition, a contribution to avoid a benefit 
limitation is disregarded in determining whether the minimum required 
contribution under section 430 has been made and in determining the 
plan's prefunding balance.
    Section 436(f)(3) describes certain situations in which an employer 
is deemed to have made the election in section 430(f)(5) to reduce the 
plan's funding standard carryover balance or prefunding balance. Such 
an election has the effect of increasing the plan's FTAP (because the 
result of the election is a higher asset value used to determine the 
FTAP) and could lead to the plan not being subject to a benefit 
limitation under section 436. In particular, if the limitation under 
section 436(d) would otherwise apply to a plan, the plan sponsor is 
treated as having made an election (a deemed election) to reduce any 
prefunding balance or funding standard carryover balance by the amount 
necessary to prevent the benefit limitation from applying. A comparable 
rule applies to the other benefit limitations under sections 436(b),

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436(c), and 436(e), but only in the case of a plan maintained pursuant 
to a collective bargaining agreement. In either case, this deeming rule 
applies only if the prefunding balance and funding standard carryover 
balances are large enough to avoid the application of a section 436 
limitation.
    Section 436(h) sets forth a series of presumptions that apply 
during the portion of the plan year that is before the plan's enrolled 
actuary has certified the plan's AFTAP for the year. Under section 
436(h)(1), if a plan was subject to a limitation under section 436(b), 
436(c), 436(d), or 436(e) for the plan year preceding the current plan 
year, the plan's AFTAP for the current year is presumed to be the same 
as for the preceding year until the plan's enrolled actuary certifies 
the plan's AFTAP for the current year. Under section 436(h)(3), if any 
of these limitations did not apply to the plan for the preceding year, 
but the plan's AFTAP for the preceding year was within 10 percentage 
points of the limitation's threshold, the plan's AFTAP is presumed to 
be reduced by 10 percentage points as of the first day of the 4th month 
of the current plan year, unless the plan's enrolled actuary has 
certified the plan's AFTAP for the current year by that day (and that 
day is deemed to be the plan's valuation date for purposes of applying 
the benefit limitations). If the plan's enrolled actuary has not 
certified the plan's AFTAP by the first day of the 10th month of the 
current plan year, section 436(h)(2) provides that the plan's AFTAP is 
conclusively presumed to be less than 60 percent as of that day (and 
that day is deemed to be the valuation date for purposes of applying 
the benefit limitations).
    Under section 436(i), unless the plan provides otherwise, if a 
limitation on prohibited payments or future benefit accruals under 
section 436(d) or (e) ceases to apply to a plan, all such payments and 
benefit accruals resume, effective as of the day following the close of 
the limitation period.
    Section 436(j) provides definitions that are used under section 
436, including the plan's AFTAP. In general, the plan's AFTAP is based 
on the plan's FTAP for the plan year. However, the plan's AFTAP is 
determined by adding the aggregate amount of purchases of annuities for 
employees other than highly compensated employees (within the meaning 
of section 414(q)) made by the plan during the two preceding plan years 
to the numerator and the denominator of the fraction used to determine 
the FTAP.
    In addition, section 436(j)(3) provides a special rule which 
applies to certain well-funded plans under which the plan's FTAP for 
purposes of section 436 (and hence the plan's AFTAP) is determined by 
using the plan's assets without reduction for the prefunding balance 
and the funding standard carryover balance. Section 436(j)(3)(B) sets 
forth a transition rule for determining eligibility for this special 
rule.
    Section 436(k) provides that, for plan years that begin in 2008, 
the determination of the plan's FTAP for the preceding year is to be 
made pursuant to guidance issued by the Secretary.

