Corporate Bond Yield Curve for Determining Present Value, 2127-2132 [2024-00552]
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Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Rules and Regulations
Special condition 7 requires that
supercapacitor be disconnected or
otherwise removed from its charging
source without the need for crew
intervention should the supercapacitor
become overheated or fail in a manner
that may create a safety hazard. This
requirement applies to all
supercapacitor installations and is not
limited to those whose proper
functioning is required for the safe
operation of the airplane.
The special conditions contain the
additional safety standards that the
Administrator considers necessary to
establish a level of safety equivalent to
that established by the existing
airworthiness standards.
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Discussion of Comments
The FAA issued Notice of Proposed
Special Conditions No. 25–22–02–SC
for the Airbus Model A319–133 and
A321–200 series airplanes, which was
published in the Federal Register on
June 1, 2023 (88 FR 35781). The FAA
received one comment from The Boeing
Company (Boeing).
Boeing recommended the FAA add a
definition of what constitutes a
supercapacitor and high-capacity
electrical storage device and to include
their thresholds such as capacity,
voltage, and dialectic strength. Boeing
stated that this clarification of
supercapacitor terminology will avoid
any ambiguity and confusion when
applying special conditions and their
applicability, specifically with the
inapplicability to small capacitors that
are used on various electrical systems
used in electronics.
The FAA acknowledges Boeing’s
recommendation that adding a
definition of what constitutes a
supercapacitor is important for
clarification and to ensure these special
conditions’ inapplicability to small
capacitors used in various electrical
systems in aviation electronics.
However, the FAA declines to create a
definition for supercapacitors through
special conditions. Currently, the FAA
is not aware of an industry standard
regarding the design and installation of
supercapacitors. With no supercapacitor
industry standard currently available,
the similarity of the function of the
supercapacitor closely relates to the
rechargeable lithium batteries.
Therefore, the special conditions used
for lithium batteries are being used for
this supercapacitor installation. The
applicant and the FAA will review the
design and installation of the
supercapacitor to ensure these special
conditions will apply only to
supercapacitors used as energy storage
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devices similar to rechargeable lithium
batteries.
Applicability
As discussed above, these special
conditions are applicable to the Airbus
Model A319–133 and A321–200 series
airplanes. Should Lufthansa apply at a
later date for a change to the
supplemental type certificate to include
another model incorporating the same
novel or unusual design feature
included on Type Certificate No.
A28NM, these special conditions would
apply to that model as well.
Under standard practice, the effective
date of final special conditions would
be 30 days after the date of publication
in the Federal Register. However, as the
certification date for the Airbus Model
A319–133 and A321–200 series
airplanes is imminent, the FAA finds
that good cause exists to make these
special conditions effective upon
publication.
Conclusion
This action affects only a certain
novel or unusual design feature on
Airbus Models A319–133 and A321–200
series airplanes. It is not a rule of
general applicability and affects only
the applicant who applied to the FAA
for approval of these features on the
airplane.
List of Subjects in 14 CFR Part 25
Aircraft, Aviation safety, Reporting
and recordkeeping requirements.
Authority Citation
The authority citation for these
special conditions is as follows:
Authority: 49 U.S.C. 106(f), 106(g), 40113,
44701, 44702, 44704.
The Special Conditions
Accordingly, pursuant to the
authority delegated to me by the
Administrator, the following special
conditions are issued as part of the type
certification basis for Airbus Model
A319–133 and A321–200 series
airplanes, as modified by Lufthansa
Technik AG. Each supercapacitor
installation must:
1. Be designed to preclude the
occurrence of uncontrolled increases in
temperature or pressure under all
foreseeable operating and failure
conditions to prevent fire and
explosion.
2. Not emit explosive or toxic gasses,
in normal operation or as the result of
its failure that may accumulate in
hazardous quantities in any area of the
airplane.
3. Meet the requirements of § 25.863.
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2127
4. Not damage surrounding structure
or adjacent systems, equipment, or
electrical wiring interconnection system
(EWIS) components from corrosive
fluids or gases that may escape to cause
a hazardous condition.
5. Have provisions to prevent any
hazardous effect on surrounding
structure or adjacent systems,
equipment, or EWIS components,
caused by the maximum amount of heat
it can generate during any failure
including any individual
supercapacitors.
6. Have a means to prevent
overheating or overcharging of the
supercapacitor.
7. Have a means to automatically
disconnect it from its charging source in
the event of an over-temperature
condition or failure.
8. Have a monitoring and alerting
feature that alerts the flightcrew when
the capacity has fallen below acceptable
levels if its function is required for safe
operation of the airplane. The flightcrew
alerting must be in accordance with the
requirements of § 25.1322.
9. Have a means to prevent
insufficient charging if required for safe
operation of the airplane.
Note: A supercapacitor installation consists
of the supercapacitor(s) and any protective,
monitoring and alerting circuitry or hardware
inside or outside of the supercapacitor. This
includes EWIS components as defined by
§ 25.1701. It also includes any venting or
cooling system and packaging. For the
purpose of these special conditions, a
supercapacitor and the supercapacitor
installation is referred to as a supercapacitor.
Issued in Kansas City, Missouri, on January
8, 2024.
Patrick R. Mullen,
Manager, Technical Policy Branch, Policy and
Standards Division, Aircraft Certification
Service.
[FR Doc. 2024–00484 Filed 1–11–24; 8:45 am]
BILLING CODE 4910–13–P
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9986]
RIN 1545–BQ57
Corporate Bond Yield Curve for
Determining Present Value
Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
AGENCY:
This document sets forth final
regulations specifying the methodology
SUMMARY:
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Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Rules and Regulations
for constructing the corporate bond
yield curve that is used to derive the
interest rates used in calculating present
value and making other calculations
under a defined benefit plan, as well as
for discounting unpaid losses and
estimated salvage recoverable of
insurance companies. These regulations
affect participants in, beneficiaries of,
employers maintaining, and
administrators of certain retirement
plans, as well as insurance companies.
DATES:
Effective date: These regulations are
effective January 12, 2024.
Applicability date: These regulations
apply for purposes of determining the
corporate bond yield curve under
section 430(h)(2)(D) of the Internal
Revenue Code for months that begin on
or after February 1, 2024.
FOR FURTHER INFORMATION CONTACT:
Arslan Malik or Linda S.F. Marshall,
Office of Associate Chief Counsel
(Employee Benefits, Exempt
Organizations, and Employment Taxes)
at (202) 317–6700 (not a toll-free
number).
SUPPLEMENTARY INFORMATION:
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Background
Section 412 of the Internal Revenue
Code (Code) prescribes minimum
funding requirements for defined
benefit pension plans. Section 430
specifies the minimum funding
requirements that apply generally to
defined benefit plans that are not
multiemployer plans.1 For a plan
subject to section 430, section 430(a)
defines the minimum required
contribution for a plan year by reference
to the plan’s funding target for the plan
year. Under section 430(d)(1), a plan’s
funding target for a plan year generally
is the present value of all benefits
accrued or earned under the plan as of
the first day of that plan year.
Section 430(h)(2) provides rules
regarding the interest rates to be used
under section 430. Section 430(h)(2)(B)
provides that a plan’s funding target and
target normal cost for a plan year are
determined using three interest rates: (1)
1 Section 302 of the Employee Retirement Income
Security Act of 1974, Public Law 93–406, 88 Stat.
829 (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 minimum
funding requirements that apply generally for
defined benefit plans (other than multiemployer
plans) that are parallel to those in section 430 of
the Code. Pursuant to section 101 of Reorganization
Plan No. 4 of 1978, 5 U.S.C. App., as amended, 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 Treasury regulations issued
under section 430 of the Code also apply for
purposes of section 303 of ERISA.
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the first segment rate, which applies to
benefits reasonably determined to be
payable during the 5-year period
beginning on the valuation date; (2) the
second segment rate, which applies to
benefits reasonably determined to be
payable during the next 15-year period;
and (3) the third segment rate, which
applies to benefits reasonably
determined to be paid after that 15-year
period. Under sections 430(h)(2)(C)(i)
through (iii), each of these segment rates
is determined for a month on the basis
of the corporate bond yield curve for the
month, taking into account only that
portion of the yield curve that is based
on bonds maturing during the period for
which the segment rate is used.
