Measurement of Assets and Liabilities for Pension Funding Purposes, 74215-74233 [E7-25125]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 72, Number 249 (Monday, December 31, 2007)]
[Proposed Rules]
[Pages 74215-74233]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-25125]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-139236-07]
RIN 1545-BH07


Measurement of Assets and Liabilities for Pension Funding 
Purposes

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations providing guidance 
on the determination of plan assets and benefit liabilities for 
purposes of the funding requirements that apply to single employer 
defined benefit plans. These regulations affect sponsors, 
administrators, participants, and beneficiaries of single employer 
defined benefit plans.

DATES: Written or electronic comments and requests for a public hearing 
must be received by March 31, 2008.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-139236-07), 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. and 4 p.m. to CC:PA:LPD:PR (REG-
139236-07), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC, or sent electronically via the Federal 
eRulemaking Portal at www.regulations.gov (IRS-REG-139236-07).

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Lauson C. 
Green or Linda S. F. Marshall at (202) 622-6090; concerning submissions 
and requests for a public hearing, Richard A. Hurst at Richard.A.Hurst@
irscounsel.treas.gov or 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 February 29, 2008. 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(h)(2)-1(e). This information is required in order for a 
plan sponsor to make an election to use an alternative interest rate 
for purposes of determining a plan's funding obligations under Sec.  
1.430(h)(2)-1. This information is required to obtain or retain 
benefits. The likely respondents are qualified retirement plan 
sponsors.
    Estimated total annual reporting burden: 54,000 hours.
    Estimated average annual burden hours per respondent: 0.75 hours.
    Estimated number of respondents: 72,000.
    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(d), 430(g), 430(h)(2), and 430(i), as added to 
the Internal Revenue Code (Code) by the Pension Protection Act of 2006 
(PPA '06), Public Law 109-280 (120 Stat. 780).
    Section 412 provides minimum funding requirements that generally 
apply for pension plans (including both defined benefit pension plans 
and money purchase pension plans). PPA '06 makes extensive changes to 
those minimum funding requirements that generally apply for plan years 
beginning on or after January 1, 2008. Section 430, which was added by 
PPA '06, specifies the minimum funding requirements that apply to 
single employer defined benefit pension plans (including multiple

[[Page 74216]]

employer plans) pursuant to section 412.\1\
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    \1\ 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 Internal Revenue Code 
(Code), and section 303 of ERISA sets forth additional funding rules 
for single employer plans that are parallel to those in section 430 
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 section 430 of the Code apply as well for purposes of section 
303 of ERISA.
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    Section 430(a) defines the minimum required contribution for a 
single employer plan as the sum of the plan's target normal cost and 
the shortfall and waiver amortization charges for the plan year. Under 
section 430(b), a plan's target normal cost for a plan year is the 
present value of all benefits expected to accrue or be earned under the 
plan during the plan year. For this purpose, section 430(b) provides 
that an increase in any benefit attributable to services performed in a 
preceding plan year by reason of a compensation increase during the 
current plan year is treated as having accrued during the current plan 
year.
    One of the amortization charges used in determining the minimum 
required contribution, the shortfall amortization charge, is determined 
based on the difference between the plan's funding target and the value 
of plan assets. Under section 430(d), except as provided in section 
430(i)(1) (regarding plans in at-risk status), a plan's ``funding 
target'' for a plan year is the present value of all benefits accrued 
or earned under the plan as of the beginning of the plan year.
    Section 430(g)(1) provides that all determinations made with 
respect to minimum required contributions for a plan year (such as the 
value of plan assets and liabilities) must be made as of the plan's 
valuation date. Section 430(g)(2) provides that, other than for plans 
with 100 or fewer participants (determined as provided in section 
430(g)(2)(B) and (C)), the valuation date for a plan year must be the 
first day of the plan year. Under section 430(g)(3), the value of plan 
assets is generally the fair market value of those assets. However, the 
value of plan assets may be determined on the basis of the averaging of 
fair market values, but only if the averaging method is permitted under 
regulations and satisfies certain other requirements.
    Under section 430(g)(4), if a required contribution for a preceding 
plan year is made after the valuation date for the current plan year, 
the contribution is taken into account in determining the value of plan 
assets for the current plan year. For 2009 and future plan years, only 
the present value (determined as of the valuation date for the current 
plan year, using the plan's effective interest rate for the preceding 
plan year) of the contributions made for the preceding plan year is 
taken into account. If any contributions for the current plan year are 
made before the valuation date (which could only occur for a small plan 
with a valuation date that is not the first day of the plan year), plan 
assets as of the valuation date must exclude (1) those contributions, 
and (2) interest on those contributions (determined at the plan's 
effective interest rate for the plan year) for the period between the 
date of the contribution and the valuation date. Under section 
430(h)(2)(A), a plan's effective interest rate for a plan year is 
defined as the single interest rate that, if used to determine the 
present value of the benefits taken into account in determining the 
plan's funding target for the plan year, would result in an amount 
equal to the plan's funding target determined for the plan year under 
section 430(d).
    Under section 430(h)(1), the determination of any present value or 
other computation under section 430 is to be made on the basis of 
actuarial assumptions and methods each of which is reasonable (taking 
into account the experience of the plan and reasonable expectations) 
and which, in combination, offer the actuary's best estimate of 
anticipated experience under the plan.
    Section 430(h)(2) specifies the interest rates that must be used in 
determining a plan's target normal cost and funding target. Under the 
provision, present value is determined using three interest rates 
(segment rates), each of which applies to benefit payments expected to 
be paid during a certain period. The first segment rate applies to 
benefits reasonably determined to be payable during the 5-year period 
beginning on the first day of the plan year. The second segment rate 
applies to benefits reasonably determined to be payable during the 15-
year period following the initial 5-year period. The third segment rate 
applies to benefits reasonably determined to be payable after the end 
of that 15-year period.
    Each segment rate is a single interest rate determined monthly by 
the Treasury Department on the basis of a corporate bond yield curve. 
The corporate bond yield curve used for this purpose is to be 
prescribed monthly by the Treasury Department and is to reflect the 
average, for the 24-month period ending with the preceding month, of 
yields on investment grade corporate bonds with varying maturities that 
are in the top three quality levels available. Under section 
430(h)(2)(F), the Secretary of the Treasury is directed to publish each 
month the corporate bond yield curve and each of the segment rates for 
the month. In addition, the Secretary is directed to publish a 
description of the methodology used to determine the yield curve and 
segment rates to enable plans to make reasonable projections regarding 
the yield curve and segment rates for future months, based on a plan's 
projection of future interest rates.
    Section 430(h)(2)(G) provides a transition rule for plan years 
beginning in 2008 and 2009 (other than for plans where the first plan 
year begins on or after January 1, 2008). Under this transition rule, 
the interest rates to be used in the valuation are based on a blend of 
the segment rates and the long-term corporate bond rates used for plan 
years prior to the effective date of PPA '06. Under section 
430(h)(2)(G)(iv), a plan sponsor may elect to have this transition rule 
not apply. In addition, solely for purposes of determining minimum 
required contributions under section 430, in lieu of using the segment 
rates, an employer may elect under section 430(h)(2)(D)(ii) to use 
interest rates on a yield curve based on the yields on investment grade 
corporate bonds within the top three quality levels without regard to 
the 24-month averaging described above.
    Section 430(i) requires the application of special assumptions in 
determining the funding target and target normal cost of a plan in at-
risk status. Under section 430(i)(4), a plan is in at-risk status for a 
year if, for the preceding year: (1) The plan's funding target 
attainment percentage, determined without regard to the at-risk 
assumptions, was less than 80 percent (with a transition rule discussed 
below), and (2) the plan's funding target attainment percentage, 
determined using the at-risk assumptions (without regard to whether the 
plan was in at-risk status for the preceding year), was less than 70 
percent. Under a transition rule applicable for plan years beginning in 
2008, 2009, and 2010, the following percentages apply instead of 80 
percent in the first part of the test for determining at-risk status: 
65 percent for 2008, 70 percent for 2009, and 75 percent for 2010. In 
the case of plan years beginning in 2008, the plan's funding target 
attainment percentage for the preceding plan year is to be determined 
under rules provided by the Treasury Department.