Explanation of Provisions

I. Section 430(f)--Effect of Prefunding Balance and Funding Standard 
Carryover Balance

A. Overview
    1. In general. The proposed regulations would be the second in a 
series of proposed regulations under new section 430.\2\ These 
regulations would provide guidance on the application of section 
430(f), relating to the establishment and maintenance of a funding 
standard carryover balance and a prefunding balance for purposes of 
sections 430 and 436. The Treasury Department and the IRS intend to 
issue additional proposed regulations relating to other portions of the 
rules under section 430 later in 2007.
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    \2\ Proposed regulation Sec. Sec.  1.430(h)(3)-1 and 
1.430(h)(3)-2, relating to the mortality tables used to determine 
liabilities under section 430(h)(3), were issued May 29, 2007 (REG-
143601-06, 72 FR 29456).
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    2. Multiple employer plans. The proposed regulations under section 
430(f) apply to plans subject to section 412 that are maintained by one 
employer or a controlled group of employers and to multiple employer 
plans within the meaning of section 413(c). In the case of a multiple 
employer plan to which section 413(c)(4)(A) applies, the rules under 
the proposed regulations would be applied separately for each employer 
under the plan, as if each employer maintained a separate plan. Thus, 
each employer under such a multiple employer plan may have a separate 
funding standard carryover balance and a prefunding balance for the 
plan. In the case of a multiple employer plan to which section 
413(c)(4)(A) does not apply (that is, a plan described in section 
413(c)(4)(B) that has not made the election for section 413(c)(4)(A) to 
apply), the proposed regulations under section 430(f) would apply as if 
all participants in the plan were employed by a single employer.
B. Establishment of Prefunding Balance and Funding Standard Carryover 
Balance
    The proposed regulations would provide that an employer is 
permitted to establish a prefunding balance for a plan that represents 
the accumulation of contributions made for plan years beginning on or 
after the effective date of section 430 with respect to the plan (the 
first effective plan year) that are in excess of the minimum required 
contributions (determined without regard to the prefunding balance and 
funding standard carryover balance) for those plan years. Specifically, 
for the first effective plan year of a plan, the prefunding balance is 
initialized at zero dollars and an employer is permitted to elect to 
add some or all of the excess contributions made to a plan for each 
plan year to the prefunding balance as of the first day of the next 
plan year. For this purpose, the excess contributions are generally 
determined as the amount by which the employer contributions to the 
plan for the plan year exceed the minimum required contribution for the 
plan year, with appropriate adjustments for interest determined at the 
effective interest rate under section 430(h)(2)(A). However, the 
proposed regulations would provide that any contribution that is made 
to avoid the application of a benefit limitation under section 436 is 
not taken into account in determining the amount of excess 
contributions.
    The proposed regulations would also provide that the minimum 
required contribution for purposes of determining the amount of excess 
contributions for the year is determined without regard to any offset 
of the minimum required contribution for the year as a result of the 
use of the prefunding or funding standard carryover balances. 
Accordingly, an employer would not be permitted to add to the 
prefunding balance any amount of contributions that are ``excess'' by 
reason of an offset of the minimum required contribution for the year 
through the use of the prefunding balance or funding standard carryover 
balance. This prohibition precludes an employer from avoiding the 
requirement to adjust the prefunding balance and funding standard 
carryover balance by the actual rate of return on plan assets in the 
situation where the plan assets have experienced a loss (or a rate of 
return that is lower than the effective interest rate that is used for 
interest adjustments with respect to minimum required contributions for 
the plan year).

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    The proposed regulations would provide that the funding standard 
carryover balance is initialized as the balance in the funding standard 
account as of the last day of the last plan year before section 430 
applies to a plan (the pre-effective plan year). This is generally the 
last plan year beginning in 2007, but could be a later year in the case 
of a plan to which a delayed effective date applies under the rules of 
sections 104 through 106 of PPA '06.
C. Maintenance of Prefunding Balance and Funding Standard Carryover 
Balance
    The proposed regulations would provide that a plan's prefunding 
balance and funding standard carryover balance as of the beginning of a 
plan year are adjusted to reflect the actual rate of return on plan 
assets for the plan year. This calculation of the actual rate of return 
on plan assets for the plan year is determined on the basis of fair 
market value and must take into account the amount and timing of all 
contributions, distributions, and other plan payments made during the 
year. The adjustment for investment return is applied to the prefunding 
balance and funding standard carryover balance after any reductions to 
those balances as described under the following two headings in this 
preamble. In addition, the proposed regulations would provide special 
rules in the case of a plan with a valuation date that is not the first 
day of the plan year.
D. Use of Prefunding Balance and Funding Standard Carryover Balance To 
Offset Minimum Funding Requirements for a Year
    The proposed regulations would provide that the employer may elect 
