Determination of Minimum Required Pension Contributions, 20203-20220 [08-1133]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 73, Number 73 (Tuesday, April 15, 2008)]
[Proposed Rules]
[Pages 20203-20220]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 08-1133]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 54

[REG-108508-08]
RIN 1545-BH71


Determination of Minimum Required Pension Contributions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations providing guidance 
on the determination of minimum required contributions for purposes of 
the funding rules that apply to single employer defined benefit plans. 
These regulations would affect sponsors, administrators, participants, 
and beneficiaries of single employer defined benefit plans. This 
document also provides a notice of a public hearing on these proposed 
regulations.

DATES: Written or electronic comments must be received by July 14, 
2008. Outlines of topics to be discussed at the public hearing 
scheduled for August 4, 2008, at 10 a.m. must be received by July 15, 
2008.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-108508-08), room 
5203, Internal Revenue Service, PO 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-
108508-08), 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-108508-08). The 
public hearing will be held in the IRS Auditorium, Internal Revenue 
Building, 1111 Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Lauson C. 
Green or Linda S. F. Marshall at (202) 622-6090; concerning submissions 
of comments, the hearing, and/or being placed on the building access 
list to attend the hearing, Richard A. Hurst, at 
Richard.A.Hurst@irscounsel.treas.gov or (202) 622-7180 (not toll-free 
numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed Income Tax Regulations (26 CFR part 
1) under sections 430(a), 430(c), 430(e), and 430(j), as added to the 
Internal Revenue Code (Code) by the Pension Protection Act of 2006 (PPA 
'06), Public Law 109-280 (120 Stat. 780). In addition, this document 
contains proposed Excise Tax Regulations (26 CFR part 54) under section 
4971.
    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 
employer plans) pursuant to section 412.\1\
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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 Code section 412, 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 would 
apply as well for purposes of section 303 of ERISA.

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[[Page 20204]]

    Section 430(a) provides that a plan's minimum required contribution 
for a plan year is determined under one of two rules, depending on 
whether the value of plan assets is less than, or is equal to or 
greater than, the plan's funding target. If the value of plan assets is 
less than the funding target, the minimum required contribution is the 
sum of: (1) Target normal cost; (2) any shortfall amortization charge; 
and (3) any waiver amortization charge. If the value of plan assets 
equals or exceeds the funding target, the minimum required contribution 
is the plan's target normal cost, reduced (but not below zero) by the 
excess of the value of plan assets over the plan's funding target. For 
purposes of section 430(a), the value of plan assets is determined 
after reduction for certain funding balances as provided under section 
430(f)(4)(B).
    Section 430(c) provides that a shortfall amortization charge is the 
total (not less than zero) of the shortfall amortization installments 
for the plan year with respect to any shortfall amortization base 
established for that plan year and the 6 preceding plan years. Section 
430(c)(2)(A) provides that the shortfall amortization installments with 
respect to a shortfall amortization base established for a plan year 
are the amounts necessary to amortize the shortfall amortization base 
in level annual installments over the 7-plan-year period beginning with 
that plan year.
    Section 430(c)(3) provides that a shortfall amortization base is 
determined for a plan year based on the plan's funding shortfall for 
the plan year. Under section 430(c)(4), the funding shortfall is the 
amount (if any) by which the plan's funding target for the year exceeds 
the value of the plan's assets (as reduced by the funding standard 
carryover balance and prefunding balance under section 430(f)(4)(B)). 
The shortfall amortization base for a plan year is the plan's funding 
shortfall, minus the present value (determined using the interest rates 
under section 430(h)(2)) of the total of the shortfall amortization 
installments and waiver amortization installments that have been 
determined for the plan year and any succeeding plan year with respect 
to any shortfall amortization bases and waiver amortization bases for 
preceding plan years.
    Under section 430(c)(5), a shortfall amortization base is not 
established for a plan year if the value of a plan's assets is at least 
equal to the plan's funding target for the plan year. For this purpose, 
the prefunding balance is subtracted from the value of plan assets, but 
only if an election to use that prefunding balance to offset the 
minimum required contribution is in effect for the plan year. A 
transition rule applies for plan years beginning after 2007 and before 
2011 under which only a specified percentage of the plan's funding 
target is taken into account for purposes of section 430(c)(5). The 
transition rule does not apply to a plan that is not in effect for 2007 
or to a plan that is subject to the pre-PPA '06 deficit reduction 
contribution rules for 2007 (that is, a plan covering more than 100 
participants and with a funded current liability below the applicable 
threshold).
    Under section 430(e), the waiver amortization charge for a plan 
year is the total of the waiver amortization installments for the plan 
year with respect to any waiver amortization bases for the 5 preceding 
plan years. Under section 430(e)(2), the waiver amortization 
installments with respect to a waiver amortization base established for 
a plan year are the amounts necessary to amortize the waiver 
amortization base in level annual installments over the 5-plan-year 
period beginning with the succeeding plan year. Under section 
430(e)(4), the waiver amortization base for a plan year is the amount 
of the waived funding deficiency (if any) for that plan year.
    If a plan's funding shortfall for a plan year is zero (that is, the 
value of the plan's assets, reduced by the funding standard carryover 
balance and prefunding balance to the extent provided under section 
430(f)(4)(B), is at least equal to the plan's funding target for the 
year), any shortfall amortization bases and waiver amortization bases 
for preceding plan years (and any associated shortfall amortization 
installments and waiver amortization installments) are eliminated.
    Under section 430(j), as under pre-PPA '06 law, the due date for 
the payment of a minimum required contribution for a plan year is 
generally 8\1/2\ months after the end of the plan year. Any payment 
made on a date other than the valuation date for the plan year must be 
adjusted for interest accruing at the plan's effective interest rate 
under section 430(h)(2)(A) for the plan year for the period between the 
valuation date and the payment date. Pursuant to section 430(g)(2), the 
valuation date for a plan year must be the first day of the plan year 
except in the case of a small plan described in section 430(g)(2)(B).
    Under section 430(j)(3)(A), quarterly contributions must be made 
during a plan year if the plan had a funding shortfall for the 
preceding plan year. Each quarterly installment is 25% of the required 
annual payment. The required annual payment is equal to the lesser of 
90% of the minimum required contribution under section 430 for the plan 
year or 100% of the minimum required contribution under section 430 
(determined without regard to any waiver under section 412) for the 
preceding plan year. If a quarterly installment is not made, the 
interest charge that applies for the period of underpayment is 
determined using the plan's effective interest rate plus 5 percentage 
points. The requirements regarding quarterly contributions are similar 
to the requirements that formerly applied under section 412(m) as in 
effect before amendments made by PPA '06.
    Under section 430(j)(4), a plan sponsor of a plan that is subject 
to the quarterly contribution requirements for a plan year (other than 
a small plan described in section 430(g)(2)(B)) must make additional 
quarterly contributions in order to ensure that a minimum level of 
liquid assets is available to pay benefits as of the end of each 
quarter. Generally, this required minimum level of liquid assets is the 
amount of liquid assets needed to pay for three years of benefits, and 
an additional quarterly contribution (made in liquid assets) is due if 
the plan has insufficient liquid assets to meet this minimum level. A 
plan sponsor that fails to satisfy this liquidity requirement is 
treated as failing to make the required quarterly contribution and, 
pursuant to section 206(e) of ERISA, is required to cease making 
certain types of accelerated payments that are described in section 
401(a)(32)(B) of the Code. Pursuant to section 430(j)(4)(C), the 
portion of an installment that is treated as not made because of the 
liquidity requirement continues to be treated as unpaid until the close 
of the quarter that contains the due date for the contribution. These 
liquidity requirements are substantially similar to the requirements 
that formerly applied under section 412(m)(5), as in effect before 
amendments made by PPA '06.
    Section 402 of PPA '06 provides a series of special funding rules 
for a plan maintained by a commercial passenger airline (or by an 
employer whose principal business is providing catering services to a 
commercial passenger airline) if such an employer has made an election 
provided under that section. If an eligible employer has made the 
election described in section 402(a)(1) of PPA '06 (which is only 
available for a frozen plan), the calculation of the minimum required 
contribution for the plan is determined using a special 17-plan-year 
amortization period and an interest rate of 8.85%. If an eligible 
employer has made the election