[[Page 74217]]

    Under section 430(i)(6), the at-risk rules do not apply if a plan 
had 500 or fewer participants on each day during the preceding plan 
year. For this purpose, all defined benefit pension plans (other than 
multiemployer plans) maintained by the same employer (or a predecessor 
employer), or by any member of the employer's controlled group, are 
treated as a single plan.
    If a plan is in at-risk status, the plan's funding target and 
normal cost are determined (under section 430(i)(1) and (2)) using 
special actuarial assumptions. Under these assumptions, all employees 
who are not otherwise assumed to retire as of the valuation date, but 
who will be eligible to elect to commence benefits in the current and 
10 succeeding plan years, are assumed to retire at the earliest 
retirement date under the plan, but not before the end of the current 
plan year. All employees are assumed to elect the form of retirement 
benefit available under the plan at that assumed retirement age that 
results in the highest present value.
    The funding target of a plan in at-risk status for a plan year is 
generally the sum of: (1) The present value of all benefits accrued or 
earned as of the beginning of the plan year, and (2) in the case of a 
plan that has been in at-risk status for at least 2 of the 4 preceding 
plan years, a loading factor. That loading factor is equal to the sum 
of: (1) $700 multiplied by the number of participants in the plan, plus 
(2) 4% of the funding target determined without regard to the loading 
factor. The target normal cost of a plan in at-risk status for a plan 
year is generally the sum of: (1) The present value of benefits 
expected to accrue or be earned under the plan during the plan year, 
determined using the special assumptions described above, and (2) in 
the case of a plan that has been in at-risk status for at least 2 of 
the 4 preceding plans years, a loading factor of 4% of the target 
normal cost determined without regard to the loading factor. If a plan 
has been in at-risk status for fewer than 5 consecutive plan years, a 
phase-in rule applies to the determination of the ``funding target'' 
and ``target normal cost'' under section 430(i)(5).

Explanation of Provisions

I. Overview

    These proposed regulations are the third in a series of proposed 
regulations under new section 430.\2\ These proposed regulations would 
provide guidance on the determination of assets and liabilities for 
purposes of applying the new funding rules of section 430. The Treasury 
Department and the IRS intend to issue additional proposed regulations 
relating to other portions of the rules under section 430 (including 
sections 430(a), (c), and (j)) in the first part of 2008. It is 
expected that those regulations will be effective for plan years 
beginning on or after January 1, 2009.
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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), and proposed regulation Sec.  1.430(f)-1, 
relating to prefunding and funding standard carryover balances under 
section 430(f), was issued August 31, 2007 (REG-113891-07, 72 FR 
50544).
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II. Section 1.430(d)-1 Determination of Funding Target and Target 
Normal Cost