to use some or all of the prefunding balance or funding standard 
carryover balance to offset the otherwise applicable minimum required 
contribution for a plan year, provided that the plan met a funding 
percentage threshold for the preceding plan year. Specifically, an 
employer is permitted to make such an election only if the plan's prior 
year funding ratio was at least 80 percent. For this purpose, the 
plan's prior year funding ratio generally is a fraction (expressed as a 
percentage), the numerator of which is the value of plan assets on the 
valuation date for the preceding plan year, reduced by the amount of 
any prefunding balance (but not the amount of any funding standard 
carryover balance), and the denominator of which is the funding target 
of the plan for the preceding plan year (determined without regard to 
the at-risk rules of section 430(i)(1)).
    The proposed regulations would provide a transition rule to 
determine a plan's prior year funding ratio for the first effective 
plan year. Under this transition rule, the current liability for the 
plan for the pre-effective plan year is substituted for the funding 
target of the plan for that plan year. In addition, the transition rule 
provides that the value of plan assets is determined under section 
412(c)(2) as in effect for that pre-effective plan year, except that 
the value of plan assets must be limited so that it is not less than 90 
percent and not more than 110 percent of the fair market value of plan 
assets.
    The proposed regulations would reflect the rule in section 
430(f)(3)(B) that requires the plan sponsor to have reduced the funding 
standard carryover balance in full (either by using the funding 
standard carryover balance to offset the minimum required contribution 
for a year or through a voluntary reduction under section 430(f)(5)) 
before the prefunding balance is permitted to be used to offset a 
current year minimum funding requirement.
E. Subtraction From Plan Assets and Employer Election To Reduce 
Balances
    The proposed regulations would reflect the rules under section 
430(f)(4) which provide that the prefunding balance and funding 
standard carryover balance are subtracted from the plan assets for 
certain purposes. These include the determination of the FTAP, which is 
also relevant for purposes of applying the benefit limitations of 
section 436.
    In accordance with section 430(f)(4)(A), the proposed regulations 
would provide that the amount of the prefunding balance is subtracted 
from the value of plan assets for purposes of determining whether a 
plan is exempt from the requirement to establish a new shortfall 
amortization base under section 430(c)(5) only if an election to use 
the prefunding balance to offset the minimum required contribution is 
made for the plan year. In addition, pursuant to section 
430(f)(4)(B)(ii), the proposed regulations would provide that the 
prefunding balance and funding standard carryover balance are not 
subtracted from plan assets for purposes of determining the funding 
shortfall under section 430(c)(4) to the extent that there is a binding 
written agreement with the Pension Benefit Guaranty Corporation (PBGC) 
which provides that all or a portion of those balances cannot be used 
to offset the minimum required contribution for a plan year. For this 
purpose, an agreement with the PBGC is taken into account with respect 
to a plan year only if the agreement was executed prior to the 
valuation date for the plan year.
    In addition, section 436(j) sets forth an exception from the 
requirement to subtract the plan's prefunding balance and funding 
standard carryover balance from the value of plan assets in determining 
a plan's FTAP for purposes of the benefit limitation rules of section 
436 provided that the plan's FTAP would meet certain standards if it 
were calculated without subtracting the balances from plan assets.
    Section 430(f)(5) provides that an employer may elect to reduce the 
amount of the prefunding balance and the funding standard carryover 
balance. This will have the effect of increasing the plan assets for 
various purposes. For example, the increase in plan assets will 
increase the FTAP, which may allow the plan to avoid the application of 
section 436 limitations. The proposed regulations would reflect the 
rule in section 430(f)(5)(B) that requires the employer to reduce the 
funding standard carryover balance in full (either by using the funding 
standard carryover balance to offset the minimum required contribution 
for a year or through a voluntary reduction under section 430(f)(5)) 
before any reduction is permitted for the prefunding balance.
F. Elections Under Section 430(f)
    The proposed regulations would provide that an election under 
section 430(f) is made by the plan sponsor by providing written 
notification of the election to the plan's enrolled actuary and the 
plan administrator, must be irrevocable when made, and must satisfy 
certain timing rules. The written notification must set forth the 
relevant details of the election, including the specific amounts 
involved in the election with respect to the prefunding balance and 
funding standard carryover balance. An election under section 430(f) 
generally must be made on or before the due date (with extensions) for 
the filing of the plan's Form 5500 ``Annual Return/Report of Employee 
Benefit Plan'' for the plan year to which the election relates (or, in 
the case of a plan not required to file a Form 5500 for the plan year, 
before the last day of the seventh month after the end of the plan year 
to which the election relates). For this purpose, an election to add to 
the prefunding balance relates to the plan year for which excess 
contributions were made. However, the proposed regulations would 
require any section 430(f)(5) election to reduce a portion of the 
prefunding balance or funding standard carryover balance for a plan 
year to be made by the end of the plan