[[Page 20205]]

described in section 402(a)(2) of PPA '06 (which can be made without 
regard to whether the plan is frozen), calculation of the minimum 
required contribution for the plan is determined using a special 10-
plan-year amortization period for the initial shortfall amortization 
base (that is, the shortfall amortization base for the first plan year 
for which section 430 applies to the plan) and, pursuant to the 
amendment to section 402 of PPA '06 made by 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), an interest rate of 8.25% is used to determine the funding target 
for each of those 10 plan years.
    Section 4971(a) provides an excise tax on a failure to meet 
applicable minimum funding requirements. In the case of a single 
employer plan, the tax is 10% of the aggregate unpaid minimum required 
contributions for all plan years remaining unpaid as of the end of any 
plan year ending with or within a taxable year. In the case of a 
multiemployer plan, the tax is 5% of the accumulated funding deficiency 
as of the end of any plan year ending with or within the taxable year. 
Section 4971(b) provides an additional excise tax that applies where 
the applicable minimum funding requirements remain unsatisfied for a 
specified period. Section 4971(c) provides definitions that apply for 
purposes of section 4971, including a definition of unpaid minimum 
required contribution (which is based on the new section 430 rules for 
determining the minimum required contribution for a year). Section 
4971(f) imposes a tax of 10% of the amount of the liquidity shortfall 
for a quarter that is not paid by the due date for the installment for 
that quarter.
    Regulations under section 4971 were issued on May 1, 1986 (TD 
8084). In addition, proposed regulations regarding section 4971 were 
issued on the same date. Guidance regarding quarterly contribution 
requirements under former section 412(m) was issued in Notice 89-52 
(1989-1 C.B. 692), and guidance regarding the liquidity requirements 
under former section 412(m)(5) was issued in Rev. Rul. 95-31 (1995-1 
C.B. 76). See Sec.  601.601(d)(2).

Explanation of Provisions

I. Overview

    These proposed regulations are the fourth in a series of proposed 
regulations under new section 430.\2\ These proposed regulations would 
provide guidance regarding the minimum contribution rules that apply to 
sponsors of single employer defined benefit plans under section 430. In 
addition, this document includes proposed regulations under section 
4971, reflecting changes to the excise tax rules under PPA '06.
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    \2\ Proposed 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), proposed 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), and proposed 
Sec. Sec.  1.430(d)-1, 1.430(g)-1, 1.430(h)(2)-1, and 1.430(i)-1, 
relating to measurement of plan assets and liabilities for pension 
funding purposes, were issued December 31, 2007 (REG-139236-07, 72 
FR 74215).
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II. Section 1.430(a)-1 Determination of Minimum Required Contribution