    Section 1.430(d)-1 would provide rules for determining the funding 
target and the target normal cost of a plan that is not in at-risk 
status (within the meaning of section 430(i)). The proposed regulations 
would provide that the funding target is the present value of all 
benefits that have been accrued or earned under the plan as of the 
first day of the plan year, and that the target normal cost for the 
plan year is the present value of all benefits that accrue or are 
earned (or that are expected to accrue or to be earned) under the plan 
during the plan year. Thus, if the actuarial valuation date for the 
plan year is not the first day of the plan year, the target normal cost 
will include the benefits actually earned during the year through the 
valuation date for the plan year plus a projection of benefits that 
will be earned through the rest of the plan year.
    In order to determine the funding target and target normal cost, 
the future benefits to be paid from the plan must be allocated among 
prior plan years (in which case they will be taken into account in 
determining the funding target for the current year), the current plan 
year (in which case they will be taken into account in determining the 
target normal cost of the plan for the plan year), and future years. If 
the amount of a benefit that is expected to be paid is a function of 
the accrued benefit at the time the benefit is expected to be paid, 
then the amount taken into account in the funding target is determined 
by applying that function to the accrued benefit as of the beginning of 
the plan year and the amount of the benefit taken into account in the 
target normal cost is determined by applying that function to the 
increase in the accrued benefit for the plan year. If the amount of a 
benefit that is expected to be paid is not a function of the accrued 
benefit at the time the benefit is expected to be paid (for example, 
certain ancillary benefits), but is a function of the participant's 
service at that time, then the amount taken into account for purposes 
of determining the funding target for a plan year is based on a 
participant's service as of the first day of the plan year and the 
amount of the benefit that is taken into account in the target normal 
cost is the increase in that benefit for the plan year based on the 
additional year of service. If the amount of a benefit that is expected 
to be paid is neither a function of the accrued benefit at the time the 
benefit is expected to be paid nor a function of the participant's 
service at that time, then the portion of the benefit taken into 
account for purposes of determining the funding target for a plan year 
is based on the proportion of a participant's service as of the first 
day of the plan year relative to the service the participant will have 
when the participant meets the age and service eligibility requirement 
for the benefit, and the portion of the benefit that is taken into 
account in the target normal cost is the increase in the proportional 
benefit for the plan year.
    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. Also, the proposed regulations would 
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. However, an alternative rule is provided in the case of 
benefits that are funded through certain insurance contracts purchased 
from an insurance company licensed under the laws of a State. Under 
this rule, a plan is permitted to exclude benefits provided under such 
contracts from the plan's funding target and target normal cost and to 
exclude the corresponding insurance contracts from plan assets, but 
only to the extent that a participant's or beneficiary's right to 
receive those benefits is an irrevocable contractual right based on 
premiums paid to the insurance company prior to

[[Page 74218]]

the valuation date under the insurance contracts.
    The proposed regulations would provide that, except as provided in 
section 412(d)(2), the funding target and target normal cost are 
determined based on the plan terms that are adopted no later than the 
valuation date for the plan year and become effective during that plan 
year. Thus, the rules of Revenue Ruling 77-2 (1977-1 CB 120) would no 
longer apply. See Sec.  601.601(d)(2) of this chapter. For example, if 
an amendment that increases plan liabilities is adopted on or before 
the plan's valuation date and is effective during the plan year that 
includes the valuation date, the full increase in liability with 
respect to the amendment is taken into account as of that year's 
valuation date. However, with respect to the pre-PPA counterpart to 
section 412(d)(2) (section 412(c)(8) as in effect prior to amendments 
made by PPA '06), Rev. Rul. 79-325 (1979-2 CB 190) provides that 
section 412(c)(8) applies to plan amendments made during the plan year 
(as well as to plan amendments made within 21/2 months after the end of 
the plan year), and this same rule applies under the identical 
statutory provisions of section 412(d)(2). See Sec.  601.601(d)(2) of 
this chapter. Thus, if an amendment that increases plan liabilities is 
adopted after the valuation date for a plan year but the amendment is 
effective during that plan year, the full increase in liability will be 
taken into account as of the valuation date for that plan year if a 
section 412(d)(2) election is made, and none of the increase in 
liability will be taken into account as of the valuation date for that 
plan year if no section 412(d)(2) election is made. Regardless of 
whether a section 412(d)(2) election is made, the rules of section 
436(c) must be applied in determining whether the amendment is 
permitted to take effect during the plan year. Section 430 does not 
contain a corresponding provision to former section 412(c)(12) under 
which the provisions of a collective bargaining agreement are taken 
into account for funding purposes before the corresponding plan 
amendments have been made.
    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. 
Unlike Sec.  1.412(c)(3)-1(c)(3)(ii), the proposed regulations would 
not permit exclusion from the valuation of those plan participants who 
could have been excluded from participation in the plan under the rules 
of section 410(a). However, the proposed regulations would continue to 
apply the rules of Sec.  1.412(c)(3)-1(c)(3)(iii) (relating to the 
exclusion of terminated employees who do not have a vested benefit 
under the plan but whose service might be taken into account in future 
years upon rehire) and the rules of Sec.  1.412(c)(3)-1(d)(2) (under 
which the future participation in the plan of current employees who are 
not yet participants is permitted to be anticipated).
    Section 1.430(d)-1 of the proposed regulations would cross-
reference other regulations for the details of the statutorily 
specified interest rates, mortality tables, and actuarial assumptions 
that apply to plans in at-risk status. With respect to the actuarial 
assumptions that are not specified by statute or regulations, the 
proposed regulations would require that the actuarial assumptions used 
to determine present value satisfy the section 430(h)(1) requirements 
to be individually reasonable (taking into account the experience of 
the plan and reasonable expectations) and, in combination, offer the 
plan's enrolled actuary's best estimate of anticipated experience under 
the plan.
    The proposed regulations would provide that, once the actuarial 
assumptions for a plan year are established, they are not permitted to 
be changed for that plan year (unless the Commissioner determines that 
the assumptions are unreasonable). Similarly, the proposed regulations 
would provide that, once the funding method for a plan year is 
established, it is not permitted to be changed for that plan year 
(unless the Commissioner determines that the use of the funding method 
for the plan year is impermissible).
    In general, the actuarial assumptions and funding method used by a 
plan for a plan year are required to be established not later than the 
due date (with extensions) for the filing of Form 5500, ``Annual 
Return/Report of Employee Benefit Plan,'' for that plan year (or not 
later than the last day of the seventh month after the end of the plan 
year in the case of a plan not required to file Form 5500). The 
proposed regulations would provide that the filing of the first 
actuarial report (Schedule SB) under section 6059 for a plan year that 
reflects the use of actuarial assumptions and a funding method is 
treated as the establishment of those assumptions and the funding 
method for that plan year.
    In accordance with section 430(h)(4), the proposed regulations 
would provide that the plan's actuarial valuation must take into 
account the probability that future benefits will be paid in optional 
forms of benefit under the plan, including single sum distributions, 
determined on the basis of the plan's experience and other relevant 
assumptions. In addition, the plan's enrolled actuary must take into 
account any difference in the present value of those future benefit 
payments that results from the use of actuarial assumptions in 
determining benefit payments in any such optional forms of benefit that 
are different from those prescribed by section 430(h).
    In the case of a distribution that is subject to section 417(e)(3) 
and that is determined using the applicable interest rate and 
applicable mortality table under section 417(e)(3), the proposed 
regulations would provide that the computation of the present value of 
that distribution will be treated as having taken into account any 
difference in present value that results from the use of actuarial 
assumptions that are different from those prescribed by section 430(h) 
only if the present value of the distribution is determined by valuing 
the annuity that corresponds to the distribution using special 
actuarial assumptions. Under these special assumptions, for the period 
beginning with the annuity starting date, the current applicable 
mortality table under section 417(e)(3) is substituted for the 
mortality table under section 430(h)(3) that would otherwise apply. In 
addition, under these special actuarial assumptions, the valuation 
interest rates under section 430(h)(2) are used for all periods (as 
opposed to the interest rates under section 417(e)(3) which the plan 
uses to determine the amount of the benefit).
    The proposed regulations provide two elective adjustments to this 
methodology for valuing distributions subject to section 417(e)(3). 
First, in determining the present value of such a distribution, if a 
plan uses the generational mortality tables under Sec.  1.430(h)(3)-
1(a)(4) or under Sec.  1.430(h)(3)-2, the plan would be permitted to 
use a 50-50 male-female blend of the annuitant mortality rates under 
the Sec.  1.430(h)(3)-1(a)(4) generational mortality tables in lieu of 
the applicable mortality table under section 417(e)(3) that would apply 
to a distribution with an annuity starting date occurring on the 
valuation date. Second, a plan would be permitted to make adjustments 
to reflect differences between the phase-in of the section 430(h)(2) 
segment rates under section 430(h)(2)(G) and the adjustments to the 
segment rates under section 417(e)(3)(D)(iii).