[[Page 50548]]

year to which the election relates. For example, in the case of a 
calendar year plan required to file Form 5500, an election to add to 
the prefunding balance as of the first day of the 2010 plan year (in an 
amount not in excess of the 2009 interest-adjusted excess 
contributions), must be made no later than the due date for filing the 
2009 Form 5500 (with extensions) while an election to reduce the 
prefunding balance as of the first day of the 2010 plan year must be 
made by the end of the 2010 plan year. In both cases, the election 
would be reported on the 2010 Form 5500 (Schedule SB) that would be 
filed in 2011.
    The proposed regulations would provide that, for purposes of 
elections under section 430(f), any reference in the proposed 
regulations to the plan sponsor generally means the employer or 
employers responsible for making contributions to the plan. However, in 
the case of elections under section 430(f) for multiple employer plans 
to which section 413(c)(4)(A) does not apply, any reference in the 
proposed regulations to the plan sponsor means the plan administrator 
within the meaning of section 414(g).

II. Section 436--Limits on Benefits and Benefit Accruals Under Single 
Employer Defined Benefit Plans

A. Overview and General Rules
    1. In general. The proposed regulations would set forth the rules 
that a defined benefit pension plan that is subject to section 412 and 
that is not a multiemployer plan must satisfy in order to comply with 
the requirement in section 401(a)(29) that the plan meet the 
requirements of section 436. This requirement is a qualification 
requirement. A plan satisfies the requirements of section 436 only if 
the plan meets the requirements of these regulations.
    2. New plans. In accordance with section 436(g), the proposed 
regulations would provide that the limitations described in sections 
436(b), 436(c), and 436(e) do not apply to a plan for the first five 
plan years of the plan. For purposes of applying this new plan rule, 
plan years under a plan are aggregated with plan years under a 
predecessor plan. Thus, the only benefit limitation that could apply 
under a plan that is not a successor plan during the first five years 
of its existence is the section 436(d) limitation applicable to 
accelerated benefit payments (such as single sum distributions).
    3. Multiple employer plans. The proposed regulations under section 
436 apply to plans maintained by one employer (including a controlled 
group of employers) and to multiple employer plans (within the meaning 
of section 413(c)). In the case of a multiple employer plan to which 
section 413(c)(4)(A) applies, the rules under the proposed regulations 
would be applied separately for each employer under the plan, as if 
each employer maintained a separate plan. Thus, the benefit limitations 
under section 436 could apply differently to employees of different 
employers under such a multiple employer plan. In the case of a 
multiple employer plan to which section 413(c)(4)(A) does not apply 
(that is, a plan described in section 413(c)(4)(B) that has not made 
the election for section 413(c)(4)(A) to apply), the proposed 
regulations under section 436 would apply as if all participants in the 
plan were employed by a single employer.
    4. Treatment of plan as of close of prohibited or cessation period. 
The proposed regulations would provide that, if a limitation on 
accelerated benefit payments under section 436(d) (such as single sum 
distributions) applies to a plan as of a section 436 measurement date, 
but that limit subsequently ceases to apply to the plan as of a later 
section 436 measurement date, then the limitation does not apply to 
benefits with annuity starting dates that are on or after that later 
section 436 measurement date. In addition, the proposed regulations 
would provide that, if a limitation on benefit accruals under section 
436(e) applies to a plan, unless the plan provides otherwise, benefit 
accruals under the plan will resume effective as of the section 436 
measurement date as of which benefit accruals are no longer restricted.
    With respect to a participant who had an annuity starting date 
within a period during which the accelerated benefit payment limitation 
rules of section 436(d) applied to the plan, once the limitation ceases 
to apply, the participant's benefits will continue to be paid in the 
form previously elected unless the plan permits the participant to be 
offered a new election which would modify the prior election. The 
proposed regulations would permit a plan to provide that the 
participant will be offered the opportunity to have a new election 
under which the form of benefit previously elected may be modified, 
subject to applicable qualification requirements, and that new election 
will constitute a new annuity starting date for purposes of section 
417. Similarly, a plan is permitted to be amended to provide that any 
benefit accruals that were limited under the rules of section 436(e) 
will be credited under the plan once the limitation no longer applies, 
subject to applicable qualification requirements. If a plan provides 
for the restoration of benefit accruals for the period of the 
limitation under preexisting plan terms, the plan is treated as having 
adopted an amendment that has the effect of increasing liabilities 
under the plan if the period of the limitation exceeded 12 months. 
Whether a plan is amended or is treated as having been amended as 
described above, the amendment or pre-existing plan provision is 
subject to the limitations of section 436(c).\3\
---------------------------------------------------------------------------

    \3\ The PBGC has informed the IRS and the Treasury Department 
that it expects similarly to treat such an automatic restoration of 
missed benefit accruals as a plan amendment.
---------------------------------------------------------------------------

    In addition, the proposed regulations would provide that a plan is 
permitted to be amended to provide that any unpredictable contingent 
event benefits that were limited under the rules of section 436(b) will 
be paid or reinstated when the limitation no longer applies, subject to 
applicable qualification requirements. Any such amendment is subject to 
the limitations of section 436(c). A plan is not permitted to provide 
for restoration of any such unpredictable contingent event benefits 
without an amendment that complies with section 436(c).
    5. Deemed election to reduce prefunding and funding standard 
carryover balances. The proposed regulations would provide that, if a 
limitation on accelerated benefit payments under section 436(d) would 
otherwise apply to a plan, the plan sponsor is treated as having made 
an election under section 430(f) to reduce the prefunding balance or 
funding standard carryover balance by such amount as is necessary for 
the AFTAP to be at or above the applicable threshold (60, 80, or 100 
percent, as the case may be) in order for the benefit limitation not to 
apply to the plan. In such a case, the plan sponsor is treated as 
having made that election on the section 436 measurement date as of 
which the benefit limitation would otherwise apply. This deemed 
election applies if the plan provides for accelerated distributions 
that would be limited in a plan year, regardless of whether a plan 
participant is eligible or elects to receive such a distribution during 
the plan year (but does not apply if the plan does not provide for any 
accelerated distributions that are subject to the benefit limitation). 
However, the deemed reduction applies with respect to this limitation 
only if the prefunding and funding standard carryover balances to be 
reduced are large enough

[[Page 50549]]

