Measurement of Assets and Liabilities for Pension Funding Purposes; Benefit Restrictions for Underfunded Pension Plans, 53004-53084 [E9-24284]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 74, Number 198 (Thursday, October 15, 2009)]
[Rules and Regulations]
[Pages 53004-53084]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-24284]



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Part II





Internal Revenue Service





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26 CFR Parts 1 and 602



Measurement of Assets and Liabilities for Pension Funding Purposes; 
Benefit Restrictions for Underfunded Pension Plans; Final Rule

Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / 
Rules and Regulations

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 9467]
RIN 1545-BG72; RIN 1545-BH07


Measurement of Assets and Liabilities for Pension Funding 
Purposes; Benefit Restrictions for Underfunded Pension Plans

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations providing guidance 
regarding the determination of the value of plan assets and benefit 
liabilities for purposes of the funding requirements that apply to 
single employer defined benefit plans, regarding the use of certain 
funding balances maintained for those plans, and regarding benefit 
restrictions for certain underfunded defined benefit pension plans. 
These regulations reflect provisions added by the Pension Protection 
Act of 2006, as amended by the Worker, Retiree, and Employer Recovery 
Act of 2008. These regulations affect sponsors, administrators, 
participants, and beneficiaries of single employer defined benefit 
pension plans.

DATES: Effective Date: These regulations are effective on October 15, 
2009.
    Applicability Date: These regulations apply to plan years beginning 
on or after January 1, 2010.

FOR FURTHER INFORMATION CONTACT: Michael P. Brewer, Lauson C. Green, or 
Linda S.F. Marshall at (202) 622-6090 (not a toll-free number).

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act

    The collections of information contained in these final regulations 
have been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)) under control number 1545-2095. The collections of information 
in this final regulation are in Sec. Sec.  1.430(f)-1(f), 1.430(h)(2)-
1(e), 1.436-1(f), and 1.436-1(h). The information required under Sec.  
1.430(f)-1(f) is required in order for plan sponsors to make elections 
regarding a plan's credit balances upon occasion. The information 
required under Sec.  1.430(h)(2)-1(e) 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. The information required under Sec. Sec.  1.436-1(f) and 
1.436-1(h) is required in order for a qualified defined benefit plan's 
enrolled actuary to provide a timely certification of the plan's 
adjusted funding target attainment percentage (AFTAP) for each plan 
year to avoid certain benefit restrictions.
    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.
    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 final Income Tax Regulations (26 CFR part 1) 
under sections 430(d), 430(f), 430(g), 430(h)(2), 430(i), and 436, as 
added to the Internal Revenue Code (Code) by the Pension Protection Act 
of 2006 (PPA '06), Public Law 109-280 (120 Stat. 780), and amended by 
the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA '08), 
Public Law 110-458 (122 Stat. 5092).
    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 for defined benefit plans 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. 
Section 436, which was also added by PPA '06, sets forth certain 
limitations on benefits that may apply to a single employer defined 
benefit plan based on its funded status. Neither section 430 nor 
section 436 applies to multiemployer plans.
    Section 302 of the Employee Retirement Income Security Act of 1974, 
as amended (ERISA), sets forth funding rules that are parallel to those 
in section 412 of the Code, 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. In addition, section 206(g) of ERISA 
sets forth benefit limitations that are parallel to those in section 
436 of the Code. Under section 101 of Reorganization Plan No. 4 of 1978 
(43 FR 47713) and section 3002(c) of ERISA, the Secretary of the 
Treasury has interpretive jurisdiction over the subject matter 
addressed in these regulations for purposes of ERISA, as well as the 
Code. Thus, these final Treasury Department regulations issued under 
sections 430 and 436 of the Code apply for purposes of sections 206(g) 
and 303 of ERISA.
    If the value of plan assets (less the sum of the plan's prefunding 
balance and funding standard carryover balance) is less than the 
funding target, section 430(a)(1) defines the minimum required 
contribution as the sum of the plan's target normal cost and the 
shortfall and waiver amortization charges for the plan year. If the 
value of plan assets (less the sum of the plan's prefunding balance and 
funding standard carryover balance) equals or exceeds the funding 
target, section 430(a)(2) defines the minimum required contribution as 
the plan's target normal cost for the plan year reduced (but not below 
zero) by the amount of the excess.
    Under section 430(d), except as otherwise provided in section 
430(i)(1) (regarding 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.
    Prior to amendment by WRERA '08, section 430(b) defined a plan's 
target normal cost for a plan year as the present value of all benefits 
expected to accrue or be earned under the plan during the plan year 
(with any increase in any benefit attributable to services performed in 
a preceding plan year by reason of a compensation increase during the 
current plan year treated as having accrued during the current plan 
year). Section 101(b)(2) of WRERA '08 amended section 430(b) to modify 
the definition of a plan's target normal cost by adding the amount of 
plan-related expenses expected to be paid from plan assets during the 
plan year, and by subtracting the amount of mandatory employee 
contributions expected to be made during the plan year. This 
modification applies to plan years beginning after December 31, 2008; 
however, a plan sponsor is permitted to elect to apply this 
modification beginning with the first plan year beginning after 
December 31, 2007.
    Under section 430(f)(3), certain funding balances--referred to as 
the prefunding balance and the funding standard carryover balance--are 
permitted to be used to reduce the otherwise applicable minimum 
required contribution for a plan year in certain situations. Under 
section 430(f)(6), the prefunding balance represents the accumulation 
of the contributions that