[[Page 74219]]

    In the case of a distribution that is subject to section 417(e)(3) 
but that is determined as the greater of the benefit determined using 
the applicable interest rate and the applicable mortality table under 
section 417(e)(3) and the benefit determined using some basis other 
than the section 417(e)(3) assumptions, the proposed regulations would 
provide that the computation of present value must take into account 
the extent to which the present value of the distribution is greater 
than the present value determined using the applicable interest rate 
and applicable mortality table.
    In the case of an applicable defined benefit plan described in 
section 411(a)(13)(C) (such as a cash balance plan), the proposed 
regulations would provide that, if the distribution is determined under 
the rules of section 411(a)(13)(A), the amount of the future 
distribution must be determined by projecting the future interest 
credits or equivalent amounts under the plan's interest crediting rules 
to the expected date of payment using reasonable actuarial assumptions. 
Thus, the present value of a future distribution is not necessarily the 
current amount of a participant's hypothetical account balance.
    The proposed regulations would provide 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. For example, the 
present value of a monthly retirement annuity payable at the beginning 
of each month can be determined using the standard actuarial 
approximation that reflects 13/24ths of the discounted expected 
payments for the year as of the beginning of the year and 11/24ths of 
the discounted expected payments for the year as of the end of the 
year, or by assuming that the payment is made in the middle of the 
year.
    The proposed regulations would also reflect the provisions of 
section 430(h)(5), requiring approval of the Commissioner for large 
changes in actuarial assumptions. In general, this rule applies where 
the application of the changes in actuarial assumptions results in a 
decrease in the plan's funding shortfall for the current plan year 
(disregarding the effect on the plan's funding shortfall resulting from 
changes in interest and mortality assumptions) that exceeds 
$50,000,000, or that exceeds $5,000,000 and that is 5 percent or more 
of the funding target of the plan before the change. Thus, for example, 
if a plan leaves at-risk status and consequently makes changes to its 
actuarial assumptions (including a return to previously used 
assumptions) that result in a reduction in the funding shortfall that 
exceeds $50,000,000, that change in actuarial assumptions would require 
approval of the Commissioner. In determining whether aggregate unfunded 
vested benefits exceed $50,000,000, the proposed regulations would 
provide that multiemployer plans and plans with no unfunded vested 
benefits are disregarded. In addition, the proposed regulations would 
provide that the aggregate unfunded vested benefits used to determine 
premiums for the current plan year (as determined under section 
4006(a)(3)(E)(iii) of ERISA) are used for purposes of calculating 
whether unfunded vested benefits exceed $50,000,000.