to avoid the application of the limitation. Thus, no reduction of 
prefunding and funding standard carryover balances is required if the 
limitation would still apply for a year even if those balances were 
reduced to zero.
    In addition, the proposed regulations would provide that, in the 
case of a plan maintained pursuant to one or more collective bargaining 
agreements between an employee representative and one or more employers 
in which a benefit limitation under section 436(b), 436(c), or 436(e) 
would otherwise apply to the plan, the employer is treated for purposes 
of section 436 as having made an election under section 430(f) to 
reduce the prefunding balance or funding standard carryover balance by 
such amount as is necessary for the AFTAP to be at or above the 
applicable threshold for the benefit limitation not to apply to the 
plan, taking into account the unpredictable contingent event benefits 
or plan amendment, as applicable. The proposed regulations would 
provide that, in the case of a plan with respect to which collective 
bargaining agreements apply to some, but not all, of the plan 
participants, the plan is considered a collectively bargained plan for 
purposes of this provision if at least 25 percent of the participants 
in the plan are members of the collective bargaining units for whom the 
benefit levels under the plan are specified under the collective 
bargaining agreements. As in the case of the deemed reduction in 
funding balances for the accelerated benefit distributions under 
section 436(d), the deemed reduction applies only if the prefunding and 
funding standard carryover balances to be reduced are large enough to 
avoid the application of the limitation under section 436(b), 436(c), 
or 436(e), as applicable.
    If the mandatory reduction of funding balances applies to a plan, 
the employer is treated as having made that election on the date as of 
which the applicable benefit restriction would otherwise apply. In 
addition, the proposed regulations would provide that, if a plan 
(whether or not collectively bargained) is presumed to have an AFTAP of 
less than 60 percent under the section 436(h) presumption rules, then 
the plan is treated as if the plan's funding standard carryover balance 
and prefunding balance are insufficient to increase the plan's AFTAP to 
the threshold percentage.
    6. Section 436 measurement date. The ``section 436 measurement 
date'' is a defined term under the proposed regulations that is used to 
describe the date that stops or starts the application of the 
limitations of sections 436(d) and 436(e) and is also used for 
calculations with respect to applying the limitations of sections 
436(b) and 436(c). The regulations would provide that the date of the 
enrolled actuary's certification of the AFTAP for the plan year is a 
section 436 measurement date if it occurs within the first nine months 
of the plan year. If the date of an enrolled actuary's certification of 
the AFTAP is between the first day of the 10th month of a plan year and 
the last day of that plan year, that date is not a section 436 
measurement date for purposes of the limitations of section 436(d) or 
436(e) because, in that case, the plan's AFTAP is presumed to be under 
60 percent (however, receipt of the enrolled actuary's certification 
during that period impacts the plan's presumed ``carryover'' AFTAP for 
the following year). The proposed regulations would provide that a 
section 436 measurement date occurs where there is a change in the 
plan's AFTAP under the presumption rules of section 436(h). In 
addition, the proposed regulations would provide a series of rules in 
cases where the enrolled actuary's certification of the AFTAP for a 
plan year is made after the end of the plan year, as described below 
under the heading ``Presumed underfunding for purposes of benefit 
limitations.''
B. Limitation on Plant Shutdown and Other Unpredictable Contingent 
Event Benefits
    In accordance with section 436(b), the proposed regulations would 
provide that a plan that provides for any unpredictable contingent 
event benefit \4\ must provide that the benefit will not be paid to a 
plan participant during a plan year if the AFTAP for the plan year is 
less than 60 percent (or is 60 percent or more but would be less than 
60 percent if the benefits attributable to the unpredictable contingent 
event were taken into account in determining the AFTAP). However, this 
prohibition on payment of unpredictable contingent event benefits no 
longer applies for a plan year, effective as of the first day of the 
plan year, if the employer makes the contribution specified in section 
436(b)(2), as described in paragraph F in this preamble.
---------------------------------------------------------------------------

    \4\ See also Notice 2007-14, IRB 501, (see Sec.  601.601(d)(2) 
of this chapter) requesting comments on the types of benefits that 
are permitted to be provided in a qualified defined benefit plan, 
including benefits payable in the event of a plant shutdown or 
similar event.
---------------------------------------------------------------------------

    For this purpose, the proposed regulations would provide that an 
``unpredictable contingent event benefit'' means any benefit or 
increase in benefits to the extent the benefit or increase would not be 
payable but for the occurrence of an unpredictable contingent event, 
and an ``unpredictable contingent event'' means a plant shutdown 
(whether full or partial) or similar event, or an event other than the 
attainment of any age, performance of any service, receipt or 
derivation of any compensation, or the occurrence of death or 
disability. Thus, for example, if a plan provides for an unreduced 
early retirement benefit upon the occurrence of an event other than the 
attainment of any age, performance of any service, receipt or 
derivation of any compensation, or the occurrence of death or 
disability, then that unreduced early retirement benefit is an 
unpredictable contingent event benefit to the extent of any portion of 
the benefit that would not be payable but for the occurrence of the 
event, even if the remainder of the benefit is payable without regard 
to the occurrence of the event. Similarly, an unpredictable contingent 
event benefit under the proposed regulations includes a benefit payable 
upon the presence of circumstances specified in the plan (other than 
the attainment of any age, performance of any service, receipt or 
derivation of any compensation, or the occurrence of death or 
disability), so that a plan that provides those benefits upon a 
participant's severance from employment in those circumstances, but not 
upon a severance from employment that does not involve those 
circumstances, is providing an unpredictable contingent event benefit.
    Unpredictable contingent event benefits attributable to a plant 
shutdown or other unpredictable contingent event that occurred within a 
period during which no limitation under section 436(b) applied to the 
plan are not affected by the limitation as it applies in a subsequent 
period. For example, if a plant shutdown occurs in 2010 and a plan's 
funded status is such that its shutdown benefits are not subject to the 
limitation for that plan year, benefits paid pursuant to that shutdown 
are permitted to be paid in a later plan year even if the plan's AFTAP 
for the subsequent year is less than 60 percent. Conversely, if a plant 
shutdown occurs in 2010 and a plan's funded status is such that its 
shutdown benefits are subject to the limitation under section 436(b) 
for that plan year and cannot be paid, those shutdown benefits related 
to the 2010 plant shutdown are not permitted to be paid in a later year 
even if the plan's AFTAP for the later year is at or above the 60 
percent threshold for the section 436(b) limitation (subject to