Section 430(h)(2)(C)(iv), which was
added to the Code in 2012 by section
40211 of the Moving Ahead for Progress
in the 21st Century Act, Public Law
112–141, 126 Stat. 405, and has been
modified several times since then (most
recently in 2021 by section 80602 of the
Infrastructure Investment and Jobs Act,
Pub. L. 117–58, 135 Stat. 429), provides
interest rate stabilization rules under
which the segment rates are constrained
by reference to the 25-year average
segment rates. Under section
430(h)(2)(C)(iv), if a segment rate for a
month is less than the applicable
minimum percentage, or more than the
applicable maximum percentage, of the
average of the corresponding segment
rates for years in the 25-year period
ending with September 30 of the
calendar year preceding the calendar
year in which the plan year begins, then
the segment rate for that month is equal
to the applicable minimum percentage
or the applicable maximum percentage
of the corresponding 25-year average
segment rate, whichever is closest. The
last sentence of section
430(h)(2)(C)(iv)(I) provides that any 25year average segment rate that is less
than 5 percent is deemed to be 5
percent.
Under section 430(h)(2)(D)(i), the term
‘‘corporate bond yield curve’’ means,
with respect to any month, a yield curve
prescribed by the Secretary for the
month that reflects the average, for the
24-month period ending with the month
preceding such month, of monthly
yields on investment grade corporate
bonds with varying maturities and that
are in the top three quality levels
available. Section 430(h)(2)(D)(ii)
permits a plan sponsor to elect to use
the corporate bond yield curve, rather
than the segment rates, to determine the
plan’s minimum required contribution.
The yield curve that applies pursuant to
this election is determined without
regard to 24-month averaging. This
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election, once made, may be revoked
only with the consent of the Secretary.
Under section 430(h)(2)(F), the
Secretary is instructed to publish for
each month the corporate bond yield
curve (without regard to the 24-month
averaging specification), the segment
rates described in section 430(h)(2)(C),
and the 25-year averages of segment
rates used under section
430(h)(4)(C)(iv). The Secretary is also
instructed to publish a description of
the methodology used to determine the
yield curve and segment rates which is
sufficiently detailed to enable plans to
make reasonable projections regarding
the yield curve and segment rates for
future months based on the plan’s
projection of future interest rates.
Section 1.430(h)(2)–1 was issued in
2009 to provide rules regarding the
interest rates to be used under section
430. T.D. 9467, 74 FR 53004. Section
1.430(h)(2)–1(d) provides that the
methodology for determining the yield
curve is provided in guidance that is
published in the Internal Revenue
Bulletin. Notice 2007–81, 2007–2 CB
899, describes the methodology used by
the Department of the Treasury
(Treasury Department) to develop the
corporate bond yield curve. Section
1.430(h)(2)–1(d) also provides that the
yield curve for each month will be set
forth in guidance published in the
Internal Revenue Bulletin. Monthly IRS
notices set forth the corporate bond
yield curve for the month (without
regard to the 24-month averaging
specification), the section 430 segment
interest rates (before and after
adjustment pursuant to section
430(h)(3)(C)(iv)), and the 25-year
average segment rates (which are
updated annually).
Section 417(e)(3) provides
assumptions for determining minimum
present value for certain purposes,
including the determination of a lumpsum that is the present value of an
annuity, and prescribes an applicable
interest rate for this purpose. Section
417(e)(3)(C) provides that the term
‘‘applicable interest rate’’ means the
adjusted first, second, and third segment
rates applied under rules similar to the
rules of section 430(h)(2)(C) for the
month before the date of a distribution
or such other time as the Secretary may
prescribe by regulations. However, for
purposes of section 417(e)(3), these rates
are determined without regard to the
segment rate stabilization rules of
section 430(h)(2)(C)(iv). In addition,
under section 417(e)(3)(D), these rates
are determined using the average yields
for a month, rather than the 24-month
average used under section 430(h)(2)(D).
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Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Rules and Regulations
Under section 846(c), the Secretary
determines the applicable interest rate
to be used by insurance companies to
discount unpaid losses on the basis of
the corporate bond yield curve (as
defined in section 430(h)(2)(D)(i),
determined by substituting ‘‘60-month
period’’ for ‘‘24-month period’’). Under
§ 1.832–4(c), the applicable interest rate
determined under section 846(c) is also
used by insurance companies to
discount estimated salvage recoverable,
unless the Commissioner publishes
applicable discount factors to be used
for that purpose.
A notice of proposed rulemaking and
notice of public hearing (REG–124123–
22) that would revise the methodology
for determining the corporate bond
yield curve was published in the
Federal Register (88 FR 41047) on June
23, 2023. Two commenters submitted
comments on the proposed regulations.
A public hearing on the proposed
regulations was scheduled for August
30, 2023, but was cancelled because no
one requested to speak. After
consideration of these comments, these
final regulations are adopted with minor
changes to the language from the
proposed regulations to provide more
detail on the methodology for
determining the corporate bond yield
curve.
Summary of Comments and
Explanation of Revisions
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These regulations specify the
methodology used to develop the
corporate bond yield curve. This
methodology is generally the same as
the methodology set forth in Notice
2007–81 but includes two refinements
to take into account changes in the bond
market since 2007. The regulations also
amend the existing regulations under
section 430(h)(2) to reflect the addition
of the interest rate stabilization rules of
section 430(h)(2)(C)(iv) and to eliminate
transition rules that applied to plan
years beginning before January 1, 2010.
One commenter expressed support for
the rules set forth in the proposed
regulations. The other commenter raised
various concerns regarding the
corporate bond yield curve.2 Those
2 This commenter suggested that multiple yield
curves be published for different segments of the
corporate bond market, such as by industry, sector,
or region. This suggestion is inconsistent with the
requirements of section 430(h)(2)(D) and (F), under
which the Secretary must publish a single corporate
bond yield curve for each month. In addition, this
commenter expressed concern about the impact of
the proposed regulations on the determination of
the applicable federal rate and any resulting impact
on the tax-exempt bond market. However, pursuant
to section 1274(d), the applicable federal rates are
determined with reference to the yields on Treasury
securities, not corporate bonds; thus, these
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concerns are discussed in this Summary
of Comments and Explanation of
Revisions.
Under these regulations, as under
Notice 2007–81, the monthly corporate
bond yield curve for a month is defined
as the set of spot rates at specified
durations. The specified durations are at
6-month intervals ranging from 6
months through 100 years, and the spot
rate at a duration is the yield (when
compounded semiannually) for a bond
that matures at that duration with a
single payment at maturity. Each spot
rate at a specified duration on the
monthly corporate bond yield curve for
a month is equal to the arithmetic
average for each business day of that
month of the spot rates at that duration
on the daily corporate bond yield
curves.
Under these regulations, as under
Notice 2007–81, each spot rate on the
daily corporate bond yield curve is
derived from a forward interest rate
function (that is, the projected
instantaneous interest rate at each point
in time) that is defined by the selection
of five coefficients of B-splines
determined using the bond data, taking
into account certain adjustment factors.
Two of those adjustment factors,
which are included in the methodology
set forth in Notice 2007–81, take into
account the ratings of the bonds used to
develop the daily corporate bond yield
curve. The third adjustment factor,
which was not included in the
methodology set forth in that notice, is
a hump adjustment variable that peaks
at 20 years maturity 3 and serves to
capture the effects of the hump in spot
rates that is often seen around 20 years
maturity.
Under the methodology used in
Notice 2007–81, the spot rate at a
duration t could be calculated directly
as the discount rate at that duration
derived from the forward interest rate
function. However, the addition of the
hump adjustment variable under the
proposed regulations means that the
calculation of the spot rates from the
discount function and the hump
adjustment variable requires an
intermediate step. This intermediate
step, which was implicit in the
proposed regulations, involves the
determination of a par yield curve (that
is, the curve in which the rate at
maturity t on the curve is equal to the
yield for a bond with maturity of t for
regulations have no effect on the determination of
the applicable federal rates.
3 The hump adjustment variable is a
mathematical function that is a cubic spline in the
interval from 10 years maturity through 30 years
maturity made up of two polynomials with a
smooth junction at 20 years maturity.