    Section 1.430(a)-1 would provide rules for determining the minimum 
required contribution for a single employer defined benefit plan 
(including a multiple employer plan under section 413(c)) for a plan 
year under section 430(a). The determination of the amount of the 
minimum required contribution for a plan year depends on whether the 
value of plan assets, as reduced to reflect certain funding balances 
pursuant to section 430(f)(4)(B) (but not below zero), equals or 
exceeds the plan's funding target for the plan year. If this value of 
plan assets is less than the funding target for the plan year, the 
minimum required contribution for that plan year is equal to the sum of 
the plan's target normal cost for the plan year plus any applicable 
shortfall amortization installments and waiver amortization 
installments. If this value of plan assets equals or exceeds the 
funding target for the plan year, the minimum required contribution for 
that plan year is equal to the target normal cost of the plan for the 
plan year reduced (but not below zero) by any such excess.
    The proposed regulations provide that the shortfall amortization 
installments with respect to a shortfall amortization base established 
for a plan year are the annual amounts necessary to amortize that 
shortfall amortization base in level annual installments over the 7-
year period beginning with that plan year. As provided in proposed 
Sec.  1.430(h)(2)-1(f)(2), these installments are determined assuming 
that the installments are paid on the valuation date for each plan year 
and using the interest rates applicable under section 430(h)(2)(C) or 
(D). The shortfall amortization installments are determined using the 
interest rates that apply for the plan year for which the shortfall 
amortization base is established and are not redetermined in subsequent 
plan years to reflect changes in interest rates under section 430(h)(2) 
for those subsequent plan years.\3\
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    \3\ The proposed regulations reflect the alternative 
amortization periods and interest rates that apply to a commercial 
passenger airline (or other eligible employer) that has made an 
election under section 402 of PPA '06.
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    Under the proposed regulations, if the value of plan assets 
(reduced by the prefunding balance if the prefunding balance is used to 
offset the minimum required contribution for the plan year as provided 
under Sec.  1.430(f)-1(c), but not below zero) is equal to or greater 
than the funding target for the plan year, then no shortfall 
amortization base is established for that plan year. If this value of 
plan assets is less than the funding target for the plan year, a 
shortfall amortization base is established for the plan year. In such a 
case, the shortfall amortization base (which can be either positive or 
negative) is equal to the funding shortfall of the plan for the plan 
year, minus the sum of the present values of any remaining shortfall 
amortization installments and waiver amortization installments 
(determined in accordance with Sec.  1.430(h)(2)-1(f)(2) using the 
interest rates that apply for the current plan year). For this purpose, 
the funding shortfall of a plan for any plan year is the excess (if 
any) of the funding target of the plan for the plan year, over the 
value of plan assets for the plan year (as reduced to reflect the 
subtraction of the funding standard carryover balance and prefunding 
balance to the extent provided under Sec.  1.430(f)-1(c)).
    The proposed regulations reflect the transition rule under section 
430(c)(5)(B) under which only a specified portion of the funding target 
is taken into account in determining whether a shortfall amortization 
base is established for plan years beginning before January 1, 2011. 
This transition rule does not apply with respect to any plan year 
beginning after 2008 if a shortfall amortization base was required to 
be established for any preceding year, nor does it apply to a plan that 
was not in effect for a plan year beginning in 2007 or to a plan that 
was subject to section 412(l) for the last plan year before section 430 
applies to the plan (the pre-effective plan year), determined after the 
application of section 412(l)(6) and (9). The proposed regulations 
would not provide for any adjustment to the applicable percentages 
under this transition rule for a plan for which the effective date of 
section 430 is delayed under sections 104 through 106 of PPA `06.

[[Page 20206]]

    Under the proposed regulations, the waiver amortization 
installments with respect to a waiver amortization base established for 
a plan year are the annual amounts necessary to amortize that waiver 
amortization base in level annual installments over the 5-year period 
beginning with the following plan year. As provided in proposed Sec.  
1.430(h)(2)-1(f)(2), these installments are determined assuming that 
the installments are paid on the valuation date for each plan year and 
using the interest rates applicable under section 430(h)(2). Thus, if 
the plan is using segment rates, the installments are determined by 
applying the first segment rate to the first four installments and the 
second segment rate to the fifth (and final) installment. The waiver 
amortization installments established with respect to a waiver 
amortization base are determined using the interest rates that apply 
for the plan year for which the waiver is granted (even though the 
first installment with respect to the waiver amortization base is not 
due until the subsequent plan year) and are not redetermined in 
subsequent plan years to reflect changes in interest rates under 
section 430(h)(2) for those subsequent plan years. A waiver 
amortization base is established for each plan year for which a waiver 
of the minimum funding standard has been granted, and the amount of 
that waiver amortization base is equal to the amount of the minimum 
required contribution waived (or the waived funding deficiency) for the 
plan year.
    In the case of a plan that received a funding waiver under section 
412 for a plan year for which section 430 was not yet effective with 
respect to the plan, the proposed regulations provide that the waiver 
is treated as giving rise to a waiver amortization base, and the 
amortization charges with respect to that funding waiver are treated as 
waiver amortization installments. With respect to such a preexisting 
funding waiver, the amount of the annual waiver amortization 
installment is equal to the amortization charge with respect to that 
waiver determined using the interest rate or rates that applied for the 
pre-effective plan year. Thus, for a plan that received a waiver in the 
past, the plan sponsor would have to contribute the amounts needed to 
amortize that waiver over the original schedule as previously 
established.
    In accordance with section 430(c)(6), the proposed regulations 
provide that, in any case in which the funding shortfall of a plan for 
a plan year is zero, the shortfall amortization bases for all preceding 
plan years (and all shortfall amortization installments determined with 
respect to those shortfall amortization bases) are reduced to zero, and 
the waiver amortization bases for all preceding plan years (and all 
waiver amortization installments determined with respect to such bases) 
are reduced to zero.
    The proposed regulations would provide rules for determining the 
amount of a minimum required contribution for a short plan year. Under 
the proposed regulations, the amortization installments are prorated 
for a short plan year. The proposed regulations would not provide for 
any proration of the target normal cost. Instead, the determination of 
target normal cost would reflect actual accruals that accrue or are 
expected to accrue during the plan year.\4\ The proposed regulations 
also provide rules for the treatment of installments in subsequent plan 
years to take into account the proration of these installments for 
short plan years and any change in valuation date.
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    \4\ See 29 CFR 2530.204-2(e) for rules relating to changes in 
accrual computation periods.
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III. Section 1.430(j)-1 Payment of Minimum Required Contributions