III. Section 1.430(g)-1 Valuation Date and Value of Plan Assets

    Section 1.430(g)-1 would provide rules for a plan's valuation date 
and the value of plan assets.\3\ Under the proposed regulations, except 
in the case of a small plan, a plan's valuation date is the first day 
of the plan year. For this purpose, a small plan is defined as a plan 
sponsored by an employer that had 100 or fewer participants in defined 
benefit plans (other than multiemployer plans as defined in section 
414(f)) sponsored by the employer or members of the employer's 
controlled group, including active and inactive participants and all 
other individuals entitled to future benefits. A small plan is 
permitted to have a valuation date other than the first day of a plan 
year. The selection of a valuation date by a small plan is part of the 
plan's funding method and, thus, is permitted to be changed only with 
the Commissioner's consent. If a plan that was using a valuation date 
that was not the first day of the plan year is no longer eligible to 
use that date because the plan is no longer a small plan, the required 
change of the valuation date to the first day of the plan year is 
treated as automatically approved and no prior approval of the 
Commissioner is necessary.
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    \3\ The value of plan assets under these proposed regulations is 
referred to in Schedule SB of Form 5500 as ``actuarial assets.''
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    The proposed regulations would provide that plan assets must be 
valued either at their fair market value on the valuation date or at 
the ``average'' value of assets on the valuation date. Under this 
average value, the value of plan assets is set equal to the average of 
the fair market value of assets on the valuation date and the adjusted 
fair market value of assets determined for one or more earlier 
determination dates. The proposed regulations would provide that the 
period of time between the valuation date and each of the earlier 
determination dates must be equal (with a period that is not more than 
12 months), and the earliest of these determination dates cannot be 
earlier than the last day of the 25th month before the valuation date 
of the plan year. In a typical situation, the earlier determination 
dates will be the two immediately preceding valuation dates. The 
proposed regulations would provide that this average of fair market 
values is increased for contributions included in the plan's asset 
balance on the current valuation date that were not included in the 
plan's asset balance on an earlier determination date, and reduced for 
benefits and administrative expenses paid from plan assets during the 
same period.\4\ After these adjustments, as well as the adjustments 
described in the following two paragraphs, the resulting average value 
must be constrained so that it falls between 90 and 110 percent of the 
fair market value of plan assets.
---------------------------------------------------------------------------

    \4\ Note that this average of fair market values is different 
from the calculation of average value under Sec.  1.412(c)(2)-
1(b)(7). For example, the adjusted value described in the proposed 
regulations does not include interest and dividends on plan assets 
attributable to the period between the earlier determination date 
and the valuation date in determining the adjusted fair market value 
of assets.
---------------------------------------------------------------------------

    The proposed regulations would implement the rules of section 
430(g)(4) relating to the treatment of contributions for a prior plan 
year that are made after the valuation date for the current plan year. 
These rules work in conjunction with the rules of section 430(j)(2) in 
order to keep employers and plans neutral regarding the timing of 
contributions that are paid after the end of the plan year. Under 
section 430(j)(2), the amount of the contribution must be adjusted for 
interest at the effective interest rate under section 430(h)(2) in 
order to take into account the delay in contributions (including the 
period after the end of the year). For this purpose, section 430(g)(4) 
requires that only the present value of a prior year contribution paid 
after the valuation date be included in plan assets, so that the value 
of plan assets for the next plan year is not inflated by reflecting a 
delayed contribution at full value. This effectively means that the 
present value of the contribution is the same from the perspective of 
the employer and the plan, regardless of when it is made. Because the 
requirement to adjust contributions for delayed payment after the end 
of the plan year is first effective

[[Page 74220]]

for plan years beginning in 2008 (except for certain plans with a 
delayed effective date), the corresponding requirement to include only 
the present value of a prior year contribution paid after the valuation 
date is not effective until the second plan year for which section 430 
applies to the plan. Thus, this corresponding requirement will become 
effective in plan years beginning in 2009, except with respect to plans 
for which the effective date of section 430 is delayed.
    The proposed regulations would specify the treatment of current 
year contributions that are made before the valuation date (which could 
only occur for small plans with valuation dates other than the first 
day of the plan year). These contributions, adjusted for interest at 
the effective interest rate under section 430(h)(2) for the plan year, 
must be subtracted from plan assets in determining the actuarial value 
of plan assets. This is similar to the pre-PPA '06 requirement to 
subtract these contributions from plan assets after adjustment using 
the plan's valuation interest rate.
    The proposed regulations would incorporate the provisions of 
section 430(l) (involving qualified transfers to health benefit 
accounts under section 420).

IV. Section 1.430(h)(2)-1 Interest Rates

    Section 1.430(h)(2)-1 would specify the interest rates that are to 
be used to determine present value and to make other calculations under 
section 430. These rates are generally based on the 24-month moving 
averages of 3 separate segment rates for the month that includes the 
valuation date (the applicable month). The first segment rate, which is 
based on the portion of the corporate bond yield curve over the period 
from 0 to 5 years, applies for purposes of discounting benefits that 
are expected to be paid during the 5-year period beginning on the 
valuation date for a plan year. The second segment rate, which is based 
on the portion of the corporate bond yield curve over the period 
between 5 and 20 years, applies for purposes of discounting benefit 
payments that are expected to be paid at least 5 years after the 
valuation date, but before 20 years. The third segment rate applies to 
benefit payments that are expected to be paid at least 20 years after 
the valuation date. Thus, for example, if a series of monthly payments 
is assumed to be made beginning on the valuation date, the second 
segment rate will apply to the 61st such payment and the third segment 
rate will apply beginning with the 241st such payment.\5\ Except in the 
case of a new plan, a transition rule applies for 2008 and 2009 under 
which these segment rates are blended with the long-term corporate bond 
rate that applies under pre-PPA law.
---------------------------------------------------------------------------

    \5\ The same interest rate timing rules apply for purposes of 
determining present values for purposes of section 417(e)(3).
---------------------------------------------------------------------------