[[Page 53005]]

an employer makes for a plan year that exceed the minimum required 
contribution for the year. An employer that makes contributions for a 
plan year that exceed the minimum required contribution for the year is 
permitted in certain circumstances to use those excess contributions in 
order to satisfy the minimum funding requirement in a subsequent plan 
year. However, section 430(f)(6)(iii) provides that contributions 
required to avoid a benefit restriction under section 436 are 
disregarded for purposes of determining the extent to which 
contributions for a plan year exceed the minimum required contribution 
for the plan year. Under section 430(f)(7), the funding standard 
carryover balance is based on the funding standard account credit 
balance as determined under section 412 for a plan as of the last day 
of the last plan year beginning in 2007.
    The treatment of these balances under section 430 reflects 
Congressional concern with the treatment of a funding standard account 
credit balance under the section 412 rules in effect prior to PPA '06. 
Accordingly, section 430(f)(3) sets forth a new restriction on the 
ability of a poorly funded plan to use the prefunding balance and the 
funding standard carryover balance as a credit against the minimum 
required contribution for a plan year. Under section 430(f)(3)(C), the 
prefunding balance or funding standard carryover balance can only be 
used for a plan year if the value of plan assets for the preceding plan 
year (after subtracting the prefunding balance) was at least 80 percent 
of the funding target (determined without regard to the at-risk rules 
of section 430(i)) for that preceding plan year. In addition, section 
430(f)(4) requires that the prefunding balance and the funding standard 
carryover balance be subtracted from the value of plan assets for 
certain purposes (including the determination of the plan's funding 
target attainment percentage (FTAP), as defined under section 
430(d)(2)), and section 430(f)(8) requires that the prefunding balance 
and the funding standard carryover balance be adjusted for actual 
investment return on plan assets. In order to give employers the 
opportunity to minimize the impact of the requirement to subtract the 
prefunding balance and funding standard carryover balance from plan 
assets, section 430(f)(5) permits an employer to elect to reduce those 
balances.
    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) are 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)(2)(B), all defined 
benefit pension plans (other than multiemployer plans) maintained by 
the employer, a predecessor employer, or by any member of the 
employer's controlled group are treated as a single plan for this 
purpose, but only participants with respect to the employer or member 
of the controlled group are taken into account.
    Section 430(g)(3) provides rules regarding the determination of the 
value of plan assets for purposes of section 430. Under section 
430(g)(3)(A), except as otherwise provided in section 430(g)(3)(B), the 
fair market value of plan assets must be used for this purpose. As an 
alternative to the use of fair market value, section 430(g)(3)(B) 
permits the use of an actuarial value of assets based on the average of 
fair market values, but only if such method is permitted under 
regulations prescribed by the Secretary, does not provide for averaging 
of such values over more than the period beginning on the last day of 
the 25th month preceding the month in which the valuation date occurs 
and ending on the valuation date (or a similar period in the case of a 
valuation date that is not the 1st day of a month), and does not result 
in a determination of the actuarial value of plan assets that, at any 
time, is lower than 90 percent or greater than 110 percent of the fair 
market value of plan assets as of the valuation date.
    Under section 430(g)(4), if a contribution made after the valuation 
date for the current plan year is a contribution for a preceding 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 those 
contributions and also must exclude 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 in lieu of the 
interest rates under section 430(h)(2), 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 
section 430(h)(2)(B), present value is determined using three interest 
rates (segment rates) for the applicable month, 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.
    Section 430(h)(2)(C) defines each segment rate as a single interest 
rate determined for a month by the Treasury Department on the basis of 
the corporate bond yield curve for the month. Under section 
430(h)(2)(D), the corporate bond yield curve for a month is to be 
prescribed 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. Section 430(h)(2)(D)(ii) 
provides an alternative to the use of the three segment rates, under 
which the corporate bond yield curve (determined without regard to the 
24 month average) is substituted for the segment 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

[[Page 53006]]