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2129
which the price is the same as the
principal amount) that is calculated
from the discount function and the
hump adjustment variable. In response
to a commenter’s request that the
regulations specify clear standards for
the determination of the corporate bond
yield curve, these regulations describe
this intermediate step. Accordingly,
these regulations clarify that the spot
rates are determined by first setting the
spot rate at duration of 1⁄2 year on the
daily corporate bond yield curve as the
yield at maturity of 1⁄2 year from the
daily par yield curve, and then
determining the spot rate for any later
duration by applying an iterative
process based on the spot rates at earlier
durations and the daily par yield curve.
One commenter asked how the IRS
handles the situation in which the
rating of a bond is upgraded or
downgraded during a month, or a bond
is rated differently by different rating
organizations for a single day. Because
the monthly corporate bond yield curve
is developed from a set of daily
corporate bond yield curves, changes in
ratings during the month are
automatically taken into account. In the
case of a bond that is rated differently
by different ratings organizations on a
single day, the bond is treated as having
the average of the ratings for that day.
These regulations generally adopt the
specification for the bond data set for a
month under Notice 2007–81 but
modify an exclusion from that bond
data set. Under Notice 2007–81 and
these regulations, subject to certain
exclusions, the bonds that are used to
construct the daily corporate bond yield
curve for a business day are bonds with
the following characteristics: (1)
maturities longer than 1⁄2 year,4 (2) at
least two payment dates, (3) designated
as corporate, (4) high quality ratings
(that is, AAA, AA, or A) as of that
business day from the nationally
recognized statistical rating
organizations,5 (5) at least $250 million
in par amount outstanding on at least
one day during the month, (6) payment
of fixed nominal semiannual coupons
and the principal amount at maturity,
4 Under Notice 2007–81 and the regulations, the
data for durations equal to or below 1⁄2 year that is
used to construct the daily corporate bond yield
curve consists of AA financial and AA nonfinancial
commercial paper rates, as reported by the Federal
Reserve Board.
5 Although section 939A(b) of the Dodd-Frank
Wall Street Reform and Consumer Protection Act,
Public Law 111–203, 124 Stat. 1376, generally
prohibits federal agencies from issuing regulations
that apply a standard that is based on credit ratings
from statistical rating organizations, this prohibition
does not apply to the construction of the daily
corporate bond yield curve because the use of those
credit ratings is required by section 430(h)(2)(D) of
the Code.
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Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Rules and Regulations
and (7) maturity not later than 30 years
after that day.
Under Notice 2007–81 and these
regulations, the following categories of
bonds are excluded from the bond data
set: (1) bonds not denominated in U.S.
dollars, (2) bonds not issued by U.S.
corporations, (3) bonds that are capital
securities (sometimes referred to as
hybrid preferred stock), (4) bonds
having variable coupon rates, (5)
convertible bonds, (6) bonds issued by
a government-sponsored enterprise
(such as the Federal National Mortgage
Association), (7) asset-backed bonds, (8)
putable bonds, (9) bonds with sinking
funds, and (10) bonds with a par
amount outstanding below $250 million
for the day for which the daily yield
curve is constructed.
Notice 2007–81 also excluded callable
bonds (unless the call feature is makewhole) from the bond data set used to
construct the daily corporate bond yield
curve. The regulations generally retain
this exclusion but narrow it. Under the
proposed regulations, this exclusion
does not apply if the call feature is
exercisable only during the last year
before maturity. This type of call feature
has recently become more widely used,
and the inclusion of bonds with this
feature in the data set will result in a
significantly larger pool of bonds that
more accurately reflects the market for
high quality corporate bonds.
One commenter asked how the
calculation of the yield of a corporate
bond is affected by any options
embedded in that bond. The complexity
of the calculations involved in
quantifying this effect is the reason that
corporate bonds with embedded put and
call options have been generally
excluded from the set of bonds used to
determine the corporate bond yield
curve in the past. However, as noted in
the preceding paragraph, including
bonds with a call feature that is
exercisable only during the last year
before maturity significantly increases
the pool of bonds that are taken into
account in developing the corporate
bond yield curve, and the Treasury
Department and the IRS have
determined that this feature does not
significantly affect the yields of these
bonds. Accordingly, no adjustment will
be made to reflect the effect of this
feature on bond yields.
Statement of Availability of IRS
Documents
IRS Revenue Rulings, Revenue
Procedures, and Notices cited in this
document are published in the Internal
Revenue Bulletin (or Cumulative
Bulletin) and are available from the
Superintendent of Documents, U.S.
Government Printing Office,
Washington, DC 20402, or by visiting
the IRS website at www.irs.gov.
includes any Federal mandate that may
result in expenditures in any one year
by a State, local, or Tribal government,
in the aggregate, or by the private sector,
of $100 million in 1995 dollars, updated
annually for inflation. These regulations
do not include any Federal mandate that
may result in expenditures by State,
local, or Tribal governments, or by the
private sector in excess of that
threshold.
Special Analyses
Executive Order 13132: Federalism
Executive Order 13132 (Federalism)
prohibits an agency from publishing any
rule that has federalism implications if
the rule either imposes substantial,
direct compliance costs on State and
local governments, and is not required
by statute, or preempts State law, unless
the agency meets the consultation and
funding requirements of section 6 of the
Executive order. These regulations do
not have federalism implications,
impose substantial direct compliance
costs on State and local governments, or
preempt State law within the meaning
of the Executive order.
Applicability Date
Unfunded Mandates Reform Act
Section 202 of the Unfunded
Mandates Reform Act of 1995 requires
that agencies assess anticipated costs
and benefits and take certain other
actions before issuing a final rule that
These regulations apply for purposes
of determining the corporate bond yield
curve under section 430(h)(2)(D) for
months that begin on or after February
1, 2024.
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Regulatory Planning and Review
(Executive Orders 12866 and 13563)
Pursuant to the Memorandum of
Agreement, Review of Treasury
Regulations under Executive Order
12866 (June 9, 2023), tax regulatory
actions issued by the IRS are not subject
to the requirements of section 6 of
Executive Order 12866, as amended.
Therefore, a regulatory impact
assessment is not required.
Regulatory Flexibility Act
It is hereby certified that this rule will
not have a significant economic impact
on a substantial number of small
entities. The vast majority of plan
sponsors of defined benefit plans that
are subject to section 430 choose to use
the segment rates under section
430(h)(2)(C), rather than the corporate
bond yield curve under section
430(h)(2)(D), to determine minimum
required contributions. Furthermore,
most of the plan sponsors who choose
to use the corporate bond yield curve for
this purpose are not small employers.
Therefore, the methodology set forth in
these regulations for constructing the
corporate bond yield curve will not
have a significant effect on minimum
required contributions for small
employers. In addition, the insurance
companies that are required to use a
modified version of the corporate bond
yield curve to discount unpaid losses
are typically not small employers.
Accordingly, a regulatory flexibility
analysis under the Regulatory
Flexibility Act is not required.
Pursuant to section 7805(f) of the
Code, the proposed regulations that
preceded these regulations were
submitted to the Chief Counsel for
Advocacy of the Small Business
Administration for comment on their
impact on small business, and no
comments were received.
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Congressional Review Act
Pursuant to the Congressional Review
Act (5 U.S.C. 801 et seq.), the Office of
Information and Regulatory Affairs
designated this rule as not a major rule,
as defined by 5 U.S.C. 804(2).
Drafting Information
The principal authors of these
regulations are Arslan Malik and Linda
S.F. Marshall of the Office of Associate
Chief Counsel (Employee Benefits,
Exempt Organizations, and Employment
Taxes). However, other personnel from
the Treasury Department and the IRS
participated in the development of these
regulations.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
Adoption of Amendments to the
Regulations
Accordingly, the Treasury Department
and the IRS amend 26 CFR part 1 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(h)(2)–1 is
amended by:
■ 1. Removing the phrase ‘‘and
transition rules’’ in the last sentence of
paragraph (a)(1);
■ 2. Revising paragraph (b)(2);
■
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3. Removing the last sentence in
paragraph (c)(1);
■ 4. In paragraphs (c)(2)(i) through (iii),
removing the phrase ‘‘under the
transition rule of paragraph (h)(4) of this
section’’ and adding the phrase ‘‘under
the interest rate stabilization rules in
section 430(h)(2)(C)(iv)’’ in its place;
■ 5. Revising paragraph (d);
■ 6. Removing paragraph (e)(3) and
redesignating paragraph (e)(4) as
paragraph (e)(3);
■ 7. In newly redesignated paragraph
(e)(3)(ii), removing the phrase ‘‘this
paragraph (e)(4)’’ and adding the phrase
‘‘this paragraph (e)(3)’’ in its place;
■ 8. Redesignating paragraph (e)(5) as
paragraph (e)(4); and
■ 9. Revising paragraph (h).