    The monthly corporate bond yield curve is, with respect to any 
month, a yield curve that is prescribed by the Commissioner for that 
month based on yields for that month on investment grade corporate 
bonds with varying maturities that are in the top three quality levels 
available. Notice 2007-81 (2007-44 IRB 899) provides guidance on the 
monthly corporate bond yield curve and related interest rates used to 
make certain computations related to the funding requirements that 
apply to single employer defined benefit plans under section 430(h)(2), 
including a description of the methodology for determining the monthly 
corporate bond yield curve. See Sec.  601.601(d)(2) of this chapter.
    The proposed regulations would reflect the special interest rate 
for determining a plan's funding target in the case of airlines that 
make the 10-year amortization election described in section 402(a)(2) 
of PPA '06, in accordance with section 6615 of the U.S. Troop 
Readiness, Veterans' Care, Katrina Recovery, and Iraq Accountability 
Appropriations Act, 2007, Public Law 110-28 (121 Stat. 112). The 
special interest rate does not apply for other purposes such as the 
determination of the plan's target normal cost.
    The proposed regulations describe several elections a plan sponsor 
is permitted to make in order to use an alternative interest rate 
rather than the segment rates. These elections are made by providing 
written notification of the election to the plan's enrolled actuary. 
Such an election is part of the plan's funding method and, accordingly, 
may only be adopted or changed with the consent of the Commissioner. 
Under one such election, a plan sponsor that is using segment rates may 
elect the use of an alternative month as the applicable month, provided 
that the alternative month is one of the 4 months that precede the 
month that includes the valuation date for the plan year. Under another 
such election, the plan sponsor may elect not to apply the transition 
rule under which the segment rates are blended with the 30-year 
Treasury rate for 2008 and 2009. Under the third such election, for 
purposes of determining the minimum required contribution under section 
430 (including the determination of shortfall amortization 
installments, waiver amortization installments, and the present value 
of those installments), the plan sponsor may elect to use interest 
rates under the monthly corporate bond yield curve--which is a set of 
spot rates for the month preceding the valuation date rather than a 24-
month moving average for that month or an alternative applicable 
month--in lieu of the segment rates. The amount of the funding target 
calculated in accordance with any of these elections applies for all 
purposes, including determining the adjusted funding target attainment 
percentage under section 436 and the applicable limitations under 
section 404. In the case of the first plan year to which section 430 
applies to a plan (the first plan year beginning in 2008 other than for 
a plan with a delayed section 430 effective date), any of these 
elections are treated as having been approved by the Commissioner and 
do not require the Commissioner's specific prior approval.
    In the case of a plan sponsor that has elected to use interest 
rates under the monthly corporate bond yield curve, if with respect to 
a decrement the benefit is only expected to be paid for one-half of a 
year (because the decrement was assumed to occur in the middle of the 
year), the proposed regulations would provide that the interest rate 
for that year can be determined as if the benefit were being paid for 
the entire year.
    Under the proposed regulations, the effective interest rate 
determined under section 430(h)(2)(A) is the single interest rate that, 
if used to determine the present value of the benefits taken into 
account in determining the plan's funding target for a plan year, would 
result in an amount equal to the plan's funding target determined for 
the plan year under section 430(d) as described in Sec.  1.430(d)-
1(b)(2) (without regard to calculations for plans in at-risk status 
under section 430(i)). The effective interest rate is used to adjust 
plan contributions made on a date other than the valuation date.
    Under the proposed regulations, the interest rates used to 
determine the amount of shortfall amortization installments and waiver 
amortization installments are determined based on the dates those 
installments are assumed to be paid, using the same timing rules that 
apply for purposes of determining the target normal cost. Thus, for a 
plan that uses the segment rates, the first segment rate applies to the 
five shortfall amortization installments assumed to be paid during the 
first five years beginning on the valuation date for the plan year, and 
the

[[Page 74221]]

second segment rate applies to the two shortfall amortization 
installments that are assumed to be paid after that period.

V. Section 1.430(i)-1 Plans in At-Risk Status

    The proposed regulations would provide rules and assumptions for 
determining the funding target and making other computations for 
certain defined benefit plans that are referred to as plans in ``at-
risk'' status due to their significantly underfunded status. These 
rules apply to single employer defined benefit plans (including 
multiple employer plans) but do not apply to multiemployer plans. The 
at-risk rules do not apply to small plans. For this purpose, a small 
plan is defined as a plan sponsored by an employer that had 500 or 
fewer participants (including both active and inactive participants) in 
defined benefit plans (other than multiemployer plans) sponsored by the 
employer or any member of the employer's controlled group on each day 
during the preceding plan year.
    In general, the proposed regulations would provide that a plan is 
in at-risk status for a plan year if the funding target attainment 
percentage (FTAP) for the preceding plan year is less than 80% (65%, 
70%, and 75%, for plan years beginning in 2008, 2009, and 2010, 
respectively),\6\ and the at-risk FTAP for the preceding plan year is 
less than 70 percent. For this purpose, the proposed regulations would 
provide that a plan's FTAP for a plan year is a fraction (expressed as 
a percentage) determined as: (i) The value of plan assets for the plan 
year after subtraction of the prefunding balance and the funding 
standard carryover balance under section 430(f)(4)(B)), divided by (ii) 
the funding target of the plan for the plan year (determined without 
regard to section 430(i) and these proposed regulations). The proposed 
regulations would provide that the at-risk FTAP of a plan for a plan 
year is determined similarly except that the denominator is the at-risk 
funding target of the plan for the plan year (but determined without 
regard to the loading factor discussed in the following paragraph). The 
proposed regulations would provide that, in the case of a newly 
established plan, this FTAP and at-risk FTAP determination are assumed 
to be 100% for years before the plan exists.
---------------------------------------------------------------------------

    \6\ This phase-in of the 80% rule applies solely for plan years 
beginning in 2008 through 2010 and is not adjusted for plans 
described in Sec.  1.430(i)-1(f)(2) for which the effective date of 
section 430 is delayed.
---------------------------------------------------------------------------