[[Page 50550]]

the rules permitting plan amendments to reinstate previously restricted 
benefits, including unpredictable contingent event benefits, as 
described in paragraph II.A.4 of this preamble).
C. Limitations on Plan Amendments Increasing Liability for Benefits
    In accordance with section 436(c), the proposed regulations would 
provide that a plan satisfies the limitation on plan amendments 
increasing liability for benefits only if the plan provides that no 
amendment to the plan that has the effect of increasing liabilities of 
the plan by reason of increases in benefits, establishment of new 
benefits, changing the rate of benefit accrual, or changing the rate at 
which benefits become nonforfeitable is permitted to take effect if the 
AFTAP for the plan year is less than 80 percent (or is 80 percent or 
more but would be less than 80 percent if the benefits attributable to 
the amendment were taken into account in determining the AFTAP). 
However, this prohibition on plan amendments no longer applies for a 
plan year if the employer makes the contribution specified in section 
436(c)(2), as described in paragraph F of this preamble.
    In accordance with section 436(c)(3), the limitation on amendments 
increasing liabilities does not apply to any amendment that provides 
for an increase in benefits under a formula that is not based on a 
participant's compensation, but only if the rate of increase in 
benefits does not exceed the contemporaneous rate of increase in 
average wages of participants covered by the amendment. The proposed 
regulations would provide that the determination of the rate of 
increase in average wages is made by taking into consideration the net 
increase in average wages during the period beginning with the 
effective date of the most recent benefit increase applicable to all of 
those participants who are covered by the current amendment and ending 
on the effective date of the current amendment. If the participants 
covered by an amendment include both currently employed participants 
and terminated participants (who will have no increase or decrease in 
wages for this purpose after severance from employment), all covered 
participants must be included in determining the increase in average 
wages of the participants covered by the amendment. Alternatively, the 
employer could adopt two amendments--one that increases benefits for 
currently employed participants and another one that increases benefits 
for the terminated participants. In that case, this exception from 
application of the section 436(c) limitation generally would apply to 
the amendment that increases benefits for currently employed 
participants (based solely on the wages of those current employees), 
but the amendment that applies only to terminated participants (who 
received no increase in wages from the employer during the period over 
which the increase in average wages is determined) would not be 
eligible for the exception.
    In addition, the proposed regulations would provide that, to the 
extent that any amendment results in (or is made pursuant to) a 
mandatory increase in the vesting of benefits under the Code or ERISA 
(such as vesting rate increases pursuant to statute and plan 
termination amendments under section 411(d)(3)), that amendment does 
not constitute an amendment that changes the rate at which benefits 
become nonforfeitable for purposes of section 436(c).
D. Limitations on Accelerated Benefit Distributions
    1. Funding percentage less than 60 percent. In accordance with 
section 436(d)(1), under the proposed regulations, a plan must provide 
that, if the plan's AFTAP for a plan year is less than 60 percent, the 
plan will not pay any prohibited payment with an annuity starting date 
that is on or after the applicable section 436 measurement date. 
However, if a participant requests such a prohibited distribution, the 
plan must permit the participant to elect another form of benefit 
available under the plan or to defer payment to a later date to the 
extent permitted under applicable qualification requirements. Similar 
rules apply in any case in which a beneficiary is entitled to a 
prohibited payment (for example, where a qualified pre-retirement 
survivor annuity is offered in an alternative single sum payment).
    2. Bankruptcy. In accordance with section 436(d)(2), under the 
proposed regulations, a plan must provide that the plan will not pay 
any prohibited payment with an annuity starting date that is during any 
period during a plan year in which the plan sponsor is a debtor in a 
case under title 11, United States Code, or similar Federal or State 
law, until the date on which the enrolled actuary of the plan certifies 
that the plan's AFTAP is not less than 100 percent.
    3. Limited payment if percentage at least 60 percent but less than 
80 percent. In accordance with section 436(d)(3), under the proposed 
regulations, a plan must provide that, in any case in which the plan's 
AFTAP for a plan year is 60 percent or more but is less than 80 
percent, a participant is permitted to elect a prohibited payment only 
if the present value of the portion of the payment that is greater than 
the amount of the monthly straight life annuity under the plan (and any 
social security supplement, if applicable) does not exceed 50 percent 
of the present value of the participant's benefits (or if less, 100 
percent of the present value of the maximum guarantee with respect to 
the participant under section 4022 of ERISA). For this purpose, present 
value is determined using the rules of section 417(e) except that, if 
the plan provides a single sum distribution that is larger than the 
present value of the benefit determined using the rules of section 
417(e), then that larger benefit is substituted for the present value 
of the participant's benefits before applying the 50 percent factor. 
Similar rules apply in any case in which a beneficiary is entitled to a 
prohibited payment.
    If an optional form of benefit that is otherwise available under 
the terms of the plan is not available as of the annuity starting date 
because it is a prohibited payment that cannot be paid under the 
preceding paragraph, then the plan must provide a participant who 
elects such an optional form with the option either to defer payment to 
a later date (to the extent permitted under applicable qualification 
requirements) or to bifurcate the benefit into unrestricted and 
restricted portions. If the participant elects to bifurcate the 
benefit, the plan must permit the participant to elect, with respect to 
the unrestricted portion, any optional form of benefit otherwise 
available under the plan with respect to the participant's entire 
benefit (whether or not the optional form of benefit with respect to 
the unrestricted portion is a prohibited payment). The unrestricted 
portion of the benefit is the lesser of (i) 50 percent of the benefit 
and (ii) the benefit that has a present value that does not exceed 100 
percent of the present value of the maximum PBGC guarantee with respect 
to the participant under section 4022 of ERISA. If the participant 
elects payment of the unrestricted portion of the benefit in the form 
of a prohibited payment, then the plan must permit the participant to 
elect payment of the restricted portion in any optional form of benefit 
under the plan that would have been permitted with respect to the 
participant's entire benefit other than a prohibited payment. A plan is 
also permitted (but not required) to offer optional forms of benefit 
that are solely available during the period section 436(d)(3) applies 
to the plan, such as an optional form of benefit that provides