The revisions read as follows:
■
§ 1.430(h)(2)–1 Interest rates used to
determine present value.
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*
*
*
*
*
(b) * * *
(2) Benefits payable within 5 years. In
the case of benefits expected to be
payable during the 5-year period
beginning on the valuation date for the
plan year, the interest rate used in
determining the present value of the
benefits that are included in the target
normal cost and the funding target for
the plan is the first segment rate with
respect to the applicable month, as
described in paragraph (c)(2)(i) of this
section.
*
*
*
*
*
(d) Monthly corporate bond yield
curve—(1) In general—(i) Construction
of monthly corporate bond yield curve.
For purposes of this section, the
monthly corporate bond yield curve for
a month is defined as the set of spot
rates at specified durations. The
specified durations are at 6-month
intervals ranging from 6 months through
100 years and the spot rate at a duration
is the yield (when compounded
semiannually) for a bond that matures at
that duration with a single payment at
maturity. The monthly corporate bond
yield curve is constructed as the average
of the spot rates from the set of daily
corporate bond yield curves as specified
in paragraph (d)(1)(ii) of this section.
Each daily corporate bond yield curve is
constructed using the methodology set
forth in paragraph (d)(2) of this section
based on the data described in
paragraph (d)(3) of this section. The
yield curve for each month will be
published in the Internal Revenue
Bulletin. See § 601.601(d) of this
chapter.
(ii) Monthly corporate bond yield
curve constructed through averaging.
Each spot rate at a specified duration on
the monthly corporate bond yield curve
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for a month is equal to the arithmetic
average, for each business day of that
month, of the spot rates at that duration
on the daily corporate bond yield
curves.
(2) Construction of the daily corporate
bond yield curve—(i) In general—(A)
Calculation of spot rates. The spot rate
at duration of 1⁄2 year on the daily
corporate bond yield curve is set equal
to the yield at maturity of 1⁄2 year from
the daily par yield curve described in
paragraph (d)(2)(i)(B) of this section.
The spot rate for any later duration on
the daily corporate bond yield curve is
determined by applying an iterative
process based on the spot rates at earlier
durations and the daily par yield curve.
(B) Calculation of par yield curve. The
daily par yield curve (that is, the curve
in which the rate at maturity t on the
curve is equal to the yield for a bond
with maturity of t for which the price is
the same as the principal amount) is
calculated from the discount function
described in paragraph (d)(2)(i)(C) of
this section and the hump adjustment
variable described in paragraph
(d)(2)(iii)(D) of this section.
(C) Derivation of discount function.
The discount function for a day at
duration t (denoted d(t)) is derived from
the forward interest rate function as
described in paragraph (d)(2)(ii) of this
section (denoted f(z)) using the
following equation:
d(t) = exp (-
f
f(z)dz)
(ii) Determination of forward interest
rates—(A) In general. The forward
interest rate function used to derive the
discount function is determined as a
series of cubic polynomials (referred to
as a cubic spline) that have a smooth
junction at specified knot points
(maturities of 0, 1.5, 3, 7, 15, and 30
years). The requirement that the
polynomials have a smooth junction at
a knot point is satisfied if the two
polynomials that are meeting at the knot
have the same value, the same
derivative, and the same second
derivative at that knot point.
(B) Constraints on the forward interest
function. The following three
constraints are placed on the forward
interest rate function—
(1) The second derivative of the
function is set to 0 at maturity 0.
(2) The value of the forward interest
rate function at and after 30 years is
constrained to equal its average value
from 15 to 30 years.
(3) The derivative of the forward
interest rate function is set to 0 at
maturity 30 years.
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2131
(iii) Parameters for daily bond price
model—(A) B-spline coefficients. The
assumed cubic spline for the forward
interest rate function can be described
as a linear combination of B-splines,
with five parameters, which are
determined taking into account the two
coefficients for the bond-quality
adjustment variables described in
paragraphs (d)(2)(iii)(B) and (C) of this
section and the coefficient for the hump
adjustment variable described in
paragraph (d)(2)(iii)(D) of this section.
The five parameters and three
coefficients are determined using the
bond data weighted as described in
paragraph (d)(2)(iv) of this section. After
this weighting of the bond data, the five
parameters and three coefficients are
chosen to minimize the sum of the
squared differences between the bid
price for each of the bonds (or ask price
for commercial paper) and the price
estimated for each of those bonds
determined using the specified
parameters and coefficients, and taking
into account the bond’s coupon rate,
number of years until maturity, and
rating.
(B) Adjustment factor for share of
bonds that are AA-rated. The first
adjustment variable is based on the
proportion of bonds that are rated AA
within the universe of bonds in the data
set that are rated AA or AAA, weighted
by par value. In the case of an AAArated bond the adjustment variable
described in this paragraph (d)(2)(iii)(B)
is equal to the product of the proportion
described in the preceding sentence and
the number of years until maturity for
the bond. In the case of an AA-rated
bond the adjustment variable described
in this paragraph (d)(2)(iii)(B) is equal to
the product of (1- that proportion) and
the number of years until maturity for
the bond. In the case of an A-rated bond,
the adjustment variable described in
this paragraph (d)(2)(iii)(B) is 0.
(C) Adjustment factor for share of
bonds that are A-rated. The second
adjustment variable is based on the
proportion of bonds rated A within the
universe of bonds in the data set,
weighted by par value. In the case of an
AAA-rated bond or an AA-rated bond,
the adjustment variable described in
this paragraph (d)(2)(iii)(C) is equal to
the product of the proportion described
in the preceding sentence and the
number of years until maturity for the
bond. In the case of an A-rated bond, the
adjustment variable described in this
paragraph (d)(2)(iii)(C) is equal to the
product of (1- that proportion) and the
number of years until maturity for the
bond.
(D) Hump adjustment variable. The
hump adjustment variable is a
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Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Rules and Regulations
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Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Rules and Regulations
mathematical function that is a cubic
spline in the interval from 10 years
maturity through 30 years maturity
made up of two polynomials with a
smooth junction (as described in
paragraph (d)(2)(ii)(A) of this section) at
20 years maturity. The spline rises from
0 at 10 years maturity to 1.0 at 20 years
maturity, then falls back down to 0 at 30
years maturity. The hump adjustment
variable is 0 for maturities less than 10
years and maturities greater than 30
years.
(iv) Weighting of bond data. The bond
data are weighted in three steps. In the
first step, equal weights are assigned to
the commercial paper rates at the short
end of the curve, and the par amounts
outstanding of all the bonds are rescaled
so that their sum equals the sum of the
weights for commercial paper. In the
second step, the squared price
difference for each commercial paper
rate is multiplied by the commercial
paper weight, and the squared price
difference for each bond is multiplied
by the bond’s rescaled par amount
outstanding. In the third step,
applicable for bonds with duration
greater than 1, the weighted squared
price difference for each bond from the
second step is divided by the bond’s
duration.
(3) Data used—(i) In general. Except
as otherwise provided in this paragraph
(d)(3), the bonds that are used to
construct the daily corporate bond yield
curve for a business day are bonds with
maturities longer than 1⁄2 year, with at
least two payment dates, and that:
(A) Are designated as corporate;
(B) Have high quality ratings (AAA,
AA, or A) as of that business day from
the nationally recognized statistical
rating organizations;
(C) Have at least $250 million in par
amount outstanding on at least one day
during the month;
(D) Pay fixed nominal semiannual
coupons and the principal amount at
maturity; and
(E) Mature not later than 30 years after
that business day.