    The proposed regulations under section 430(j) would provide rules 
related to the payment of minimum required contributions, including the 
payment of quarterly contributions and liquidity requirements. The 
proposed regulations provide that any payment of the minimum required 
contribution under section 430 for a plan year that is made on a date 
other than the valuation date for that plan year is adjusted for 
interest accruing for the period between the valuation date and the 
payment date, at the effective interest rate for the plan for that plan 
year determined pursuant to Sec.  1.430(h)(2)-1(f)(1). The direction of 
the adjustment depends on whether the contribution is paid before or 
after the valuation date for the plan year. If the contribution is paid 
after the valuation date for the plan year, the contribution is 
discounted to the valuation date using the plan's effective interest 
rate. By contrast, if the contribution is paid before the valuation 
date for the plan year (which could only occur in the case of a small 
plan described in section 430(g)(2)(B)), the contribution is increased 
for interest at that same interest rate.
    Under the proposed regulations, a payment of the minimum required 
contribution under section 430 for a plan year can be made no earlier 
than the first day of the plan year. The deadline for any payment of 
any minimum required contribution for a plan year is 8\1/2\ months 
after the close of the plan year. If a minimum required contribution is 
not paid by this deadline, an excise tax applies under section 4971.
    The proposed regulations would provide rules for accelerated 
quarterly contributions for underfunded plans. These rules are similar 
to the rules provided under Notice 89-52; however, these rules have 
been updated to reflect statutory changes. These statutory changes 
include changes regarding which plans are subject to the quarterly 
contribution requirements as well as the interest rates applicable to 
missed quarterly contributions.
    Under the proposed regulations, in any case in which the plan has a 
funding shortfall for the preceding plan year, the employer maintaining 
the plan must make the required quarterly installments.\5\ The amount 
of each required quarterly installment is equal to 25% of the required 
annual payment. For this purpose, the required annual payment is equal 
to the lesser of 90% of the minimum required contribution under section 
430(a) for the plan year, or 100% of the minimum required contribution 
under section 430(a) (determined without regard to any funding waiver 
under section 412) for the preceding plan year. These minimum required 
contributions are determined under section 430 as of the valuation date 
for each year and have no adjustment for interest.\6\ The proposed 
regulations provide that, for purposes of determining the required 
annual payment, the minimum required contribution for a plan year is 
determined without regard to use of the prefunding balance or funding 
standard carryover balance in the current year or any prior year.
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    \5\ These proposed regulations do not provide rules for 
determining whether a plan has a funding shortfall for the 2007 plan 
year for purposes of determining whether the plan must make required 
quarterly installments for the 2008 plan year. Nonetheless, plans 
must make this determination on a reasonable basis. See the 
discussion in this preamble under the heading ``Proposed 
Legislation'' for a rule that the IRS and the Treasury Department 
are considering for this purpose.
    \6\ In determining required installations for the plan year that 
begins in 2008, the minimum required contribution for the 2007 plan 
year under section 412 is used as the minimum required contribution 
for the preceding plan year. This amount, which does not reflect 
either use of the credit balance or the granting of any funding 
waiver, is adjusted with interest to the end of the 2007 plan year 
at the plan's valuation interest rate for the 2007 plan year.
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    Pursuant to section 430(j)(3)(C), the proposed regulations would 
provide that the due dates for the four required quarterly installments 
with respect to a

[[Page 20207]]

full plan year are as follows: The first installment is due on the 15th 
day of the 4th plan month, the second installment is due on the 15th 
day of the 7th plan month, the third installment is due on the 15th day 
of the 10th plan month, and the fourth installment is due on the 15th 
day following the close of the plan year. In the case of a short plan 
year, the proposed regulations would provide rules for determining the 
amount of the required annual payment, the number and due dates of 
installments, and the amount of those installments. The proposed 
regulations also provide rules for determining the plan month in the 
case of a plan year that does not begin on the first day of a calendar 
month.
    The proposed regulations would provide that, if the employer fails 
to pay the full amount of a required installment, then the rate of 
interest used to adjust the amount of the contribution with respect to 
the underpayment of the required installment for the period of time 
that begins on the due date for the required installment and that ends 
on the date of payment is equal to the effective interest rate for the 
plan for that plan year determined pursuant to Sec.  1.430(h)(2)-
1(f)(1) plus 5 percentage points. This increased interest rate applies 
only to installments that are due after the valuation date for the plan 
year because section 430(j)(3) refers to interest being charged on late 
quarterly contributions. The amount of the underpayment is equal to the 
excess of the required installment over the amount (if any) of the 
installment contributed to or under the plan on or before the due date 
for the installment. For this purpose, the proposed regulations contain 
an ordering rule under which contributions are to be credited against 
unpaid required installments in the order in which those installments 
were required to be paid.
    As was the case in Notice 89-52, the proposed regulations would 
provide that a plan sponsor generally can use a plan's funding balances 
to satisfy quarterly contribution requirements. However, this rule is 
subject to the new limitation on the use of funding balances by 
underfunded plans pursuant to section 430(f)(3)(C). An eligible plan 
sponsor's election to use the plan's prefunding balance and funding 
standard carryover balance under section 430(f) satisfies the 
obligation to make an installment on the date of the election, to the 
extent of the amount elected, as adjusted with interest at the plan's 
effective interest rate under section 430(h)(2)(A) for the plan year 
from the valuation date through the due date of the installment. 
Comments are requested regarding whether rules should be provided under 
which a plan sponsor is deemed to make an election to use a funding 
balance to the extent it is available to avoid a failure to make any 
required quarterly installment or under which a plan sponsor can make a 
single election that will apply to all future quarterly installments 
until revoked.
    A plan sponsor that uses the plan's prefunding balance or funding 
standard carryover balance toward satisfaction of the plan's quarterly 
contribution requirement before the plan's effective interest rate for 
the plan year has been determined should assume, in order to ensure 
that the quarterly contribution requirements are satisfied, that the 
effective interest rate is equal to the lowest of the three segment 
rates (generally the first segment rate) to adjust the elected amount. 
Plan sponsors should also note that, pursuant to proposed Sec.  
1.430(f)-1(b)(1)(ii)(B), the amount of the funding balance that is used 
to satisfy the quarterly contribution requirements cannot later be 
added back to the prefunding balance (because only contributions in 
excess of the minimum funding requirement, determined without regard to 
the offset under section 430(f)(3), are eligible to be added to the 
prefunding balance).
    The proposed regulations would provide rules for the liquidity 
requirements that generally apply to plans for which quarterly 
contributions are required. Under the proposed regulations, a plan 
subject to the requirement to make quarterly contributions (other than 
a small plan described in section 430(g)(2)(B)) is treated as failing 
to pay the full amount of the required installment for a quarter to the 
extent that the value of the liquid assets paid after the close of that 
quarter and on or before the due date for the installment is less than 
the liquidity shortfall for that quarter. Thus, in order to satisfy the 
quarterly contribution requirement for a quarter, liquid assets in the 
amount of the liquidity shortfall must be contributed after the close 
of that quarter and on or before the due date for the installment.\7\ 
The use of funding balances or the contribution of illiquid assets 
cannot remedy a liquidity shortfall.
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    \7\ In this context, see Department of Labor Interpretive 
Bulletin 94-3 (29 CFR 2509.94-3), which sets forth the Department's 
view that, in the absence of an applicable exemption, a contribution 
by an employer to a defined benefit plan in a form other than cash 
constitutes a prohibited transaction under section 406 of ERISA and 
section 4975 of the Code.
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    The rules under the proposed regulations relating to the liquidity 
requirements are similar to the rules provided under Rev. Rul. 95-31; 
however, these rules have been updated to reflect statutory changes. 
For example, the definition of liquid assets under the proposed 
regulations is the same as the definition of liquid assets under Rev. 
Rul. 95-31. Unlike Rev. Rul. 95-31, the proposed regulations measure 
satisfaction of a liquidity shortfall by reference to contributions 
made after the close of the quarter and by the due date for the 
installment while including contributions made during the plan quarter 
in plan assets. Although this appears to be a change from the rules of 
Rev. Rul. 95-31, the two formulations are mathematically identical.
    The proposed regulations provide that, for purposes of applying the 
additional 5 percentage point interest adjustment in the case of a 
quarterly contribution that is not fully paid, the liquidity increment 
for the quarter (the portion of the quarterly installment that is due 
solely by reason of the liquidity requirements) continues to be treated 
as unpaid until the close of the quarter in which the due date for that 
installment occurs, regardless of when it is contributed. However, for 
purposes of adjusting the contribution to the valuation date at the 
effective interest rate, the adjustment is made from the actual 
contribution date (rather than from the close of the quarter). In 
addition, the proposed regulations provide an ordering rule under 
which, if a contribution for a quarter is less than the total amount 
needed to satisfy the quarterly contribution requirement taking into 
account the liquidity requirement, then the contribution is first 
attributed toward satisfying the quarterly contribution requirement 
determined without regard to the liquidity requirement.
    Under the proposed regulations, if the amount of any required 
installment is increased because of the liquidity shortfall rules, that 
increase cannot exceed the amount that, when added to prior required 
installments determined under section 430(j) for the plan year, would 
increase the funding target attainment percentage of the plan for the 
plan year (taking into account the expected increase in funding target 
due to benefits accruing or earned during the plan year) to 100%.
    The proposed regulations would provide that the rules under section 
430(j) generally apply to a plan maintained by a commercial passenger 
airline (or other eligible employer) that has made an election under 
section 402(a)(1) or 402(a)(2) of PPA '06 in the same manner as they 
apply to any other

