IRS and PBGC Issue Guidance on Pension Funding Stabilization Issues for Defined Benefit Plans under MAP-21 | Practical Law

IRS and PBGC Issue Guidance on Pension Funding Stabilization Issues for Defined Benefit Plans under MAP-21 | Practical Law

The Internal Revenue Service (IRS) issued Notice 2012-61, which provides guidance on the special rules relating to pension funding stabilization for single employer defined benefit plans under Section 430 of the Internal Revenue Code (IRC), including guidance on the annuity substitution rule. The notice reflects changes made by the Moving Ahead for Progress in the 21st Century Act (MAP-21), which was enacted on July 6, 2012. The Pension Benefit Guaranty Corporation (PBGC) also issued Technical Release 12-2, which provides guidance on the effect of MAP-21 on annual financial and actuarial reporting under Section 4010 of ERISA.

IRS and PBGC Issue Guidance on Pension Funding Stabilization Issues for Defined Benefit Plans under MAP-21

by PLC Employee Benefits & Executive Compensation
Published on 12 Sep 2012 • USA (National/Federal)
The Internal Revenue Service (IRS) issued Notice 2012-61, which provides guidance on the special rules relating to pension funding stabilization for single employer defined benefit plans under Section 430 of the Internal Revenue Code (IRC), including guidance on the annuity substitution rule. The notice reflects changes made by the Moving Ahead for Progress in the 21st Century Act (MAP-21), which was enacted on July 6, 2012. The Pension Benefit Guaranty Corporation (PBGC) also issued Technical Release 12-2, which provides guidance on the effect of MAP-21 on annual financial and actuarial reporting under Section 4010 of ERISA.
On September 11, 2012:

IRS Notice 2012-61

MAP-21 stabilized the interest rates used in calculating pension liabilities for purposes of the minimum funding rules under the IRC for plan years beginning in 2012. This provision allows employers to reduce their minimum required contributions and contribute less money into their pension plans by using calculations that allow them to value their pension liabilities using higher interest rates than the current low interest rates.
Earlier IRS guidance in Notice 2012-55 set out the initial set of segment rates required by MAP-21 for plan years beginning in 2012 (see Legal Update, IRS Issues Guidance On Segment Rates for DB Plans Pursuant to MAP-21). Notice 2012-61 provides more detailed questions and answers on these rules, including:
  • General guidance on the application of MAP-21 segment rates, including their application to the annuity substitution rule.
  • Measurements for which the segment rates do not apply.
  • How the MAP-21 changes affect the interest crediting rates for statutory hybrid plans.
  • Transition issues, such as when the segment rates are effective.
  • Electing to defer the use of MAP-21 segment rates.
  • Schedule SB reporting.

Annuity Substitution Rule

Under MAP-21, questions arose regarding how the annuity substitution rule would be affected. The annuity substitution rule generally provides that plans that convert annuities to lump sums may use segment rates to project the IRC Section 417(e) rates. If the annuity substitution rule were changed, the cost reduction resulting from the reduced minimum required contribution might be negated.
Notice 2012-61 provides that MAP-21 does not change the annuity substitution rule and that the present value of a distribution subject to IRC Section 417(e)(3) is determined using the MAP-21 segment rates to discount the projected annuity payments. This is welcome relief for plan sponsors and actuaries who were previously worried about MAP-21's application to these rules.

PBGC Technical Update 12-2

ERISA Section 4010(b) imposes special reporting obligations on contributing sponsors of defined benefit plans where the funding target attainment percentage (FTAP) is less than 80% at the end of the previous year for a plan maintained by any member of the controlled group.
MAP-21 amended ERISA Section 4010 to provide that the pension funding stabilization rules do not apply for purposes of determining FTAP required to be reported under ERISA.
Technical Release 12-2 provides guidance on annual financial and actuarial reporting under ERISA Section 4010 and the PBGC's regulations.