(ii) Excluded bonds. The following
types of bonds are not used to construct
the daily corporate bond yield curve for
a date:
(A) Bonds not denominated in U.S.
dollars;
(B) Bonds not issued by U.S.
corporations;
(C) Bonds that are capital securities
(sometimes referred to as hybrid
preferred stock);
(D) Bonds with variable coupon rates;
(E) Convertible bonds;
(F) Bonds issued by a governmentsponsored enterprise (such as the
Federal National Mortgage Association);
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15:08 Jan 11, 2024
Jkt 262001
(G) Asset-backed bonds;
(H) Callable bonds, unless the call
feature is make-whole or the call feature
is exercisable only during the last year
before maturity;
(I) Putable bonds;
(J) Bonds with sinking funds; and
(K) Bonds with an outstanding par
amount below $250 million for the day
for which the daily yield curve is
constructed.
(iii) Durations equal to or below 1⁄2
year. The data for durations equal to or
below 1⁄2 year that is used to construct
the daily corporate bond yield curve
consists of AA financial and AA
nonfinancial commercial paper rates, as
reported by the Federal Reserve Board.
*
*
*
*
*
(h) Applicability date. This section
applies for months that begin on or after
February 1, 2024. For rules that apply
for earlier periods, see 26 CFR
1.430(h)(2)–1 revised as of April 1,
2023.
Douglas W. O’Donnell,
Deputy Commissioner for Services and
Enforcement.
Approved: December 27, 2023.
Lily Batchelder,
Assistant Secretary of the Treasury (Tax
Policy).
[FR Doc. 2024–00552 Filed 1–11–24; 8:45 am]
BILLING CODE 4830–01–P
PENSION BENEFIT GUARANTY
CORPORATION
29 CFR Parts 4071 and 4302
RIN 1212–AB45
Adjustment of Civil Penalties for
Inflation
Pension Benefit Guaranty
Corporation.
ACTION: Final rule.
AGENCY:
The Pension Benefit Guaranty
Corporation is required to amend its
regulations annually to adjust for
inflation the maximum civil penalty for
failure to provide certain notices or
other material information and for
failure to provide certain multiemployer
plan notices.
DATES:
Effective date: This rule is effective on
January 12, 2024.
Applicability date: The increases in
the civil monetary penalties under
sections 4071 and 4302 of the Employee
Retirement Income Security Act
provided for in this rule apply to such
penalties assessed after January 12,
2024.
SUMMARY:
PO 00000
Frm 00022
Fmt 4700
Sfmt 4700
FOR FURTHER INFORMATION CONTACT:
Karen Levin (levin.karen@pbgc.gov),
Attorney, Regulatory Affairs Division,
Pension Benefit Guaranty Corporation,
445 12th Street SW, Washington, DC
20024–2101; 202–229–3559. If you are
deaf or hard of hearing or have a speech
disability, please dial 7–1–1 to access
telecommunications relay services.
SUPPLEMENTARY INFORMATION:
Executive Summary
Purpose of the Regulatory Action
This rule is needed to carry out the
requirements of the Federal Civil
Penalties Inflation Adjustment Act
Improvements Act of 2015 and Office of
Management and Budget guidance M–
24–07. The rule adjusts, as required for
2024, the maximum civil penalties
under 29 CFR parts 4071 and 4302 that
the Pension Benefit Guaranty
Corporation (PBGC) may assess for
failure to provide certain notices or
other material information and certain
multiemployer plan notices.
PBGC’s legal authority for this action
comes from the Federal Civil Penalties
Inflation Adjustment Act of 1990 as
amended by the Federal Civil Penalties
Inflation Adjustment Act Improvements
Act of 2015 and from sections
4002(b)(3), 4071, and 4302 of the
Employee Retirement Income Security
Act of 1974 (ERISA).
Major Provisions of the Regulatory
Action
This rule adjusts as required by law
the maximum civil penalties that PBGC
may assess under sections 4071 and
4302 of ERISA. The new maximum
amounts are $2,670 for section 4071
penalties and $356 for section 4302
penalties.
Background
PBGC administers title IV of ERISA.
Title IV has two provisions that
authorize PBGC to assess civil monetary
penalties.1 Section 4302, added to
ERISA by the Multiemployer Pension
Plan Amendments Act of 1980,
authorizes PBGC to assess a civil
penalty of up to $100 a day for failure
to provide a notice under subtitle E of
title IV of ERISA (dealing with
multiemployer plans). Section 4071,
added to ERISA by the Omnibus Budget
Reconciliation Act of 1987, authorizes
1 Under the Federal Civil Penalties Inflation
Adjustment Act of 1990, a penalty is a civil
monetary penalty if (among other things) it is for
a specific monetary amount or has a maximum
amount specified by Federal law. Title IV also
provides (in section 4007) for penalties for late
payment of premiums, but those penalties are
neither in a specified amount nor subject to a
specified maximum amount.
E:\FR\FM\12JAR1.SGM
12JAR1
]]>Agencies
[Federal Register Volume 89, Number 9 (Friday, January 12, 2024)]
[Rules and Regulations]
[Pages 2127-2132]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-00552]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9986]
RIN 1545-BQ57
Corporate Bond Yield Curve for Determining Present Value
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
-----------------------------------------------------------------------
SUMMARY: This document sets forth final regulations specifying the
methodology
[[Page 2128]]
for constructing the corporate bond yield curve that is used to derive
the interest rates used in calculating present value and making other
calculations under a defined benefit plan, as well as for discounting
unpaid losses and estimated salvage recoverable of insurance companies.
These regulations affect participants in, beneficiaries of, employers
maintaining, and administrators of certain retirement plans, as well as
insurance companies.
DATES:
Effective date: These regulations are effective January 12, 2024.
Applicability date: These regulations apply for purposes of
determining the corporate bond yield curve under section 430(h)(2)(D)
of the Internal Revenue Code for months that begin on or after February
1, 2024.
FOR FURTHER INFORMATION CONTACT: Arslan Malik or Linda S.F. Marshall,
Office of Associate Chief Counsel (Employee Benefits, Exempt
Organizations, and Employment Taxes) at (202) 317-6700 (not a toll-free
number).
SUPPLEMENTARY INFORMATION:
Background
Section 412 of the Internal Revenue Code (Code) prescribes minimum
funding requirements for defined benefit pension plans. Section 430
specifies the minimum funding requirements that apply generally to
defined benefit plans that are not multiemployer plans.\1\ For a plan
subject to section 430, section 430(a) defines the minimum required
contribution for a plan year by reference to the plan's funding target
for the plan year. Under section 430(d)(1), a plan's funding target for
a plan year generally is the present value of all benefits accrued or
earned under the plan as of the first day of that plan year.
---------------------------------------------------------------------------
\1\ Section 302 of the Employee Retirement Income Security Act
of 1974, Public Law 93-406, 88 Stat. 829 (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 minimum funding
requirements that apply generally for defined benefit plans (other
than multiemployer plans) that are parallel to those in section 430
of the Code. Pursuant to section 101 of Reorganization Plan No. 4 of
1978, 5 U.S.C. App., as amended, 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
Treasury regulations issued under section 430 of the Code also apply
for purposes of section 303 of ERISA.
---------------------------------------------------------------------------
Section 430(h)(2) provides rules regarding the interest rates to be
used under section 430. Section 430(h)(2)(B) provides that a plan's
funding target and target normal cost for a plan year are determined
using three interest rates: (1) the first segment rate, which applies
to benefits reasonably determined to be payable during the 5-year
period beginning on the valuation date; (2) the second segment rate,
which applies to benefits reasonably determined to be payable during
the next 15-year period; and (3) the third segment rate, which applies
to benefits reasonably determined to be paid after that 15-year period.
Under sections 430(h)(2)(C)(i) through (iii), each of these segment
rates is determined for a month on the basis of the corporate bond
yield curve for the month, taking into account only that portion of the
yield curve that is based on bonds maturing during the period for which
the segment rate is used.