[[Page 20208]]

plan subject to section 430. However, in the case of a plan with 
respect to which the election under section 402(a)(1) of PPA '06 has 
been made, the determination of the funding shortfall for a plan year 
is made by reference to the unfunded liability under section 
402(e)(3)(A) of PPA '06. In addition, the effective interest rate for a 
plan with respect to which the election under section 402(a)(1) of PPA 
'06 has been made is deemed to be 8.85%. Pursuant to proposed Sec.  
1.430(h)(2)-1(f)(1), the effective interest rate for a plan with 
respect to which the election under section 402(a)(2) of PPA `06 has 
been made will be 8.25% for the 10-year period during which the 
election applies to the plan.

IV. Section 54.4971(c)-1 Taxes on Failure To Meet Minimum Funding 
Standards

    These proposed regulations set forth the definitions that apply for 
purposes of applying the rules of section 4971 that were modified by 
PPA '06.
    The proposed regulations define the term accumulated funding 
deficiency (which is only relevant for a multiemployer plan) as having 
the meaning given to that term by section 431. A multiemployer plan's 
accumulated funding deficiency for a plan year takes into account all 
charges and credits to the funding standard account under section 412 
for plan years before the first plan year for which section 431 applies 
to the plan.
    The proposed regulations define the term unpaid minimum required 
contribution, with respect to any plan year, as any minimum required 
contribution under section 430 for the plan year that is not paid on or 
before the due date for the plan year under section 430(j)(1). The 
proposed regulations provide that a plan's accumulated funding 
deficiency under section 412 for the pre-effective plan year is treated 
as an unpaid minimum required contribution for that plan year until 
correction is made. Unlike the determination of accumulated funding 
deficiency which applied under section 412 prior to PPA '06, the total 
unpaid minimum required contributions is not adjusted with interest. 
However, as described in the following paragraph, correction of an 
unpaid minimum required contribution does require a contribution that 
includes an adjustment for interest.
    The proposed regulations define the term correct as it applies to 
the accumulated funding deficiency and the unpaid minimum required 
contribution of a plan. With respect to an accumulated funding 
deficiency under a multiemployer plan, the proposed regulations set 
forth rules that are the same as the rules set forth in proposed Sec.  
54.4971-2(a). Under the proposed regulations, the correction of an 
unpaid minimum required contribution under a single employer plan for a 
plan year requires the contribution, to or under the plan, of the 
amount that, when discounted to the valuation date for the plan year 
for which the unpaid minimum required contribution is due at the 
appropriate rate of interest, equals or exceeds the unpaid minimum 
required contribution. For this purpose, the appropriate rate of 
interest is the plan's effective interest rate for the plan year for 
which the unpaid minimum required contribution is due except to the 
extent that the payments are subject to additional interest as provided 
under section 430(j)(3) or (4). With respect to an unpaid minimum 
required contribution, the proposed regulations provide an ordering 
rule under which a contribution is attributable first to the earliest 
plan year of any unpaid minimum required contribution for which 
correction has not yet been made. With respect to an accumulated 
funding deficiency under section 412 for the pre-effective plan year 
that is treated as an unpaid minimum required contribution, the 
proposed regulations provide that correction requires the contribution, 
to or under the plan, of the amount of that accumulated funding 
deficiency adjusted with interest from the end of the pre-effective 
plan year to the date of the contribution at the plan's valuation 
interest rate for the pre-effective plan year.
    The IRS and the Treasury Department intend to issue further 
guidance in the future on the application of section 4971, including 
special rules applicable to multiemployer plans that are in critical or 
endangered status under section 432.