    In general, in accordance with section 430(i)(1), the proposed 
regulations would provide that the at-risk funding target and the at-
risk target normal cost of the plan for the plan year are generally 
determined in the same manner as for plans not in at-risk status but 
using special actuarial assumptions. In addition, the at-risk funding 
target and the at-risk target normal cost are increased to take into 
account a loading factor. In any case, the at-risk funding target and 
the at-risk target normal cost of a plan for a plan year cannot be less 
than the plan's funding target and target normal cost determined 
without regard to the at-risk rules. This minimum value is determined 
on a plan-wide (rather than a participant-by-participant) basis.
    The actuarial assumptions used to determine a plan's at-risk 
funding target for a plan year are the actuarial assumptions that are 
applied under section 430, with certain modifications as set forth in 
the proposed regulations. Under these special actuarial assumptions, if 
an employee would be eligible to commence an immediate distribution 
upon termination of employment by the end of the plan year that begins 
10 years after the end of the current plan year (that is, the end of 
the 11th plan year beginning with the current plan year), that employee 
is assumed to terminate and commence an immediate distribution at the 
earliest retirement date under the plan, or, if later, at the end of 
the current plan year. (However, the proposed regulations would provide 
that this special assumption does not apply to the extent the employee 
is otherwise assumed to retire during the current plan year. Thus, for 
example, if generally applicable retirement assumptions would provide 
for a 25% probability that an employee will retire during the current 
plan year, the special retirement age assumption would require the plan 
to assume a 75% probability that the employee will retire at the end of 
the plan year.) For this purpose, the proposed regulations would define 
the earliest retirement age under the plan as the earliest age at which 
a participant could terminate employment and receive an immediate 
distribution. In addition, the special actuarial assumptions in the 
proposed regulations would provide that all employees are assumed to 
elect the optional form of benefit available under the plan at the 
assumed retirement age that would result in the highest present value 
of benefits.
    If a plan that is in at-risk status for the plan year has been in 
at-risk status for a consecutive period of fewer than 5 plan years, the 
plan's funding target for the plan year is determined as a blend of the 
funding target determined as if the plan were not in at-risk status and 
the funding target determined as if the plan had been in at-risk status 
for each of the previous 5 plan years. For this purpose, the funding 
target determined as if the plan had been in at-risk status for each of 
the previous 5 plan years is determined without applying the loading 
factor if the plan has not been in at-risk status for two of the last 
four plan years. The increase in the funding target to reflect the at-
risk rules is phased in over 5 years at 20% per year. The proposed 
regulations provide similar rules for determining the at-risk target 
normal cost of a plan that has been in at-risk status for fewer than 5 
consecutive plan years.
    For purposes of applying the rules under section 430(i), the 
proposed regulations set forth rules for making certain calculations 
with respect to the first plan year to which section 430 applies to the 
plan. These rules are generally the same as the rules that apply for 
that plan year for purposes of section 436.
    There is no special rule for determining the at-risk funding target 
for the plan year preceding the plan year section 430 first applies to 
the plan. This is because, for a plan to which section 430 applies 
beginning in 2008, if the plan's FTAP for the preceding plan year was 
less than the 65% needed to be in at-risk status (pursuant to the 
transition rule described in section 430(i)(4)(B)), then the at-risk 
FTAP would necessarily be below the 70% needed for the plan to be in 
at-risk status (because the at-risk funding target cannot be less than 
the funding target for a plan that is not in at-risk status). However, 
plans for which the effective date of section 430 is delayed will have 
to determine the at-risk funding target for the plan year that precedes 
the plan year for which section 430 is first effective with respect to 
the plan.

Effective/Applicability Dates

    Section 430 generally applies to plan years beginning on or after 
January 1, 2008. These regulations are proposed to apply to plan years 
beginning on or after January 1, 2009. However, in the case of a plan 
for which the effective date of section 430 is delayed in accordance 
with sections 104 through 106 of the Pension Protection Act of 2006, 
Public Law 109-280 (120 Stat. 780), the regulations are proposed to 
apply to plan years beginning on or after the date section 430 applies 
with respect to the plan. For plan years beginning in 2008, plans are 
permitted to rely on the provisions set forth in these proposed 
regulations for purposes of satisfying the requirements of section 430.

[[Page 74222]]

    Under the proposed regulations, any change in a plan's funding 
method that is made for the first plan year section 430 applies to the 
plan and that is not inconsistent with the requirements of section 430 
would be treated as having been approved by the Commissioner and would 
not require the Commissioner's specific prior approval. In addition, 
the Commissioner's specific prior approval is not required with respect 
to any actuarial assumptions that are adopted for the first plan year 
for which section 430 applies to the plan and that are not inconsistent 
with the requirements of section 430. Future guidance will cover 
procedures for obtaining the Commissioner's approval for changes in 
funding method and may provide for additional circumstances in which 
automatic approval is granted.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It has also 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations. It is hereby 
certified that the collection of information imposed by these proposed 
regulations will not have a significant economic impact on a 
substantial number of small entities. Accordingly, a regulatory 
flexibility analysis is not required. The estimated burden imposed by 
the collection of information contained in these proposed regulations 
is 0.75 hours per respondent. Moreover, this burden is attributable to 
the flexibility given under the applicable statutory requirements under 
which a plan sponsor may make any of several elections related to the 
interest rate used for minimum funding purposes. The written elections 
under these proposed regulations are made by the plan sponsor upon 
occasion and will require minimal time to prepare. Pursuant to section 
7805(f) of the Code, these regulations have been submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small business.

Comments and Requests for Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comments that are submitted timely to the 
IRS. The IRS and the Treasury Department specifically request comments 
on the clarity of the proposed regulations and how they may be made 
easier to understand. All comments will be available for public 
inspection and copying. A public hearing will be scheduled if requested 
in writing by any person that timely submits written comments. If a 
public hearing is scheduled, notice of the date, time, and place for 
the public hearing will be published in the Federal Register.

Drafting Information

    The principal authors of these regulations are Lauson C. Green and 
Linda S. F. Marshall, Office of Division Counsel/Associate Chief 
Counsel (Tax Exempt and Government Entities). However, other personnel 
from the IRS and the Treasury Department participated in the 
development of these regulations.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read, 
in part, as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. Section 1.430(d)-1 is added to read as follows:


Sec.  1.430(d)-1  Determination of target normal cost and funding 
target.