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.
    Section 430(i) sets forth special rules that apply to a plan that 
is in at-risk status. If a plan is in at-risk status, then special 
assumptions must be used in determining the plan's funding target and 
target normal cost, a loading factor is applied to the plan's 
liabilities in certain cases, and, under section 409A(b)(3), 
restrictions apply to the employer's ability to set aside assets for 
purposes of paying deferred compensation to a covered employee under a 
nonqualified deferred compensation plan.
    Under section 430(i)(4), a plan is in at-risk status for a year if, 
for the preceding year: (1) The plan's FTAP, determined without regard 
to the at-risk assumptions, was less than 80 percent (with a transition 
rule discussed in the next sentence); and (2) the plan's FTAP, 
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, reduced percentages apply for plan 
years beginning before 2011 instead of 80 percent in the first part of 
the test for determining at-risk status. Under section 430(i)(4), in 
the case of plan years beginning in 2008, the plan's FTAP for the 
preceding plan year is to be determined under rules provided by the 
Treasury Department.
    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, the number of participants is determined using 
the same rules as apply for determining whether a plan is a small plan 
for purposes of eligibility for the use of a valuation date other than 
the first day of the plan year. If a plan is in at-risk status, the 
plan's funding target and target 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. In addition, all employees 
are assumed to elect the form of retirement benefit available under the 
plan for each 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 determined using the 
special assumptions described in this preamble; 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 percent of the funding target determined as if the 
plan were not in at-risk status. 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 in 
this preamble; 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 percent of the present value of all benefits under the plan that 
accrue, are earned, or are otherwise allocated to service for the plan 
year (determined as if the plan were not in at-risk status). The target 
normal cost of a plan in at-risk status is adjusted for plan-related 
expenses expected to be paid from plan assets during the plan year and 
mandatory employee contributions expected to be made during the plan 
year under the same rules that apply to plans that are not in at-risk 
status.
    Under section 430(i)(3), the funding target of a plan in at-risk 
status and the target normal cost of a plan in at-risk status are never 
less than the respective funding target and target normal cost 
determined without regard to the at-risk rules. In addition, 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 
the target normal cost under section 430(i)(5).
    Section 401(a)(29) requires that a defined benefit plan (other than 
a multiemployer plan) satisfy the requirements of section 436. Section 
436 sets forth a series of limitations on the accrual and payment of 
benefits under an underfunded plan. Under section 436(g), these 
limitations (other than the limitations on accelerated benefit payments 
under section 436(d)) do not apply to a plan for the first 5 plan years 
of the plan, taking into account any predecessor plan.
    Section 436(b) sets forth a limitation on plant shutdown and other 
unpredictable contingent event benefits in situations where the plan's 
adjusted funding target attainment percentage (AFTAP) for the plan year 
is less than 60 percent or would be less than 60 percent taking into 
account the occurrence of the event. For this purpose, an unpredictable 
contingent event benefit means any benefit payable solely by reason of 
(1) a plant shutdown (or a similar event), or (2) an event other than 
attainment of age, performance of service, receipt or derivation of 
compensation, or the occurrence of death or disability. Under section 
436(b)(2), the limitation does not apply for a plan year if the plan 
sponsor makes a specified contribution (in addition to any minimum 
required contribution). If the AFTAP for a plan year is less than 60 
percent, then the specified contribution is equal to the amount of the 
increase in the plan's funding target for the plan year attributable to 
the occurrence of the event. If the AFTAP for a plan year is 60 percent 
or more but would be less than 60 percent taking into account the 
occurrence of the event, then the specified contribution is the amount 
sufficient to result in an AFTAP of 60 percent taking into account the 
occurrence of the event.
    Under section 436(c), a plan amendment that has the effect of 
increasing the liabilities of the plan by reason of any increase in 
benefits (including changes in vesting) may not take effect if the 
plan's AFTAP for the plan year is less than 80 percent or would be less 
than 80 percent taking into account the amendment. Under section 
436(c)(2), the limitation does not apply for a plan year if the plan 
sponsor makes a specified contribution (in addition to any minimum 
required contribution). If the plan's AFTAP for the plan year is less 
than 80 percent, then the specified contribution is equal to the amount 
of the increase in the plan's funding target for the plan year 
attributable to the amendment. If the plan's AFTAP for the plan year is 
80 percent or more but would be less than 80 percent taking into 
account the amendment, then the specified contribution is the amount 
sufficient to result in an AFTAP of 80 percent taking into account the 
amendment. In addition, under section 436(c)(3), the limitation does 
not apply to an amendment that provides for a benefit increase under a 
formula that is not based on compensation, but only if the rate of 
increase does not exceed the contemporaneous rate of increase in 
average wages of participants covered by the amendment.
    Under section 436(d), a plan is required to set forth certain 
limitations on accelerated benefit distributions. If the plan's AFTAP 
for a plan year is less than 60 percent, the plan must not make any 
prohibited payments after the valuation date for the plan year. If the 
plan's AFTAP for a plan year is at least 60 percent but is less than 80 
percent, the plan must not pay any prohibited

[[Page 53007]]