Proposed Legislation

    As of the date of the issuance of these proposed regulations, bills 
have been passed in the House of Representatives and the Senate that 
would provide for technical corrections to PPA '06.\8\ These bills 
would amend section 430(j)(3)(A) to authorize the Treasury Department 
to provide rules for determining the funding shortfall for purposes of 
the pre-effective plan year and would add section 430(j)(3)(E)(iii) to 
authorize the Treasury Department to provide special rules for the 
treatment of quarterly contributions in the case of a plan with a 
valuation date other than the first day of the plan year. These bills 
would also specify an effective date for the PPA '06 amendments to 
section 4971.
---------------------------------------------------------------------------

    \8\ See H.R. 3361 as passed by the House of Representatives on 
March 13, 2008 and S. 1974 as passed by the Senate on December 19, 
2007.
---------------------------------------------------------------------------

    These proposed regulations have reserved Sec.  1.430(j)-1(c)(6) and 
Sec.  1.430(j)-1(g)(5)(ii) in order to accommodate any enacted changes 
to section 430(j). If legislation similar to that in the proposed 
technical corrections is enacted, the IRS and the Treasury Department 
are considering including the following provisions in final 
regulations. First, the funding shortfall for the pre-effective plan 
year would be determined as the excess (if any) of the plan's current 
liability determined pursuant to section 412(l)(7) on the valuation 
date for the plan's pre-effective plan year, over the net plan assets 
for the pre-effective plan year as determined under Sec.  1.430(i)-
1(f)(5)(ii). Second, if a quarterly installment is due before the 
valuation date for the plan year, the minimum required contribution for 
the plan year would be increased by an additional amount if that 
quarterly installment is not paid by the due date. This additional 
amount would be determined by applying interest at an annual rate of 5% 
to the underpayment of the required installment for the period of time 
between the due date for the required installment and the earlier of 
the date of payment or the valuation date.

Effective/Applicability Dates of Regulations

    Section 430 generally applies to plan years beginning on or after 
January 1, 2008. The proposed regulations under section 430 are 
proposed to apply generally to plan years beginning on or after January 
1, 2009. When the regulations are finalized, plans will be permitted to 
apply them for plan years beginning in 2008. In addition, for plan 
years beginning in 2008, plans are permitted to rely on the proposed 
regulations for purposes of satisfying the requirements of section 430. 
In the case of a plan for which the effective date of section 430 is 
delayed in accordance with sections 104 through 106 of PPA '06, the 
regulations are proposed to apply to plan years beginning on or after 
the date section 430 first applies with respect to the plan.
    The amendments made to section 4971 by section 114 of PPA '06 do 
not have a specific effective date. The regulations provide that the 
amendments to section 4971 generally apply at the same time as the 
amendments to section 430 (or section 431, as applicable) apply to the 
plan. Thus, the regulations provide that the amendments to section 4971 
generally

[[Page 20209]]

apply to taxable years beginning on or after January 1, 2008, but only 
with respect to plan years for which section 430 (or section 431) 
applies to the plan that end with or within any such taxable year. In 
the case of a plan to which a delayed effective date applies pursuant 
to sections 104 through 106 of PPA '06, the regulations provide that 
the amendments made to section 4971 apply to the same taxable years, 
but only with respect to plan years for which section 430 applies to 
the plan. The regulations under section 4971 generally are proposed to 
apply at the same time the statutory changes to section 4971 under PPA 
'06 become effective but would not apply to taxable years ending before 
April 15, 2008. Thus, for example, the regulations under section 4971 
would not apply to a short taxable year beginning January 1, 2008, and 
ending February 29, 2008.

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 and, because 
the proposed regulations do not impose a collection of information on 
small entities, a regulatory flexibility analysis is not required. 
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 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 has been scheduled for August 4, 2008, beginning 
at 10 a.m. in the Auditorium, Internal Revenue Service, 1111 
Constitution Avenue, NW., Washington, DC. Due to building security 
procedures, visitors must enter at the Constitution Avenue entrance. In 
addition, all visitors must present photo identification to enter the 
building. Because of access restrictions, visitors will not be admitted 
beyond the immediate entrance area more than 30 minutes before the 
hearing starts. For information about having your name placed on the 
building access list to attend the hearing, see the FOR FURTHER 
INFORMATION CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit written or 
electronic comments by July 15, 2008, and an outline of topics to be 
discussed and the amount of time to be devoted to each topic (a signed 
original and eight (8) copies) by July 15, 2008. A period of 10 minutes 
will be allotted to each person for making comments. An agenda showing 
the scheduling of the speakers will be prepared after the deadline for 
receiving outlines has passed. Copies of the agenda will be available 
free of charge at the hearing.

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

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 54

    Excise taxes, Insurance, 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(a)-1 is added to read as follows:


Sec.  1.430(a)-1  Determination of minimum required contribution.

    (a) In general--(1) Overview. This section sets forth rules for 
determining a plan's minimum required contribution for a plan year 
under section 430(a). 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)). Paragraph 
(b) of this section defines a plan's minimum required contribution for 
a plan year. Paragraph (c) of this section provides rules for 
determining shortfall amortization installments. Paragraph (d) of this 
section provides rules for determining waiver amortization 
installments. Paragraph (e) of this section provides for early deemed 
amortization of shortfall and waiver amortization bases for fully 
funded plans. Paragraph (f) of this section provides definitions that 
apply for purposes of this section. Paragraph (g) of this section 
provides examples that illustrate the application of this section. 
Paragraph (h) of this section provides effective/applicability dates 
and transition rules.
    (2) 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 minimum required contribution is 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 minimum required contribution--(1) In general. In 
the case of a defined benefit plan that is not a multiemployer plan 
(within the meaning of section 414(f)), except as offset under section 
430(f) and Sec.  1.430(f)-1, the minimum required contribution for a 
plan year is determined as the applicable amount determined under 
paragraph (b)(2) of this section or paragraph (b)(3) of this section, 
reduced by the amount of any funding waiver under section 412(c) that 
is granted for the plan year. See paragraph (b)(4) of this section for 
special rules for a plan maintained by a commercial passenger airline 
(or other eligible employer) for which an election under section 402 of 
the Pension Protection Act of 2006, Public Law 109-280 (120 Stat. 780) 
(PPA '06), has been made, and see section 430(j) and Sec.  1.430(j)-1 
for rules regarding the required interest adjustment for a contribution 
that is paid on a date other than the valuation date for the plan year.