    (a) In general--(1) Overview. This section sets forth rules for 
determining a plan's target normal cost and funding target under 
sections 430(b) and 430(d), including guidance relating to the 
application of actuarial assumptions described in sections 430(h)(1) 
and 430(h)(4). Section 430 and this section apply to single employer 
defined benefit plans (including multiple employer plans as defined in 
section 413(c)) that are subject to section 412 but do not apply to 
multiemployer plans (as defined in section 414(f)). For further 
guidance on actuarial assumptions, see Sec.  1.430(h)(2)-1 (relating to 
interest rates) and Sec. Sec.  1.430(h)(3)-1 and 1.430(h)(3)-2 
(relating to mortality tables). See also Sec.  1.430(i)-1 for the 
determination of the funding target and target normal cost for a plan 
that is in at-risk status.
    (2) Organization of regulation. Paragraph (b) of this section sets 
forth definitions of target normal cost and funding target. Paragraph 
(c) of this section provides rules regarding which benefits are taken 
into account in determining a plan's target normal cost and funding 
target. Paragraph (d) of this section sets forth the rules regarding 
the plan provisions that are taken into account in making these 
determinations, and paragraph (e) of this section provides rules on 
which plan participants are taken into account for this purpose. 
Paragraph (f) of this section provides rules relating to the actuarial 
assumptions and the plan's funding method that are used to determine 
present values. Paragraph (g) of this section contains effective/
applicability dates and transition rules.
    (3) Special rules for multiple employer plans. In the case of a 
multiple employer plan to which section 413(c)(4)(A) applies, the rules 
of section 430 and this section are applied separately for each 
employer under the plan, as if each employer maintained a separate 
plan. Thus, the plan's funding target and target normal cost are 
computed separately for each employer 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 rules of section 430 and this section are applied as if all 
participants in the plan were employed by a single employer.
    (b) Definition of target normal cost, funding target, and funding 
target attainment percentage--(1) Target normal cost--(i) In general. 
For a plan that is not in at-risk status under section 430(i) for the 
plan year, the target normal cost of the plan for the plan year is the 
present value of all benefits that have accrued or have been earned (or 
that are expected to accrue or to be earned) under the plan during the 
plan year. See Sec.  1.430(i)-1(d) and (e)(2) for the determination of 
target normal cost for a plan that is in at-risk status.
    (ii) Benefits accruing for a plan year. The benefits that have been 
accrued or have been earned (or that are expected to accrue or to be 
earned) under a plan during a plan year include any increase in 
benefits during the plan year that is a result of any actual or 
projected increase in compensation during the current plan year, even 
if that increase in benefits is with respect to benefits attributable 
to services performed in a preceding plan year.
    (2) Funding target. For a plan that is not in at-risk status under 
section 430(i) for the plan year, the funding target of the plan for 
the plan year is the present value of all benefits that have been 
accrued or earned under the plan as of the first day of the plan year. 
See

[[Page 74223]]

Sec.  1.430(i)-1(c) and (e)(1) for the determination of the funding 
target for a plan that is in at-risk status.
    (3) Funding target attainment percentage. See Sec.  1.430(i)-
1(b)(3) and Sec.  1.436-1(j)(2) for rules relating to the determination 
of the funding target attainment percentage under section 430(d)(2).
    (c) Benefits taken into account--(1) In general--(i) Basic rule. 
The benefits taken into account in determining the funding target and 
target normal cost under paragraph (b) of this section are all benefits 
earned or accrued under the plan, including retirement-type and 
ancillary benefits.
    (ii) Allocation of benefits--(A) Benefits that are based on accrued 
benefits. If the amount of a benefit that is expected to be paid is a 
function of the accrued benefit at the time the benefit is expected to 
be paid, then the amount of the benefit that is taken into account in 
the funding target is determined by applying that function to the 
accrued benefit as of the beginning of the plan year and the amount of 
the benefit that is taken into account in the target normal cost is 
determined by applying that function to the increase in the accrued 
benefit for the plan year. For example, a benefit that is assumed to be 
payable at a particular early retirement age in the amount of 90% of 
the accrued benefit is taken into account in the funding target in the 
amount of 90% of the accrued benefit as of the beginning of the plan 
year, and that benefit is taken into account in the target normal cost 
in the amount of 90% of the increase in the accrued benefit for the 
plan year.
    (B) Benefits that are based on service. If the amount of a benefit 
that is expected to be paid is not a function of the accrued benefit at 
the time the benefit is expected to be paid, but is a function of the 
participant's service at that time, then the portion of the benefit 
taken into account for purposes of determining the funding target for a 
plan year is determined by applying that function to the participant's 
service as of the first day of the plan year and the amount of the 
benefit that is taken into account in the target normal cost is the 
increase in that benefit for the plan year based on the additional year 
of service. For example, if a plan provides a post-retirement death 
benefit of $500 per year of service, then the funding target is 
determined based on a death benefit of $500 multiplied by a 
participant's service at the beginning of the year and the target 
normal cost is based on the additional $500 in death benefits earned 
for one more year of service.
    (C) Other benefits. If the amount of a benefit that is expected to 
be paid is neither a function of the accrued benefit at the time the 
benefit is expected to be paid as described in paragraph (c)(1)(ii)(A) 
of this section nor a function of the participant's service at that 
time as described in paragraph (c)(1)(ii)(B) of this section, then the 
portion of the benefit taken into account for purposes of determining 
the funding target for a plan year is based on the proportion of a 
participant's service as of the first day of the plan year relative to 
the service the participant will have when the participant meets the 
age and service eligibility requirements for the benefit, and the 
portion of the benefit that is taken into account in the target normal 
cost is the increase in the proportional benefit for the plan year. For 
example, if a plan provides a Social Security supplement for a 
participant who retires after 30 years of service that is equal to a 
participant's Social Security benefit, the funding target is determined 
based on the participant's Social Security benefit as of the beginning 
of the plan year multiplied by a fraction, the numerator of which is 
the participant's service as of the first day of the plan year and the 
denominator of which is 30 years. In such a case, the target normal 
cost is based on the increase in the proportional benefit taking into 
account one additional year of service and any changes in the 
participant's Social Security benefit.
    (iii) Application of section 436 limitations to funding target and 
target normal cost determination. The determination of the funding 
target and target normal cost of a plan for a plan year is not 
permitted to take into account any limitations or anti