payment to the extent the payment exceeds the lesser of (1) 50 percent 
of the amount otherwise payable under the plan and (2) the present 
value of the maximum PBGC guarantee with respect to a participant. In 
addition, if the plan sponsor is in bankruptcy proceedings, the plan 
may not pay any prohibited payment unless the plan's enrolled actuary 
certifies that the AFTAP of the plan is at least 100 percent. However, 
section 436(d) does not apply to a plan for a plan year if the terms of 
the plan provide for no benefit accruals with respect to any 
participant for the period beginning on September 1, 2005, and 
extending throughout the plan year.
    Under section 436(d)(5), a prohibited payment is (1) any payment in 
excess of the monthly amount paid under a single life annuity (plus any 
social security supplements that are provided under the plan) to a 
participant or beneficiary, (2) any payment for the purchase of an 
irrevocable commitment from an insurer to pay benefits, or (3) any 
other payment specified by the Secretary by regulations.
    Under section 436(e), a plan is required to provide that if the 
plan's AFTAP is less than 60 percent for a plan year, all benefit 
accruals under the plan must cease as of the valuation date for the 
plan year.\1\ Under section 436(e)(2), the limitation ceases to apply 
with respect to any plan year, effective as of the first day of the 
plan year, if the plan sponsor makes a contribution (in addition to any 
minimum required contribution for the plan year) equal to the amount 
sufficient to result in an AFTAP of 60 percent.
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    \1\ Pursuant to section 203 of WRERA, for the first plan year 
beginning during the period beginning on October 1, 2008, and ending 
on September 30, 2009, section 436(e)(1) is applied by substituting 
the plan's adjusted funding target attainment percentage for the 
preceding plan year for such percentage for such plan year but only 
if the adjusted funding target attainment percentage for the 
preceding plan year is greater.
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    Section 436(f) sets forth a series of rules relating to 
contributions required to avoid benefit restrictions. Under section 
436(f)(1), an employer is permitted to provide security to the plan (in 
the form of a surety bond, cash, United States obligations that mature 
in 3 years or less, or other form satisfactory to the Treasury 
Department and the parties involved) that is treated as an asset of the 
plan for purposes of determining the plan's AFTAP. Under section 
436(f)(2), if an employer uses the option in section 436(b)(2), 
436(c)(2), or 436(e)(2) to make the specified contribution that would 
avoid a limitation under section 436, the specified contribution must 
be an actual contribution and the employer may not use a prefunding 
balance or funding standard carryover balance in lieu of making the 
specified contribution.
    Section 436(f)(3) describes certain situations in which an employer 
is deemed to have made the election in section 430(f)(5) to reduce the 
plan's funding standard carryover balance or prefunding balance. Such 
an election has the effect of increasing the plan's AFTAP to avoid a 
benefit limitation under section 436 (because the result of the 
election is a higher asset value used to determine the AFTAP). In 
particular, if the limitation under section 436(d) would otherwise 
apply to a plan, the plan sponsor is treated as having made an election 
(a deemed election) to reduce any prefunding balance or funding 
standard carryover balance by the amount necessary to prevent the 
benefit limitation from applying. A comparable rule applies to the 
other benefit limitations under sections 436(b), 436(c), and 436(e), 
but only in the case of a plan maintained pursuant to a collective 
bargaining agreement. In any of these cases (the election with respect 
to the limitations under section 436(d) or a deemed election in the 
case of a plan maintained pursuant to a collective bargaining 
agreement), the deeming rule applies only if the prefunding balance and 
funding standard carryover balances are large enough to avoid the 
application of the section 436 limitation.
    Section 436(h) sets forth a series of presumptions that apply 
during the portion of the plan year that is before the plan's enrolled 
actuary has certified the plan's AFTAP for the year. Under section 
436(h)(1), if a plan was subject to a limitation under section 436(b), 
436(c), 436(d), or 436(e) for the plan year preceding the current plan 
year, the plan's AFTAP for the current year is presumed to be the same 
as for the preceding year until the plan's enrolled actuary certifies 
the plan's AFTAP for the current year (or until the first day of the 
10th month, if earlier). Under section 436(h)(3), if any of these 
limitations did not apply to the plan for the preceding year, but would 
have applied if the plan's AFTAP for the preceding year was 10 
percentage points lower, the plan's AFTAP is presumed to be 10 
percentage points lower than the AFTAP for the prior plan year as of 
the first day of the 4th month of the current plan year (and that day 
is deemed to be the plan's valuation date for purposes of applying the 
benefit limitations), unless the plan's enrolled actuary has certified 
the plan's AFTAP for the current year by that day. If the plan's 
enrolled actuary has not certified the plan's AFTAP by the first day of 
the 10th month of the current plan year, section 436(h)(2) provides 
that the plan's AFTAP is conclusively presumed to be less than 60 
percent as of that day (and that day is deemed to be the valuation date 
for purposes of applying the benefit limitations).
    Under section 436(i), unless the plan provides otherwise, if a 
limitation on prohibited payments or future benefit accruals under 
section 436(d) or (e) ceases to apply to a plan, those payments and 
benefit accruals resume, effective as of the day following the close of 
the limitation period.
    Section 436(j) provides definitions that are used under section 
436, including the definition of AFTAP. In general, a plan's AFTAP is 
based on the plan's FTAP for the plan year. However, the plan's AFTAP 
is determined by adding the aggregate amount of purchases of annuities 
for employees other than highly compensated employees (within the 
meaning of section 414(q)) made by the plan during the two preceding 
plan years to the numerator and the denominator of the fraction used to 
determine the FTAP. In addition, section 436(j)(3) provides a special 
rule which applies to certain well-funded plans under which the plan's 
FTAP for purposes of section 436 (and hence the plan's AFTAP) is 
determined by using the plan's assets without reduction for the 
prefunding balance and the funding standard carryover balance. Section 
436(j)(3)(B) sets forth a transition rule for determining eligibility 
for this special rule.
    Section 436(k), as added by WRERA '08, provides the Secretary with 
authority to issue special rules for the application of section 436 in 
the case of a plan that uses a valuation date other than the first day 
of the plan year.
    Section 436(m) (designated section 436(k) prior to amendment by 
WRERA '08) provides that, for plan years that begin in 2008, the 
determination of the plan's FTAP for the preceding year is to be made 
pursuant to guidance issued by the Secretary.
    Under section 101(j) of ERISA, as amended by PPA '06, the plan 
administrator of a single employer plan is required to provide a 
written notice to participants and beneficiaries within 30 days after 
certain specified dates. These dates include the date the plan has 
become subject to a restriction described in the ERISA provisions that 
are parallel to Code sections 436(b) and 436(d) and, in the case of a 
plan that is subject to the ERISA provisions that are parallel to Code 
section 436(e), the valuation date for the plan year for

[[Page 53008]]

which the plan's AFTAP is less than 60 percent (or, if earlier, the 
date the AFTAP is presumed to be less than 60 percent under the ERISA 
provisions that parallel the presumption rules in Code section 436(h)). 
Under section 101(j) of ERISA, the Secretary of the Treasury can 
specify other dates under which notice is to be provided. Any notice 
under section 101(j) of ERISA must be provided in writing, except that 
the notice may be in electronic or other form to the extent that such 
form is reasonably accessible to the recipient.
    Sections 430 and 436 generally apply to plan years beginning on or 
after January 1, 2008. The applicability of section 430 for purposes of 
determining the minimum required contribution and the application of 
section 436 is delayed for certain plans in accordance with sections 
104 through 106 of PPA '06.
    Under section 1107 of PPA '06, a plan sponsor is permitted to delay 
adopting a plan amendment pursuant to statutory provisions under PPA 
'06 (or pursuant to any regulation issued under PPA '06) until the last 
day of the first plan year beginning on or after January 1, 2009 
(January 1, 2011, in the case of governmental plans). If section 1107 
of PPA '06 applies to an amendment of a plan, section 1107 provides 
that the plan does not fail to meet the anti-cutback requirements of 
section 411(d)(6) by reason of such amendment, except as otherwise 
provided by the Secretary of the Treasury.
    Proposed regulations regarding the rules for funding balances under 
section 430(f) and the benefit restrictions for underfunded plans under 
section 436 were published on August 31, 2007 (REG-113891-07, 72 FR 
50544). The regulations were proposed to apply to plan years beginning 
on or after January 1, 2008. Comments were received regarding the 
regulations, and a public hearing was held on January 28, 2008.
    Proposed regulations regarding the measurement of assets and 
liabilities for pension funding purposes (generally covering the rules 
of sections 430(d), (g), (h)(2), and (i)) were published on December 
31, 2007 (REG-139236-07, 72 FR 74215). The regulations were proposed to 
apply to plan years beginning on or after January 1, 2009. Comments 
were received regarding the regulations, and a public hearing was held 
on May 29, 2008.
    Notice 2008-21 (2008-1 CB 431) provides that the regulations under 
section 430(f) and 436 will not apply to plan years beginning before 
January 1, 2009. See Sec.  601.601(d)(2) relating to objectives and 
standards for publishing regulations, revenue rulings and revenue 
procedures in the Internal Revenue Bulletin. Notice 2008-21 also 
provides that the IRS will not challenge a reasonable interpretation of 
an applicable provision under section 430 or 436 for a plan year 
beginning in 2008 and provides transitional guidance with respect to 
years before the regulations are effective.
    On December 23, 2008, WRERA '08 was enacted. WRERA '08 contains 
technical corrections and other changes to the rules of sections 430 
and 436, including a modification to the asset valuation method set 
forth in section 430(g)(3)(B). Notice 2009-22 (2009-14 IRB 741) 
provides interim rules regarding the asset valuation method as modified 
by WRERA '08.