[[Page 20210]]

    (2) Plan assets less than funding target--(i) General rule. For any 
plan year in which the value of plan assets of the plan (as reduced to 
reflect the subtraction of certain funding balances as provided under 
Sec.  1.430(f)-1(c), but not below zero) is less than the funding 
target of the plan for the plan year, the minimum required contribution 
for that plan year is equal to the sum of--
    (A) The target normal cost of the plan for the plan year;
    (B) The total (not less than zero) of the shortfall amortization 
installments determined with respect to the shortfall amortization 
bases for the plan year and each of the 6 preceding plan years as 
described in paragraph (c) of this section; and
    (C) The total of the waiver amortization installments determined 
with respect to the waiver amortization bases for each of the 5 
preceding plan years as described in paragraph (d) of this section.
    (ii) Special rule for short plan years--(A) Proration of 
amortization installments. In determining the minimum required 
contribution in the case of a plan year that is shorter than 12 months 
(and is not a 52-week plan year of a plan that uses a 52-53 week plan 
year), the shortfall amortization installments and waiver amortization 
installments that are taken into account under paragraphs (b)(2)(i)(B) 
and (C) of this section are determined by multiplying the amount of 
those installments that would be taken into account for a 12-month plan 
year by a fraction, the numerator of which is the duration of the short 
plan year and the denominator of which is 1 year.
    (B) Effect on subsequent years. In plan years after the short plan 
year, installments with respect to a shortfall amortization base (or 
waiver amortization base) continue to be taken into account under 
paragraphs (b)(2)(i)(B) and (C) of this section until the total amount 
of those installments, as originally determined to be paid over 7 years 
(or 5 years in the case of waiver amortization installments), has been 
taken into account. Thus, for example, in the case of a plan that has a 
short plan year, an additional partial installment will be taken into 
account under paragraphs (b)(2)(i)(B) and (C) of this section during 
the plan year after the end of the original amortization period in an 
amount determined so that the total of the amortization installments 
(including the prorated installment payable for the short plan year and 
the additional partial installment) is equal to the total amount of the 
amortization installments as originally determined. Similarly, in the 
case of a plan that has a short plan year, the total number of plan 
years required to take into account the full amount of installments 
will exceed 7 plan years (or 5 plan years in the case of waiver 
amortization installments), and, accordingly, the number of preceding 
plan years taken into account in paragraphs (b)(2)(i)(B) and (C) of 
this section is correspondingly increased so that the total amount of 
the amortization installments as originally determined is taken into 
account. In addition, for plan years beginning after the close of the 
short plan year, the shortfall amortization installments and waiver 
amortization installments that are taken into account under paragraphs 
(b)(2)(i)(B) and (C) of this section are assumed to be paid on the 
valuation date for the new plan year (rather than on the valuation date 
for the short plan year and preceding plan years).
    (3) Plan assets equal or exceed funding target. For any plan year 
in which the value of plan assets (as reduced to reflect the 
subtraction of certain funding balances as provided under Sec.  
1.430(f)-1(c), but not below zero) equals or exceeds the funding target 
of the plan for the plan year, the minimum required contribution for 
that plan year is equal to the target normal cost of the plan for the 
plan year reduced (but not below zero) by that excess.
    (4) Special rules for commercial passenger airlines--(i) In 
general. This paragraph (b)(4) provides special rules for a plan 
maintained by a commercial passenger airline (or an employer whose 
principal business is providing catering services to a commercial 
passenger airline) for which an election under section 402 of PPA '06 
has been made.
    (ii) Frozen plans--(A) Determinations during 17-year amortization 
period. If an election described in section 402(a)(1) of PPA '06 
applies for the plan year with respect to an eligible plan described in 
section 402(c)(1) of PPA '06, then the plan's minimum required 
contribution for purposes of section 430 of the Code for the plan year 
is equal to the amount necessary to amortize (at an interest rate of 
8.85 percent) the unfunded liability of the plan in equal installments 
over the remaining amortization period. For this purpose, the unfunded 
liability means the excess of the accrued liability under the plan 
determined using the unit credit funding method and an interest rate of 
8.85 percent over the fair market value of assets, and the remaining 
amortization period is the 17-plan-year period beginning with the first 
plan year for which the election was made, reduced by 1 year for each 
plan year after the first plan year for which the election was made. In 
addition, the section 430(f)(3) election to apply funding balances 
against the minimum required contribution does not apply to a plan to 
which the election described in section 402(a)(1) of PPA '06 applies 
for the plan year.
    (B) Determinations following 17-year amortization period. If an 
election described in section 402(a)(1) of PPA '06 applied to the plan 
for any preceding plan year but does not apply for the current plan 
year, then the plan's minimum required contribution for purposes of 
section 430 of the Code for the plan year is determined without regard 
to that election. For the first plan year for which that election no 
longer applies to the plan, any prefunding balance or funding standard 
carryover balance is reduced to zero.
    (iii) Other plans of commercial passenger airlines. If an election 
described in section 402(a)(2) of PPA '06 has been made for an eligible 
plan described in section 402(c)(1) of PPA '06, then the minimum 
required contribution for purposes of section 430 is determined under 
generally applicable rules, except that the shortfall amortization base 
for the first plan year for which section 430 applies to the plan is 
amortized over 10 years (rather than over 7 years as provided in 
paragraph (c)(1) of this section) in accordance with Sec.  1.430(h)(2)-
1(e) and (f) using the interest rates that apply for the first plan 
year for which section 430 applies to the plan. In such a case, the 
shortfall amortization installments with respect to the shortfall 
amortization base for that plan year will continue to be included in 
determining the minimum required contribution for 10 years rather than 
7 years. See also Sec.  1.430(h)(2)-1(b)(6) for a special rule for 
determining the funding target in the case of a plan for which an 
election under section 402(a)(2) of PPA '06 has been made.
    (c) Shortfall amortization installments--(1) In general. For 
purposes of this section, the shortfall amortization installments with 
respect to a shortfall amortization base established for a plan year 
are the annual amounts necessary to amortize that shortfall 
amortization base in level annual installments over the 7-year period 
beginning with that plan year. See Sec.  1.430(h)(2)-1(e) and (f) for 
rules regarding interest rates used for determining shortfall 
amortization installments and the date within each plan year on which 
the installments are assumed to be paid. The shortfall amortization 
installments are determined using the interest rates that apply for the 
plan year for which the