[[Page 50551]]

for the current payment of the unrestricted portion of the benefit, 
with a delayed commencement for the restricted portion of the benefit, 
subject to other applicable qualification requirements.
    A participant who receives a prohibited payment (or a series of 
prohibited payments under a single optional form of benefit) under the 
rule permitting certain prohibited payments cannot receive any 
additional payment that would be a prohibited payment until there is a 
plan year for which none of the limitations on accelerated 
distributions under section 436(d) apply. Benefits provided to a 
participant and any beneficiary are aggregated for purposes of 
determining the limited distribution under section 436(d)(3). The 
proposed regulations would also reflect the rules of section 
436(d)(3)(B)(ii), which describes how this limited distribution is 
allocated among the beneficiaries of a participant.
    4. Exception for certain frozen plans. In accordance with section 
436(d)(4), the limitations under section 436(d) will not apply to a 
plan for any plan year if the terms of the plan, as in effect for the 
period beginning on September 1, 2005, provided for no benefit accruals 
with respect to any participants. However, if such a plan provides for 
any benefit accruals during a plan year, this exception will cease to 
apply for the plan as of the date those accruals start.
    5. Prohibited payment. In accordance with section 436(d)(5), the 
proposed regulations would provide that the term ``prohibited payment'' 
means:
    (i) Any payment for a month that is in excess of the monthly amount 
paid under a single life annuity (plus any social security supplements 
described in the last sentence of section 411(a)(9)), to a participant 
or beneficiary whose annuity starting date (as defined in section 
417(f)(2)) occurs during any period that a limitation on accelerated 
benefit payments is in effect;
    (ii) Any payment for the purchase of an irrevocable commitment from 
an insurer to pay benefits; and
    (iii) Any other payment that is identified as a prohibited payment 
by the Commissioner in revenue rulings and procedures, notices and 
other guidance published in the Internal Revenue Bulletin (see Sec.  
601.601(d)(2) of this chapter).
    In addition, for purposes of applying the limitations on 
accelerated benefit payments under the requirements of section 436(d), 
the term annuity starting date means, as applicable--
    (a) The first day of the first period for which an amount is 
payable as an annuity as described in section 417(f)(2)(A)(i);
    (b) In the case of a benefit not payable in the form of an annuity, 
the first day on which all events have occurred (including the 
participant's election, the participant's severance from employment if 
the participant is below normal retirement age, and, if applicable, the 
participant's survival to the date as of which payment is made) which 
entitle the participant to such benefit as described in section 
417(f)(2)(A)(ii);
    (c) In the case of an amount payable on a retroactive annuity 
starting date, the benefit commencement date; and
    (d) The date of any payment for the purchase of an irrevocable 
commitment from an insurer to pay benefits under plan.
E. Limitation on Benefit Accruals
    In accordance with section 436(e), under the proposed regulations, 
a plan must provide that, in any case in which the plan's AFTAP for a 
plan year is less than 60 percent, benefit accruals under the plan will 
cease as of the applicable section 436 measurement date. If a plan must 
cease benefit accruals under this limitation, then the plan is also not 
permitted to be amended in a manner that would increase the liabilities 
of the plan by reason of an increase in benefits or establishment of 
new benefits. This rule applies regardless of whether an amendment 
would otherwise be permissible under section 436(c)(3) (involving 
certain amendments to increase benefits under a formula not based on a 
participant's compensation). This prohibition on additional benefit 
accruals will no longer apply for a plan year if the plan sponsor makes 
the contribution specified in section 436(e)(2), as described in 
paragraph F of this preamble.
F. Rules Relating to Contributions Required To Avoid Benefit 
Limitations
    The proposed regulations provide rules regarding contributions by 
the plan sponsor to avoid benefit limitations under section 436. An 
employer sponsoring a plan that would otherwise be subject to the 
limitations of section 436 can avoid the application of those limits 
through one of four different techniques: 1) reducing the funding 
standard carryover balance and prefunding balance; 2) making additional 
contributions for a prior plan year that are not added to the 
prefunding balance; 3) making the specific contributions described in 
sections 436(b)(2), 436(c)(2), and 436(e)(2); and 4) providing 
security, as described in section 436(f)(1).
    As noted in this preamble, under the first of the techniques, if a 
plan sponsor elects to reduce the plan's funding standard carryover 
balance or the prefunding balance, this will have the effect of 
increasing the plan assets that are taken into account in determining 
the plan's FTAP and AFTAP and, thereby, will raise the AFTAP to a level 
so that the benefit limitations may no longer apply to the plan. 
Alternatively, if the deadline for making prior year contributions has 
not passed, the plan sponsor could utilize the second technique--making 
additional contributions for the prior plan year. If these additional 
contributions are not added to the prefunding balance, then the 
additional contributions will also have the effect of increasing the 
plan's FTAP and AFTAP.
    The third and fourth techniques for avoiding the application of the 
benefit limitations of section 436 are described in Sec.  1.436-1(f) of 
the proposed regulations. Under the third technique, the plan sponsor 
makes additional contributions that are specifically designated at the 
time the contribution is used to avoid the application of a limitation 
under section 436(b), 436(c), or 436(e). The proposed regulations would 
provide for this designation to be provided to the plan's enrolled 
actuary and plan administrator in writing. Furthermore, the designation 
must be irrevocable, except as described below. If the contributions 
are made on a date other than the valuation date for the plan year, the 
contributions must be adjusted for interest (using the plan's effective 
interest rate, except as provided in the proposed regulations). These 
contributions are separate from any minimum required contributions 
required by section 430, and no prefunding balance or funding standard 
carryover balance under section 430(f) may be used as a contribution to 
avoid a section 436 benefit limitation. A plan sponsor that makes such 
a current year contribution will nonetheless fail to satisfy the 
minimum funding requirements if it does not make the minimum required 
contribution under section 430 for the year. In addition, as noted 
above, these contributions are not taken into account in determining 
whether a plan sponsor is making excess contributions for purposes of 
adding to the plan's prefunding balance.
    The fourth technique for a plan sponsor to avoid the application of 
the benefit limitations of section 436 is for the plan sponsor to 
provide security. In such a case, the AFTAP for the plan year is 
determined by treating as an asset of the plan any security provided by 
a plan sponsor by the valuation date