Explanation of Provisions

I. Overview

    These regulations finalize the rules proposed in REG-113891-07 
(published August 31, 2007), regarding funding balances and benefit 
restrictions for underfunded plans, and the rules proposed in REG-
139236-07 (published December 31, 2007), regarding measurement of 
assets and liabilities for pension funding purposes, with certain 
revisions. The Treasury Department and the IRS published proposed 
regulations relating to other portions of the rules under section 430 
(including sections 430(a), (c), and (j)) on April 15, 2008 (REG-
108508-08, 72 FR 20203). Those regulations will be finalized 
separately.

II. Section 1.430(d)-1 Determination of Funding Target and Target 
Normal Cost

    Section 1.430(d)-1 generally adopts the rules set forth in the 
proposed regulations for determining the funding target and the target 
normal cost under sections 430(b) and 430(d) for a plan that is not in 
at-risk status, including rules relating to the application of 
actuarial assumptions described in sections 430(h)(1) and 430(h)(4).
    The final regulations generally adopt the definition of target 
normal cost for a plan that is not in at-risk status that was set forth 
in the proposed regulations. However, the final regulations contain 
modifications to this definition to reflect amendments made by WRERA 
'08. Under the proposed regulations, plan administrative expenses would 
not have been taken into account in determining a plan's target normal 
cost or funding target for the plan year. Under the final regulations, 
the target normal cost of a plan for the plan year is the present value 
(determined as of the valuation date) of all benefits under the plan 
that accrue during, are earned during, or are otherwise allocated to 
service for the plan year, subject to certain special adjustments as 
added by section 101(b)(2) of WRERA '08. These special adjustments are 
optional for plan years beginning during 2008, but are required to be 
made for later plan years.
    Under the special adjustments, the target normal cost of the plan 
for the plan year is adjusted (not below zero) by adding the amount of 
plan-related expenses expected to be paid from plan assets during the 
plan year, and by subtracting the amount of any mandatory employee 
contributions expected to be made during the plan year. For this 
purpose, the final regulations reserve the issue of the definition of 
plan-related expenses, which is expected to be addressed in forthcoming 
proposed regulations.
    The regulations clarify that the benefits taken into account in 
determining target normal cost are the benefits that are accrued, 
earned, or otherwise allocated to service beginning with the first day 
of the plan year through the valuation date, plus benefits that are 
expected to accrue, be earned, or otherwise allocated to service during 
the remainder of the plan year. Thus, for a plan with a valuation date 
other than the first day of the plan year, the actual benefits earned 
during the part of the year before the valuation date must be included 
in the target normal cost. The final regulations generally adopt the 
definition of the funding target for a plan that is not in at-risk 
status as set forth in the proposed regulations, but with a few 
clarifications that take into account comments received on the proposed 
regulations. Under the regulations, the funding target of a plan for 
the plan year is the present value (determined as of the valuation 
date) of all benefits under the plan that have been accrued, earned, or 
are otherwise allocated to years of service prior to the first day of 
the plan year.
    Under the proposed regulations, the definition of a plan's FTAP was 
set forth in proposed Sec.  1.430(i)-1. These final regulations include 
this definition in Sec.  1.430(d)-1, and the definition is cross-
referenced in Sec. Sec.  1.430(i)-1 and 1.436-1. Under the final 
regulations, except as otherwise provided in a transition rule, the 
FTAP of a plan for a plan year is a fraction (expressed as a 
percentage), the numerator of which is the value of plan assets for the 
plan year after subtraction of the plan's funding balances under 
section 430(f)(4)(B) and Sec.  1.430(f)-1, and the denominator of which 
is the funding target of the plan for the plan year (determined without 
regard to the at-risk rules under section 430(i) and Sec.  1.430(i)-1).