[[Page 20211]]

shortfall amortization base is established and are not redetermined in 
subsequent plan years to reflect changes in interest rates under 
section 430(h)(2) for those subsequent plan years.
    (2) Shortfall amortization base--(i) In general. For purposes of 
this section, unless the value of plan assets (as reduced to reflect 
the subtraction of certain funding balances as provided under Sec.  
1.430(f)-1(c)(2), but not below zero) is equal to or greater than the 
funding target of the plan for the plan year, a shortfall amortization 
base is established for the plan year equal to--
    (A) The funding shortfall of the plan for the plan year; minus
    (B) The amount attributable to future installments determined under 
paragraph (c)(2)(ii) of this section.
    (ii) Amount attributable to future installments. The amount 
attributable to future installments is equal to the sum of the present 
values (determined in accordance with Sec.  1.430(h)(2)-1(e) and (f) 
using the interest rates that apply for the current plan year) of--
    (A) The shortfall amortization installments that have been 
determined for the plan year and any succeeding plan year with respect 
to the shortfall amortization bases of the plan for any plan year 
preceding the plan year; and
    (B) The waiver amortization installments that have been determined 
for the plan year and any succeeding plan year with respect to the 
waiver amortization bases of the plan for any plan year preceding the 
plan year.
    (iii) Transition rule. See paragraph (h)(4) of this section for a 
transition rule under which only a portion of the funding target is 
taken into account in determining whether a shortfall amortization base 
is established under this paragraph (c)(2).
    (d) Waiver amortization installments--(1) In general. For purposes 
of this section, the waiver amortization installments with respect to a 
waiver amortization base established for a plan year are the annual 
amounts necessary to amortize that waiver amortization base in level 
annual installments over the 5-year period beginning with the following 
plan year. See Sec.  1.430(h)(2)-1(e) and (f) for rules regarding 
interest rates used for determining waiver amortization installments 
and the date within each plan year on which the installments are 
assumed to be paid. The waiver amortization installments established 
with respect to a waiver amortization base are determined using the 
interest rates that apply for the plan year for which the waiver is 
granted (even though the first installment with respect to the waiver 
amortization base is not due until the subsequent plan year) and are 
not redetermined in subsequent plan years to reflect changes in 
interest rates under section 430(h)(2) for those subsequent plan years.
    (2) Waiver amortization base--(i) In general. For purposes of this 
section, a waiver amortization base is established for each plan year 
for which a waiver of the minimum funding standard has been granted in 
accordance with section 412(c). The amount of the waiver amortization 
base is equal to the amount of the minimum required contribution waived 
(or the waived funding deficiency) for the plan year.
    (ii) Transition rule. See paragraph (h)(3) of this section for the 
treatment of funding waivers granted for plan years beginning before 
2008.
    (e) Early deemed amortization upon attainment of funding target. In 
any case in which the funding shortfall of a plan for a plan year is 
zero--
    (1) The shortfall amortization bases for all preceding plan years 
(and all shortfall amortization installments determined with respect to 
those shortfall amortization bases) are reduced to zero; and
    (2) The waiver amortization bases for all preceding plan years (and 
all waiver amortization installments determined with respect to such 
bases) are reduced to zero.
    (f) Definitions--(1) In general. The definitions set forth in this 
paragraph (f) apply for purposes of this section.
    (2) Funding shortfall. The term funding shortfall means the excess 
(if any) of--
    (i) The funding target of the plan for a plan year; over
    (ii) The value of plan assets for the plan year (as reduced to 
reflect the subtraction of the funding standard carryover balance and 
prefunding balance to the extent provided under Sec.  1.430(f)-1(c), 
but not below zero).
    (3) Funding target. The term funding target means the plan's 
funding target for a plan year determined under Sec.  1.430(d)-1(b)(2), 
Sec.  1.430(i)-1(c), or Sec.  1.430(i)-1(e)(1), whichever applies to 
the plan for the plan year.
    (4) Target normal cost. The term target normal cost means the 
plan's target normal cost for a plan year determined under Sec.  
1.430(d)-1(b)(1), Sec.  1.430(i)-1(d), or Sec.  1.430(i)-1(e)(2), 
whichever applies to the plan for the plan year.
    (g) Examples. The following examples illustrate the rules of this 
section. Unless otherwise indicated, these examples are based on the 
following assumptions: the plan is subject to section 430 starting in 
2008; the plan year is the calendar year; the valuation date is January 
1; and the plan's funding standard carryover balance is $0.

    Example 1. (i) Plan A has a funding target of $2,500,000 and 
assets totaling $1,800,000 as of January 1, 2008. The 2008 actuarial 
valuation is performed using the 24-month average segment rates 
applicable for September 2007 (determined without regard to the 
transitional rule of section 430(h)(2)(G)).
    (ii) A $700,000 shortfall amortization base is established for 
2008, which is equal to the $2,500,000 funding target less 
$1,800,000 of assets.
    (iii) With respect to this shortfall amortization base of 
$700,000, there is a shortfall amortization installment of $116,852 
(which is equal to the $700,000 shortfall amortization base 
amortized over 7 years) for each year from 2008 through 2014. The 
amount of this shortfall amor