Section 430(h)(2)(C)(iv), which was added to the Code in 2012 by
section 40211 of the Moving Ahead for Progress in the 21st Century Act,
Public Law 112-141, 126 Stat. 405, and has been modified several times
since then (most recently in 2021 by section 80602 of the
Infrastructure Investment and Jobs Act, Pub. L. 117-58, 135 Stat. 429),
provides interest rate stabilization rules under which the segment
rates are constrained by reference to the 25-year average segment
rates. Under section 430(h)(2)(C)(iv), if a segment rate for a month is
less than the applicable minimum percentage, or more than the
applicable maximum percentage, of the average of the corresponding
segment rates for years in the 25-year period ending with September 30
of the calendar year preceding the calendar year in which the plan year
begins, then the segment rate for that month is equal to the applicable
minimum percentage or the applicable maximum percentage of the
corresponding 25-year average segment rate, whichever is closest. The
last sentence of section 430(h)(2)(C)(iv)(I) provides that any 25-year
average segment rate that is less than 5 percent is deemed to be 5
percent.
Under section 430(h)(2)(D)(i), the term ``corporate bond yield
curve'' means, with respect to any month, a yield curve prescribed by
the Secretary for the month that reflects the average, for the 24-month
period ending with the month preceding such month, of monthly yields on
investment grade corporate bonds with varying maturities and that are
in the top three quality levels available. Section 430(h)(2)(D)(ii)
permits a plan sponsor to elect to use the corporate bond yield curve,
rather than the segment rates, to determine the plan's minimum required
contribution. The yield curve that applies pursuant to this election is
determined without regard to 24-month averaging. This election, once
made, may be revoked only with the consent of the Secretary.
Under section 430(h)(2)(F), the Secretary is instructed to publish
for each month the corporate bond yield curve (without regard to the
24-month averaging specification), the segment rates described in
section 430(h)(2)(C), and the 25-year averages of segment rates used
under section 430(h)(4)(C)(iv). The Secretary is also instructed to
publish a description of the methodology used to determine the yield
curve and segment rates which is sufficiently detailed to enable plans
to make reasonable projections regarding the yield curve and segment
rates for future months based on the plan's projection of future
interest rates.
Section 1.430(h)(2)-1 was issued in 2009 to provide rules regarding
the interest rates to be used under section 430. T.D. 9467, 74 FR
53004. Section 1.430(h)(2)-1(d) provides that the methodology for
determining the yield curve is provided in guidance that is published
in the Internal Revenue Bulletin. Notice 2007-81, 2007-2 CB 899,
describes the methodology used by the Department of the Treasury
(Treasury Department) to develop the corporate bond yield curve.
Section 1.430(h)(2)-1(d) also provides that the yield curve for each
month will be set forth in guidance published in the Internal Revenue
Bulletin. Monthly IRS notices set forth the corporate bond yield curve
for the month (without regard to the 24-month averaging specification),
the section 430 segment interest rates (before and after adjustment
pursuant to section 430(h)(3)(C)(iv)), and the 25-year average segment
rates (which are updated annually).
Section 417(e)(3) provides assumptions for determining minimum
present value for certain purposes, including the determination of a
lump-sum that is the present value of an annuity, and prescribes an
applicable interest rate for this purpose. Section 417(e)(3)(C)
provides that the term ``applicable interest rate'' means the adjusted
first, second, and third segment rates applied under rules similar to
the rules of section 430(h)(2)(C) for the month before the date of a
distribution or such other time as the Secretary may prescribe by
regulations. However, for purposes of section 417(e)(3), these rates
are determined without regard to the segment rate stabilization rules
of section 430(h)(2)(C)(iv). In addition, under section 417(e)(3)(D),
these rates are determined using the average yields for a month, rather
than the 24-month average used under section 430(h)(2)(D).
[[Page 2129]]
Under section 846(c), the Secretary determines the applicable
interest rate to be used by insurance companies to discount unpaid
losses on the basis of the corporate bond yield curve (as defined in
section 430(h)(2)(D)(i), determined by substituting ``60-month period''
for ``24-month period''). Under Sec. 1.832-4(c), the applicable
interest rate determined under section 846(c) is also used by insurance
companies to discount estimated salvage recoverable, unless the
Commissioner publishes applicable discount factors to be used for that
purpose.
A notice of proposed rulemaking and notice of public hearing (REG-
124123-22) that would revise the methodology for determining the
corporate bond yield curve was published in the Federal Register (88 FR
41047) on June 23, 2023. Two commenters submitted comments on the
proposed regulations. A public hearing on the proposed regulations was
scheduled for August 30, 2023, but was cancelled because no one
requested to speak. After consideration of these comments, these final
regulations are adopted with minor changes to the language from the
proposed regulations to provide more detail on the methodology for
determining the corporate bond yield curve.
Summary of Comments and Explanation of Revisions
These regulations specify the methodology used to develop the
corporate bond yield curve. This methodology is generally the same as
the methodology set forth in Notice 2007-81 but includes two
refinements to take into account changes in the bond market since 2007.
The regulations also amend the existing regulations under section
430(h)(2) to reflect the addition of the interest rate stabilization
rules of section 430(h)(2)(C)(iv) and to eliminate transition rules
that applied to plan years beginning before January 1, 2010.
One commenter expressed support for the rules set forth in the
proposed regulations. The other commenter raised various concerns
regarding the corporate bond yield curve.\2\ Those concerns are
discussed in this Summary of Comments and Explanation of Revisions.
---------------------------------------------------------------------------
\2\ This commenter suggested that multiple yield curves be
published for different segments of the corporate bond market, such
as by industry, sector, or region. This suggestion is inconsistent
with the requirements of section 430(h)(2)(D) and (F), under which
the Secretary must publish a single corporate bond yield curve for
each month. In addition, this commenter expressed concern about the
impact of the proposed regulations on the determination of the
applicable federal rate and any resulting impact on the tax-exempt
bond market. However, pursuant to section 1274(d), the applicable
federal rates are determined with reference to the yields on
Treasury securities, not corporate bonds; thus, these regulations
have no effect on the determination of the applicable federal rates.
---------------------------------------------------------------------------
Under these regulations, as under Notice 2007-81, the monthly
corporate bond yield curve for a month is defined as the set of spot
rates at specified durations. The specified durations are at 6-month
intervals ranging from 6 months through 100 years, and the spot rate at
a duration is the yield (when compounded semiannually) for a bond that
matures at that duration with a single payment at maturity. Each spot
rate at a specified duration on the monthly corporate bond yield curve
for a month is equal to the arithmetic average for each business day of
that month of the spot rates at that duration on the daily corporate
bond yield curves.
Under these regulations, as under Notice 2007-81, each spot rate on
the daily corporate bond yield curve is derived from a forward interest
rate function (that is, the projected instantaneous interest rate at
each point in time) that is defined by the selection of five
coefficients of B-splines determined using the bond data, taking into
account certain adjustment factors.
Two of those adjustment factors, which are included in the
methodology set forth in Notice 2007-81, take into account the ratings
of the bonds used to develop the daily corporate bond yield curve. The
third adjustment factor, which was not included in the methodology set
forth in that notice, is a hump adjustment variable that peaks at 20
years maturity \3\ and serves to capture the effects of the hump in
spot rates that is often seen around 20 years maturity.
---------------------------------------------------------------------------
\3\ The hump adjustment variable is a mathematical function that
is a cubic spline in the interval from 10 years maturity through 30
years maturity made up of two polynomials with a smooth junction at
20 years maturity.
---------------------------------------------------------------------------
Under the methodology used in Notice 2007-81, the spot rate at a
duration t could be calculated directly as the discount rate at that
duration derived from the forward interest rate function. However, the
addition of the hump adjustment variable under the proposed regulations
means that the calculation of the spot rates from the discount function
and the hump adjustment variable requires an intermediate step. This
intermediate step, which was implicit in the proposed regulations,
involves the determination of a par yield curve (that is, the curve in
which the rate at maturity t on the curve is equal to the yield for a
bond with maturity of t for which the price is the same as the
principal amount) that is calculated from the discount function and the
hump adjustment variable. In response to a commenter's request that the
regulations specify clear standards for the determination of the
corporate bond yield curve, these regulations describe this
intermediate step. Accordingly, these regulations clarify that the spot
rates are determined by first setting the spot rate at duration of \1/
2\ year on the daily corporate bond yield curve as the yield at
maturity of \1/2\ year from the daily par yield curve, and then
determining the spot rate for any later duration by applying an
iterative process based on the spot rates at earlier durations and the
daily par yield curve.