[[Page 53009]]

    The regulations provide transition rules for determining a plan's 
FTAP for the 2007 plan year. These rules are generally the same as the 
rules set forth in the proposed regulations under section 430(i) for 
determining a plan's FTAP for the last plan year before section 430 
applies to the plan. However, the final regulations differ from the 
proposed regulations in the transition rules that apply for the 
determination of a plan's FTAP for a plan year that begins on or after 
January 1, 2008, but for which section 430 does not apply for purposes 
of determining the plan's minimum required contribution. In such a 
case, the FTAP is determined for that plan year in the same manner as 
for a plan to which section 430 applies to determine the plan's minimum 
required contribution, except that the value of plan assets that forms 
the FTAP numerator is determined without subtraction of the funding 
standard carryover balance or the credit balance under the funding 
standard account. These rules are needed to enable a plan described in 
sections 104 through 106 of PPA '06 to disclose its FTAP for purposes 
of the annual funding notice under section 101(f) of ERISA.\2\
---------------------------------------------------------------------------

    \2\ Section 430(i)(4) provides for special rules to apply in 
determining a plan's FTAP only for plan years beginning during 2008. 
Accordingly, the regulations limit the use of the special rule under 
which the plan's FTAP is determined based on the plan's current 
liability to the determination of the plan's FTAP for the 2007 plan 
year, even for a plan described in sections 104 through 106 of PPA 
'06 for which section 430 does not apply for purposes of determining 
a plan's minimum required contribution until a plan year after the 
2008 plan year.
---------------------------------------------------------------------------

    The regulations adopt the special rule set forth in the proposed 
regulations for determining the FTAP for a new plan. Under the final 
regulations, if the funding target of the plan is equal to zero for the 
plan year, the FTAP is equal to 100 percent for the plan year. Unlike 
the proposed regulations, the final regulations do not limit the 
application of this rule to a plan that has no predecessor plan because 
of concerns that it is not always appropriate to carry over the FTAP 
from the predecessor plan.
    The final regulations contain rules regarding the determination of 
present value in order to clarify the application of various rules that 
were set forth in the proposed regulations. Under the regulations, the 
present value of a benefit with respect to a participant that is taken 
into account under the regulations is determined as of the valuation 
date by multiplying the amount of that benefit by the probability that 
the benefit will be paid at a future date and then discounting the 
resulting product using the appropriate interest rate. The probability 
that the benefit will be paid with respect to the participant at that 
future date is determined using actuarial assumptions as to the 
probability of future service, advancement in age, and other events 
(such as death, disability, termination of employment, and selection of 
an optional form of benefit) that affect whether the participant or 
beneficiary will be eligible for the benefit and whether the benefit 
will be paid at that future date.
    As under the proposed regulations, these regulations provide that 
the benefits taken into account in determining the funding target and 
the target normal cost are all benefits earned or accrued under the 
plan that have not yet been paid as of the valuation date, including 
retirement-type and ancillary benefits. The benefits taken into account 
are based on the participant's or beneficiary's status (such as active 
employee, vested or partially vested terminated employee, or disabled 
participant) as of the valuation date, and those benefits are allocated 
to funding target or target normal cost.
    In order to determine a plan's 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 plan year), the 
current plan year (in which case they will be taken into account in 
determining the target normal cost for the current plan year), and 
future plan years (in which case they will not be taken into account in 
determining either the funding target or the target normal cost for the 
current plan year). The final regulations adopt the rules set forth in 
the proposed regulations for this allocation of benefits where benefits 
are a function of the accrued benefit and where benefits are a function 
of service, but the final regulations modify those rules for benefits 
in other circumstances.
    To the extent that the amount of a benefit that is expected to be 
paid is a function of the accrued benefit, the amount of the benefit 
taken into account in determining the funding target for a plan year 
under the final regulations is determined by applying that function to 
the accrued benefit as of the first day of the plan year, and the 
portion of the benefit that is taken into account in the target normal 
cost for the plan year is determined by applying that function to the 
increase in the accrued benefit during the plan year. To the extent 
that the amount of a benefit that is expected to be paid is not a 
function of the accrued benefit but is a function of the participant's 
service, the portion of the benefit that is taken into account in 
determining the funding target for the plan year under the final 
regulations is determined by applying that function to the 
participant's service as of the first day of the plan year, and the 
portion of the benefit that is taken into account in determining the 
target normal cost for the plan year is determined by applying that 
function to the increase in the participant's years of service during 
the plan year. For a benefit that is determined as the excess of a 
function of the participant's service over a function of the 
participant's accrued benefit, the amount of the funding target and the 
target normal cost attributable to the portion of the benefit that is a 
function of the accrued benefit is determined pursuant to the rules 
that apply to such benefits and the amount of the funding target and 
the target normal cost attributable to the net benefit (the excess of 
the benefit that is a function of service over the benefit that is a 
function of accrued benefit) is determined pursuant to the rules that 
apply to a benefit that is a function of service.
    The proposed regulations included rules for allocating benefits 
where 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. Under 
those rules, the benefit would have been allocated proportionately over 
the years until the participant met the age and service conditions for 
eligibility for the benefit. A number of commenters suggested that this 
allocation yielded inappropriate results in certain cases. In response 
to these comments, the final regulations provide that, to the extent 
the amount of a benefit that is expected to be paid is neither a 
function of the accrued benefit nor a function of the participant's 
service (and is not the excess of a function of the participant's 
service over a function of the accrued benefit), the portion of the 
participant's benefit that is taken into account in determining the 
funding target for a plan year is equal to the total benefit multiplied 
by the ratio of the participant's years of service as of the first day 
of the plan year to the years of service the participant will have at 
the time of the event that causes the benefit to be payable (whether 
the benefit is expected to be paid at the time of that decrement or at 
a future time), and the portion of the benefit that is taken into 
account in determining the