[[Page 50552]]

for the plan year in a form meeting certain specified requirements. 
However, this security is not taken into account for any other purpose, 
including section 430. The only security permitted to be provided by a 
plan sponsor for this purpose is (i) a bond issued by a corporate 
surety company that is an acceptable surety for purposes of section 412 
of ERISA, or (ii) cash or United States obligations that mature in 
three years or less that are held in escrow by a bank or insurance 
company. The regulations would reflect sections 436(f)(1)(C) and (D) in 
specifying when the security is to be contributed to the plan and when 
it may be released. If the security is turned over to the plan, then 
that amount is treated as an employer contribution when it is turned 
over to the plan. The proposed regulations would provide that any such 
security turned over to the plan pursuant to the enforcement mechanism 
cannot be treated as a contribution to avoid or terminate the 
application of a section 436 benefit limitation under section 
436(b)(2), 436(c)(2), or 436(e)(2).
G. Presumed Underfunding for Purposes of Benefit Limitations
    The proposed regulations reflect the rules of section 436(h), which 
sets forth a series of presumptions that are used to apply the section 
436 benefit limitations in situations where the plan's enrolled actuary 
has not yet issued a certification of the plan's AFTAP for the plan 
year. In addition, the proposed regulations also set forth rules for 
the application of the limitations prior to and during the period those 
presumptions apply to a plan, and describe the interaction of those 
presumptions with plan operations after the plan's enrolled actuary has 
issued a certification of the plan's AFTAP for the plan year. These 
rules are designed to encourage plans to obtain certifications in a 
timely manner, with a particular emphasis with respect to plans that 
have a greater likelihood of having a new section 436 benefit 
limitation apply because they had an AFTAP for the prior plan year that 
was near a threshold for a benefit limitation to apply.
    The proposed regulations would provide that, in any case in which a 
plan was subject to a benefit limitation on the last day of the prior 
plan year, the first day of the plan year is a section 436 measurement 
date and the AFTAP of the plan for the current plan year is presumed to 
be equal to the preceding year's certified AFTAP until the plan's 
enrolled actuary certifies the AFTAP of the plan for the current plan 
year. Because no plan could be subject to a benefit limitation for a 
plan year that precedes the plan year that begins in 2008, the section 
436(h)(1) presumption gener