One commenter asked how the IRS handles the situation in which the
rating of a bond is upgraded or downgraded during a month, or a bond is
rated differently by different rating organizations for a single day.
Because the monthly corporate bond yield curve is developed from a set
of daily corporate bond yield curves, changes in ratings during the
month are automatically taken into account. In the case of a bond that
is rated differently by different ratings organizations on a single
day, the bond is treated as having the average of the ratings for that
day.
These regulations generally adopt the specification for the bond
data set for a month under Notice 2007-81 but modify an exclusion from
that bond data set. Under Notice 2007-81 and these regulations, subject
to certain exclusions, the bonds that are used to construct the daily
corporate bond yield curve for a business day are bonds with the
following characteristics: (1) maturities longer than \1/2\ year,\4\
(2) at least two payment dates, (3) designated as corporate, (4) high
quality ratings (that is, AAA, AA, or A) as of that business day from
the nationally recognized statistical rating organizations,\5\ (5) at
least $250 million in par amount outstanding on at least one day during
the month, (6) payment of fixed nominal semiannual coupons and the
principal amount at maturity,
[[Page 2130]]
and (7) maturity not later than 30 years after that day.
---------------------------------------------------------------------------
\4\ Under Notice 2007-81 and the regulations, the data for
durations equal to or below \1/2\ year that is used to construct the
daily corporate bond yield curve consists of AA financial and AA
nonfinancial commercial paper rates, as reported by the Federal
Reserve Board.
\5\ Although section 939A(b) of the Dodd-Frank Wall Street
Reform and Consumer Protection Act, Public Law 111-203, 124 Stat.
1376, generally prohibits federal agencies from issuing regulations
that apply a standard that is based on credit ratings from
statistical rating organizations, this prohibition does not apply to
the construction of the daily corporate bond yield curve because the
use of those credit ratings is required by section 430(h)(2)(D) of
the Code.
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Under Notice 2007-81 and these regulations, the following
categories of bonds are excluded from the bond data set: (1) bonds not
denominated in U.S. dollars, (2) bonds not issued by U.S. corporations,
(3) bonds that are capital securities (sometimes referred to as hybrid
preferred stock), (4) bonds having variable coupon rates, (5)
convertible bonds, (6) bonds issued by a government-sponsored
enterprise (such as the Federal National Mortgage Association), (7)
asset-backed bonds, (8) putable bonds, (9) bonds with sinking funds,
and (10) bonds with a par amount outstanding below $250 million for the
day for which the daily yield curve is constructed.
Notice 2007-81 also excluded callable bonds (unless the call
feature is make-whole) from the bond data set used to construct the
daily corporate bond yield curve. The regulations generally retain this
exclusion but narrow it. Under the proposed regulations, this exclusion
does not apply if the call feature is exercisable only during the last
year before maturity. This type of call feature has recently become
more widely used, and the inclusion of bonds with this feature in the
data set will result in a significantly larger pool of bonds that more
accurately reflects the market for high quality corporate bonds.
One commenter asked how the calculation of the yield of a corporate
bond is affected by any options embedded in that bond. The complexity
of the calculations involved in quantifying this effect is the reason
that corporate bonds with embedded put and call options have been
generally excluded from the set of bonds used to determine the
corporate bond yield curve in the past. However, as noted in the
preceding paragraph, including bonds with a call feature that is
exercisable only during the last year before maturity significantly
increases the pool of bonds that are taken into account in developing
the corporate bond yield curve, and the Treasury Department and the IRS
have determined that this feature does not significantly affect the
yields of these bonds. Accordingly, no adjustment will be made to
reflect the effect of this feature on bond yields.
Applicability Date
These regulations apply for purposes of determining the corporate
bond yield curve under section 430(h)(2)(D) for months that begin on or
after February 1, 2024.
Statement of Availability of IRS Documents
IRS Revenue Rulings, Revenue Procedures, and Notices cited in this
document are published in the Internal Revenue Bulletin (or Cumulative
Bulletin) and are available from the Superintendent of Documents, U.S.
Government Printing Office, Washington, DC 20402, or by visiting the
IRS website at www.irs.gov.
Special Analyses
Regulatory Planning and Review (Executive Orders 12866 and 13563)
Pursuant to the Memorandum of Agreement, Review of Treasury
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory
actions issued by the IRS are not subject to the requirements of
section 6 of Executive Order 12866, as amended. Therefore, a regulatory
impact assessment is not required.
Regulatory Flexibility Act
It is hereby certified that this rule will not have a significant
economic impact on a substantial number of small entities. The vast
majority of plan sponsors of defined benefit plans that are subject to
section 430 choose to use the segment rates under section 430(h)(2)(C),
rather than the corporate bond yield curve under section 430(h)(2)(D),
to determine minimum required contributions. Furthermore, most of the
plan sponsors who choose to use the corporate bond yield curve for this
purpose are not small employers. Therefore, the methodology set forth
in these regulations for constructing the corporate bond yield curve
will not have a significant effect on minimum required contributions
for small employers. In addition, the insurance companies that are
required to use a modified version of the corporate bond yield curve to
discount unpaid losses are typically not small employers. Accordingly,
a regulatory flexibility analysis under the Regulatory Flexibility Act
is not required.
Pursuant to section 7805(f) of the Code, the proposed regulations
that preceded these regulations were submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on their
impact on small business, and no comments were received.
Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 requires
that agencies assess anticipated costs and benefits and take certain
other actions before issuing a final rule that includes any Federal
mandate that may result in expenditures in any one year by a State,
local, or Tribal government, in the aggregate, or by the private
sector, of $100 million in 1995 dollars, updated annually for
inflation. These regulations do not include any Federal mandate that
may result in expenditures by State, local, or Tribal governments, or
by the private sector in excess of that threshold.
Executive Order 13132: Federalism
Executive Order 13132 (Federalism) prohibits an agency from
publishing any rule that has federalism implications if the rule either
imposes substantial, direct compliance costs on State and local
governments, and is not required by statute, or preempts State law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive order. These regulations do not have
federalism implications, impose substantial direct compliance costs on
State and local governments, or preempt State law within the meaning of
the Executive order.
Congressional Review Act
Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.),
the Office of Information and Regulatory Affairs designated this rule
as not a major rule, as defined by 5 U.S.C. 804(2).
Drafting Information
The principal authors of these regulations are Arslan Malik and
Linda S.F. Marshall of the Office of Associate Chief Counsel (Employee
Benefits, Exempt Organizations, and Employment Taxes). However, other
personnel from the Treasury Department and the IRS participated in the
development of these regulations.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, the Treasury Department and the IRS amend 26 CFR part
1 as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.430(h)(2)-1 is amended by:
0
1. Removing the phrase ``and transition rules'' in the last sentence of
paragraph (a)(1);
0
2. Revising paragraph (b)(2);
[[Page 2131]]
0
3. Removing the last sentence in paragraph (c)(1);
0
4. In paragraphs (c)(2)(i) through (iii), removing the phrase ``under
the transition rule of paragraph (h)(4) of this section'' and adding
the phrase ``under the interest rate stabilization rules in section
430(h)(2)(C)(iv)'' in its place;
0
5. Revising paragraph (d);
0
6. Removing paragraph (e)(3) and redesignating paragraph (e)(4) as
paragraph (e)(3);
0
7. In newly redesignated paragraph (e)(3)(ii), removing the phrase
``this paragraph (e)(4)'' and adding the phrase ``this paragraph
(e)(3)'' in its place;
0
8. Redesignating paragraph (e)(5) as paragraph (e)(4); and
0
9. Revising paragraph (h).
The revisions read as follows:
Sec. 1.430(h)(2)-1 Interest rates used to determine present value.
* * * * *
(b) * * *
(2) Benefits payable within 5 years. In the case of benefits
expected to be payable during the 5-year period beginning on the
valuation date for the plan year, the interest rate used in determining
the present value of the benefits that are included in the target
normal cost and the funding target for the plan is the first segment
rate with respect to the applicable month, as described in paragraph
(c)(2)(i) of this section.