[[Page 53010]]

target normal cost for the plan year is the increase in the 
proportionate benefit attributable to the increase in the participant's 
years of service during the plan year.
    Under the proposed regulations, the determination of the funding 
target and the target normal cost would not have taken into account any 
benefit limitations or anticipated benefit limitations under section 
436. The reason for this provision was to avoid the circularity in 
calculations that would result from calculating the funding target 
based on the imposition of benefit restrictions for purposes of 
determining whether the benefit restrictions need to be imposed. In 
response to comments, the final regulations contain modifications to 
the rules regarding recognition of the section 436 benefit 
restrictions. In particular, the final regulations provide that 
benefits that were not paid or accrued prior to the valuation date as a 
result of the benefit limitations are generally not included in the 
funding target and the target normal cost, but that the determination 
of the funding target and the target normal cost is not permitted to 
anticipate any future applications of the section 436 benefit 
restrictions.
    The final regulations retain the treatment from the proposed 
regulations regarding the non-recognition of the benefit accrual 
limitations of section 436(e) in determining target normal cost. This 
has the effect of requiring an employer sponsoring a plan that provides 
for ongoing benefit accruals to include the present value of those 
accruals in the target normal cost, even if the plan is temporarily not 
permitted to provide for accruals, with the goal of improving the 
plan's funded status. However, if the plan sponsor actually adopts a 
plan freeze, the target normal cost will reflect that plan freeze. In 
connection with this provision, the final regulations provide that if 
the plan contains a provision under which missed benefit accruals are 
automatically restored once the plan's AFTAP is above 60 percent 
(taking into account the missed benefit accruals), then any missed 
benefit accruals for the prior plan year are taken into account in 
determining the funding target if, as of the valuation date, the period 
of the missed benefit accruals is 12 months or less. The final 
regulations also contain rules regarding restrictions that arise as a 
result of benefit limitations that are imposed under section 401(a)(32) 
as a result of a liquidity shortfall and benefit limitations that are 
imposed under Sec.  1.401(a)(4)-5(b) with respect to certain highly 
compensated employees.
    As under the proposed regulations, these regulations provide that a 
plan generally is required to reflect in the plan's funding target and 
target normal cost the liability for benefits that are funded through 
insurance contracts held by the plan, and to include the corresponding 
insurance contracts in plan assets.\3\ As an alternative treatment of 
benefits that are funded through insurance contracts, the regulations 
provide that the 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. 
This treatment is only available with respect to insurance purchased 
from an insurance company licensed under the laws of a State and only 
to the extent that a participant's or beneficiary's right to receive 
those benefits is an irrevocable contractual right under the insurance 
contract, based on premiums paid to the insurance company prior to the 
valuation date under the insurance contracts. Thus, the alternative 
treatment is not available if the plan trustee can surrender a contract 
to the insurer for its cash value because the participant's or 
beneficiary's rights to receive those benefits is not an irrevocable 
contractual right. A plan's treatment of benefits funded through 
insurance contracts pursuant to either of these methods is part of the 
plan's funding method. Accordingly, that treatment can be changed only 
with the consent of the Commissioner.
---------------------------------------------------------------------------

    \3\ The PBGC has informed the IRS and Treasury Department that 
this inclusion of insurance contracts in plan assets and the 
associated benefit liabilities in the funding target does not apply 
for purposes of Title IV of ERISA and its regulations, which 
generally require that, if an insurer makes an irrevocable 
commitment to provide all benefit liabilities with respect to an 
individual, those benefits cease to be benefit liabilities of the 
plan, the individual is no longer a plan participant, and the 
irrevocable commitment is excluded from plan assets.
---------------------------------------------------------------------------

    Except as otherwise provided, the determination under the 
regulations of a plan's funding target and target normal cost for a 
plan year are determined based on plan provisions that are adopted no 
later than the valuation date for the plan year and that take effect 
during that plan year. For example, a plan amendment adopted on or 
before the valuation date for the plan year that has an effective date 
occurring in the current plan year is taken into account in determining 
the funding target and the target normal cost for the current plan year 
if it is permitted to take effect under the rules of section 436(c) for 
the current plan year; however, an amendment is not taken into account 
if it does not take effect until a future plan year.
    The regulations apply the rules under section 436(c) (as described 
in section VII.C of this preamble) to determine when an amendment that 
increases benefits takes effect. For an amendment that decreases 
benefits, the amendment takes effect under a plan on the first date on 
which the benefits of any individual who is or could be a participant 
or beneficiary under the plan would be decreased due to the amendment 
if the individual were on that date to satisfy the applicable 
conditions for the benefits.
    The regulations provide that section 412(d)(2) applies for purposes 
of determining whether a plan amendment is treated as having been 
adopted on the first day of the plan year (including a plan amendment 
adopted no later than 2\1/2\ months after the close of the plan year). 
This is consistent with the IRS's prior interpretations of the pre-PPA 
'06 counterpart to section 412(d)(2) (section 412(c)(8) as in effect 
prior to amendments made by PPA '06) as set forth in Rev. Rul. 79-325 
(1979-2 CB 190), which provides that section 412(c)(8) applies to plan 
amendments made during the plan year (as well as to plan amendments 
made within 2\1/2\ months after the end of the plan year). Thus, if an 
amendment is adopted after the valuation date for a plan year (and no 
later than 2\1/2\ months after the close of the plan year) but takes 
effect during that plan year, the full increase in liability is 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 is 
taken into account as of the valuation date for that plan year if no 
section 412(d)(2) election is made.
    Accordingly, the rule in section 2.02 of Revenue Ruling 77-2 (1977-
1 CB 120) under which the charges for a plan year are based on a blend 
of the charges determined with and without regard to the plan 
amendment, and the alternative to that rule in section 3 of Revenue 
Ruling 77-2, no longer apply. However, the rule in section 2.01 of 
Revenue Ruling 77-2 (under which a change in benefit structure that 
does not become effective until a future plan year is disregarded) 
continues to apply. This is because section 430 does not contain any 
provision that corresponds to section 412(c)(12) as in effect prior to 
amendments made by PPA '06 (under which the provisions of a collective 
bargaining agreement were taken into account for funding purposes 
before the corresponding plan amendments became effective).