* * * * *
(d) Monthly corporate bond yield curve--(1) In general--(i)
Construction of monthly corporate bond yield curve. For purposes of
this section, the monthly corporate bond yield curve for a month is
defined as the set of spot rates at specified durations. The specified
durations are at 6-month intervals ranging from 6 months through 100
years and the spot rate at a duration is the yield (when compounded
semiannually) for a bond that matures at that duration with a single
payment at maturity. The monthly corporate bond yield curve is
constructed as the average of the spot rates from the set of daily
corporate bond yield curves as specified in paragraph (d)(1)(ii) of
this section. Each daily corporate bond yield curve is constructed
using the methodology set forth in paragraph (d)(2) of this section
based on the data described in paragraph (d)(3) of this section. The
yield curve for each month will be published in the Internal Revenue
Bulletin. See Sec. 601.601(d) of this chapter.
(ii) Monthly corporate bond yield curve constructed through
averaging. Each spot rate at a specified duration on the monthly
corporate bond yield curve for a month is equal to the arithmetic
average, for each business day of that month, of the spot rates at that
duration on the daily corporate bond yield curves.
(2) Construction of the daily corporate bond yield curve--(i) In
general--(A) Calculation of spot rates. The spot rate at duration of
\1/2\ year on the daily corporate bond yield curve is set equal to the
yield at maturity of \1/2\ year from the daily par yield curve
described in paragraph (d)(2)(i)(B) of this section. The spot rate for
any later duration on the daily corporate bond yield curve is
determined by applying an iterative process based on the spot rates at
earlier durations and the daily par yield curve.
(B) Calculation of par yield curve. The daily par yield curve (that
is, the curve in which the rate at maturity t on the curve is equal to
the yield for a bond with maturity of t for which the price is the same
as the principal amount) is calculated from the discount function
described in paragraph (d)(2)(i)(C) of this section and the hump
adjustment variable described in paragraph (d)(2)(iii)(D) of this
section.
(C) Derivation of discount function. The discount function for a
day at duration t (denoted d(t)) is derived from the forward interest
rate function as described in paragraph (d)(2)(ii) of this section
(denoted f(z)) using the following equation:
[GRAPHIC] [TIFF OMITTED] TR12JA24.072
(ii) Determination of forward interest rates--(A) In general. The
forward interest rate function used to derive the discount function is
determined as a series of cubic polynomials (referred to as a cubic
spline) that have a smooth junction at specified knot points
(maturities of 0, 1.5, 3, 7, 15, and 30 years). The requirement that
the polynomials have a smooth junction at a knot point is satisfied if
the two polynomials that are meeting at the knot have the same value,
the same derivative, and the same second derivative at that knot point.
(B) Constraints on the forward interest function. The following
three constraints are placed on the forward interest rate function--
(1) The second derivative of the function is set to 0 at maturity
0.
(2) The value of the forward interest rate function at and after 30
years is constrained to equal its average value from 15 to 30 years.
(3) The derivative of the forward interest rate function is set to
0 at maturity 30 years.
(iii) Parameters for daily bond price model--(A) B-spline
coefficients. The assumed cubic spline for the forward interest rate
function can be described as a linear combination of B-splines, with
five parameters, which are determined taking into account the two
coefficients for the bond-quality adjustment variables described in
paragraphs (d)(2)(iii)(B) and (C) of this section and the coefficient
for the hump adjustment variable described in paragraph (d)(2)(iii)(D)
of this section. The five parameters and three coefficients are
determined using the bond data weighted as described in paragraph
(d)(2)(iv) of this section. After this weighting of the bond data, the
five parameters and three coefficients are chosen to minimize the sum
of the squared differences between the bid price for each of the bonds
(or ask price for commercial paper) and the price estimated for each of
those bonds determined using the specified parameters and coefficients,
and taking into account the bond's coupon rate, number of years until
maturity, and rating.
(B) Adjustment factor for share of bonds that are AA-rated. The
first adjustment variable is based on the proportion of bonds that are
rated AA within the universe of bonds in the data set that are rated AA
or AAA, weighted by par value. In the case of an AAA-rated bond the
adjustment variable described in this paragraph (d)(2)(iii)(B) is equal
to the product of the proportion described in the preceding sentence
and the number of years until maturity for the bond. In the case of an
AA-rated bond the adjustment variable described in this paragraph
(d)(2)(iii)(B) is equal to the product of (1- that proportion) and the
number of years until maturity for the bond. In the case of an A-rated
bond, the adjustment variable described in this paragraph
(d)(2)(iii)(B) is 0.
(C) Adjustment factor for share of bonds that are A-rated. The
second adjustment variable is based on the proportion of bonds rated A
within the universe of bonds in the data set, weighted by par value. In
the case of an AAA-rated bond or an AA-rated bond, the adjustment
variable described in this paragraph (d)(2)(iii)(C) is equal to the
product of the proportion described in the preceding sentence and the
number of years until maturity for the bond. In the case of an A-rated
bond, the adjustment variable described in this paragraph
(d)(2)(iii)(C) is equal to the product of (1- that proportion) and the
number of years until maturity for the bond.
(D) Hump adjustment variable. The hump adjustment variable is a
[[Page 2132]]
mathematical function that is a cubic spline in the interval from 10
years maturity through 30 years maturity made up of two polynomials
with a smooth junction (as described in paragraph (d)(2)(ii)(A) of this
section) at 20 years maturity. The spline rises from 0 at 10 years
maturity to 1.0 at 20 years maturity, then falls back down to 0 at 30
years maturity. The hump adjustment variable is 0 for maturities less
than 10 years and maturities greater than 30 years.
(iv) Weighting of bond data. The bond data are weighted in three
steps. In the first step, equal weights are assigned to the commercial
paper rates at the short end of the curve, and the par amounts
outstanding of all the bonds are rescaled so that their sum equals the
sum of the weights for commercial paper. In the second step, the
squared price difference for each commercial paper rate is multiplied
by the commercial paper weight, and the squared price difference for
each bond is multiplied by the bond's rescaled par amount outstanding.
In the third step, applicable for bonds with duration greater than 1,
the weighted squared price difference for each bond from the second
step is divided by the bond's duration.
(3) Data used--(i) In general. Except as otherwise provided in this
paragraph (d)(3), the bonds that are used to construct the daily
corporate bond yield curve for a business day are bonds with maturities
longer than \1/2\ year, with at least two payment dates, and that:
(A) Are designated as corporate;
(B) Have high quality ratings (AAA, AA, or A) as of that business
day from the nationally recognized statistical rating organizations;
(C) Have at least $250 million in par amount outstanding on at
least one day during the month;
(D) Pay fixed nominal semiannual coupons and the principal amount
at maturity; and
(E) Mature not later than 30 years after that business day.
(ii) Excluded bonds. The following types of bonds are not used to
construct the daily corporate bond yield curve for a date:
(A) Bonds not denominated in U.S. dollars;
(B) Bonds not issued by U.S. corporations;
(C) Bonds that are capital securities (sometimes referred to as
hybrid preferred stock);
(D) Bonds with variable coupon rates;
(E) Convertible bonds;
(F) Bonds issued by a government-sponsored enterprise (such as the
Federal National Mortgage Association);
(G) Asset-backed bonds;
(H) Callable bonds, unless the call feature is make-whole or the
call feature is exercisable only during the last year before maturity;
(I) Putable bonds;
(J) Bonds with sinking funds; and
(K) Bonds with an outstanding par amount below $250 million for the
day for which the daily yield curve is constructed.
(iii) Durations equal to or below \1/2\ year. The data for
durations equal to or below \1/2\ year that is used to construct the
daily corporate bond yield curve consists of AA financial and AA
nonfinancial commercial paper rates, as reported by the Federal Reserve
Board.
* * * * *
(h) Applicability date. This section applies for months that begin
on or after February 1, 2024. For rules that apply for earlier periods,
see 26 CFR 1.430(h)(2)-1 revised as of April 1, 2023.
Douglas W. O'Donnell,
Deputy Commissioner for Services and Enforcement.
Approved: December 27, 2023.
Lily Batchelder,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2024-00552 Filed 1-11-24; 8:45 am]
BILLING CODE 4830-01-P