[[Page 53011]]

    The regulations clarify that if an amendment is taken into account 
for a plan year, then the allocation of benefits that is used for 
purposes of determining the funding target and the target normal cost 
for the plan year is based on the plan as amended. Thus, the present 
value of the increase in the participant's accrued benefit attributable 
to service before the beginning of the plan year is taken into account 
in the funding target for the year.\4\
---------------------------------------------------------------------------

    \4\ The regulations do not address the effect on the 
determination of a plan's funding shortfall of an amendment that is 
permitted to take effect on account of a contribution under section 
436(c)(2).
---------------------------------------------------------------------------

    To address a concern regarding avoidance of the benefit 
restrictions under section 436(c), the final regulations contain a new 
rule regarding amendments adopted after the valuation date that 
increase the target normal cost for the plan year. Under this rule, in 
any case in which an increase in the target normal cost as the result 
of a plan amendment made after the valuation date would have caused the 
benefit restrictions of section 436(c) to apply if the increase were 
included in the plan's funding target (after taking into account all 
unpredictable contingent event benefits permitted to be paid for 
unpredictable contingent events that occurred during the current plan 
year and plan amendments that went into effect in the current plan 
year), the amendment must be taken into account in determining the 
plan's funding target and target normal cost for the plan year. This 
rule is necessary to prevent the avoidance of the benefit restrictions 
of section 436(c) by means of a mid-year plan amendment that purports 
not to increase benefits earned prior to the beginning of the plan year 
(so that the amendment does not increase the funding target for the 
plan year and the amount required to ``buy up'' the amendment under 
section 436(c)(2) by paying the increase to the funding target on 
account of the amendment would be zero).
    Like the proposed regulations, the regulations 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 
regulations do 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 final regulations 
adopt 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 and whose service might be taken into account in future 
years upon return to service, but only if the plan's experience as to 
separated employees returning to service has been such that the 
exclusion would not be unreasonable) 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). Whether former employees who are terminated with 
partially vested benefits are assumed to return to service is 
determined under the same rules that apply to former employees without 
vested benefits.
    The regulations provide that the determination of any present value 
or other computation under section 430 must be made on the basis of 
actuarial assumptions and a funding method. Except as specifically 
provided, the same actuarial assumptions and funding method must be 
used for all computations under sections 430 and 436.
    The final regulations 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. Under 
the final regulations, with respect to the actuarial assumptions used 
for the plan other than those that are specified by statute, each of 
those actuarial assumptions must be reasonable (taking into account the 
experience of the plan and reasonable expectations). In addition, the 
actuarial assumptions (other than the statutorily specified 
assumptions), in combination, must offer the plan's enrolled actuary's 
best estimate of anticipated experience under the plan. The final 
regulations provide that, in the case of a plan which has fewer than 
100 participants and beneficiaries who are not in pay status, the 
actuarial assumptions are permitted to assume no pre-retirement 
mortality, but only if that assumption would be a reasonable 
assumption.
    The regulations provide that actuarial assumptions established for 
a plan year cannot subsequently be changed for that plan year unless 
the Commissioner determines that the assumptions that were used are 
unreasonable. Similarly, the regulations provide that a funding method 
established for a plan year cannot subsequently be changed for that 
plan year unless the Commissioner determines that the use of that 
funding method for that plan year is impermissible. For this purpose, 
actuarial assumptions and funding methods are established by the timely 
completion (and filing, if required) of the actuarial report (Schedule 
SB, ``Single-Employer Defined Benefit Plan Actuarial Information'' of 
Form 5500, ``Annual Return/Report of Employee Benefit Plan'') for a 
plan year under section 6059. If the Schedule SB is not completed (and 
filed, if required) by the deadline, then the prior plan year actuarial 
assumptions and methods will continue to apply, unless the Commissioner 
permits or requires other actuarial assumptions or another funding 
method permitted under section 430 to be used for the current plan 
year.
    The regulations provide that a plan's funding method includes not 
only the overall funding method used by the plan, but also each 
specific method of computation used in applying the overall method. 
However, the choice of which actuarial assumptions are appropriate to 
the overall method or to the specific method of computation is not a 
part of the funding method. The assumed earnings rate used for purposes 
of determining the actuarial value of assets under section 430(g)(3)(B) 
is treated as an actuarial assumption, rather than as part of the 
funding method.
    In accordance with section 430(h)(4), the regulations provide rules 
relating to the probability that benefit payments will be paid as 
single sums or other optional forms under a plan and the impact of that 
probability on the determination of the present value of those benefit 
payments under section 430. In general, any determination of present 
value or any other computation under the regulations must take into 
account the probability that future benefit payments under the plan 
will be made in the form of optional forms of benefits provided under 
the plan (including single-sum distributions), determined on the basis 
of the plan's experience and other related assumptions, and any 
difference in the present value of future benefit payments that results 
from the use of actuarial assumptions in determining benefit payments 
in any such optional form of benefits that are different from those 
prescribed by section 430(h).
    The proposed regulations would have provided that, in the case of a 
distribution that is subject to section 417(e)(3) and that is 
determined using the applicable interest rates and applicable mortality 
table under section 417(e)(3), the computation of the present value of 
that distribution is treated as having taken into account any 
difference in present value that results from the use of actuarial 
assumptions

[[Page 53012]]

that are different from those prescribed by section 430(h) if the 
present value of the distribution is determined by valuing, using 
special actuarial assumptions, the annuity (either the deferred or 
immediate annuity) that is used under the plan to determine the amount 
of the distribution. The final regulations adopt that method and 
clarify that its use is mandatory for benefits determined using the 
section 417(e) actuarial assumptions.
    Under this special computation, for the period beginning with the 
annuity starting date for the distribution, 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 is substituted 
for the mortality table under section 430(h)(3) that would otherwise be 
used. In determining the present value of a distribution, the final 
regulations adopt the rules in the proposed regulations and provide 
that if a plan uses the generational mortality tables under Sec.  
1.430(h)(3)-1(a)(4) or Sec.  1.430(h)(3)-2, the plan is 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 m