IRS Notice 2014-53 Provides Deadlines and Requires Decisions on HATFA's Pension Funding Provisions | Practical Law

IRS Notice 2014-53 Provides Deadlines and Requires Decisions on HATFA's Pension Funding Provisions | Practical Law

Internal Revenue Service (IRS) Notice 2014-53 provides guidance on the pension funding provisions of the Highway and Transportation Funding Act of 2014 (HATFA), including the required deadlines for and decisions that must be made by companies that sponsor underfunded defined benefit plans.

IRS Notice 2014-53 Provides Deadlines and Requires Decisions on HATFA's Pension Funding Provisions

by Practical Law Employee Benefits & Executive Compensation
Published on 16 Sep 2014 • USA (National/Federal)
Internal Revenue Service (IRS) Notice 2014-53 provides guidance on the pension funding provisions of the Highway and Transportation Funding Act of 2014 (HATFA), including the required deadlines for and decisions that must be made by companies that sponsor underfunded defined benefit plans.
On September 11, 2014, the IRS issued Notice 2014-53, which provides guidance on the pension funding provisions of the Highway and Transportation Funding Act of 2014 (HATFA) (I.R.S. Notice 2014-53, (Sept. 12, 2014)). For more information on HATFA's pension funding provisions, see Legal Update, President Obama Signs the Highway and Transportation Funding Act of 2014 with Pension Funding Provisions.
Notice 2014-53 provides important guidance for sponsors of underfunded defined benefit plans that wish to take advantage of HATFA's provisions, including:

Election to Defer HATFA Segment Rates Until 2014 Plan Year

Notice 2014-53 explains how plan sponsors can opt-out of the application of HATFA for 2013 for all purposes or just for benefit restrictions by deferring the use of HATFA segment rates until the 2014 plan year. This 2013 opt-out will be deemed made by plan sponsors in certain circumstances.
Notably, Notice-2014-53 does not permit plan sponsors to opt-out of HATFA for plan years beginning in 2014 or beyond.

Affirmative Opt-out of HATFA Rates for 2013

A plan sponsor may elect to defer use of HATFA rates for all purposes, or solely for purposes of IRC Section 436, until the first plan year beginning on or after January 1, 2014. This election is irrevocable and must be made in writing to the enrolled plan actuary and plan administrator by the later of:
  • The filing deadline for Forms 5500, 5500-SF or 5500-EZ for the plan year beginning in 2013.
  • December 31, 2014.
The deferral election must specify:

Deemed Opt-out of HATFA Rates for 2013

A plan sponsor's election to defer use of the HATFA rates for purposes of IRC Sections 430 and 436 until plan years beginning in 2014 will be deemed to occur if, on or before December 31, 2014, the Form 5500, 5500-SF or 5500-EZ is filed and Schedule SB reflects the MAP-21 segment rates.
If the plan intends to use HATFA rates for 2013 but is deemed to opt-out, the plan sponsor may revoke the deemed election to defer use of HATFA segment rates by:
  • Filing, no later than December 31, 2014, an amended Form 5500, 5500-SF or 5500-EZ for the 2013 plan year, with a revised Schedule SB that reflects the use of HATFA rates.
  • Providing written notice of the revocation (including the information described in Affirmative Opt-out of HATFA Rates for 2013) to the plan's enrolled actuary and to the plan administrator, provided that on or before December 31, 2014:
    • a copy of the notice of revocation is e-mailed to the Pension Benefit Guaranty Corporation (PBGC) at [email protected] that includes in the subject line of the e-mail the plan sponsor's EIN, the plan number and the name of the plan; and
    • at the time the revocation is made, the plan sponsor is not a debtor in a case under Title 11 of the United States Code (or similar federal or state law).
If the plan sponsor revokes the deemed election using this method, then an amended Form 5500, 5500-SF or 5500-EZ for the plan year (that reflects the HATFA segment rates on Schedule SB) must be filed no later than the filing deadline for the following plan year.
While deferring the HATFA rates until the 2014 plan year may be administratively simpler, a plan sponsor's retroactive election to apply HATFA for 2013 for IRC Section 436 purposes may be helpful if the plan's funding balance was reduced (see Reversal of Election to Reduce Funding Balances) or additional contributions were made (see Redesignation of 2013 Contributions) to avoid benefit restrictions.

Elections and Redesignations Relating to Minimum Funding Requirements for the 2013 Plan Year

Section IV of Notice 2014-53 discusses permissible elections and designations relating to plans' minimum funding requirements for plans that apply HATFA rates in the 2013 plan year.
These elections and redesignations are permissible unless they would result in:
  • The imposition of benefit restrictions under IRC Section 436 for the plan year beginning in 2013 or 2014 that would otherwise not be imposed.
  • An unpaid minimum required contribution for any plan year beginning before 2014.
Section IV also provides procedural and timing rules for plan sponsors to follow when making a reversal of an election, a late election or redesignation of contributions.

Reversal of Election to Reduce Funding Balances

If the election is made on or before September 30, 2014, a plan that applies the HATFA rates for purposes of determining the minimum required contribution for the 2013 plan year may elect to reverse all or part of an election under Treasury Regulation Section 1.430(f)-1(e) to reduce the plan's funding standard carryover balance or prefunding balance, as of the first day of a plan year beginning in 2013.
According to the Notice, IRC Section 430(f) regulations will be revised to permit this reversal election as an exception to the general rule that an election to reduce a plan's funding balance is irrevocable.
If the HATFA rates are applied retroactively for purposes of IRC Section 436 for a plan year beginning in 2013, the election to reverse a reduction also applies to a deemed election made in conjunction with a certification of the plan's AFTAP for the plan year (see Application of IRC Section 436 Benefit Restrictions for 2013).
An election to reduce a plan's funding balance is irrevocable and may not be reversed if it was made to avoid or remove benefit restrictions under IRC Section 436 during the period before the date of the original AFTAP certification for the 2013 plan year, even if the HATFA rates are applied retroactively.

Adding Excess Contributions for the 2013 Plan Year to the Prefunding Balance

A plan sponsor that applies HATFA rates retroactively for purposes of determining the minimum required contribution for the 2013 plan year may elect (or increase the existing election) under Treasury Regulation Section 1.430(f)-1(b)(1)(ii) to add excess contributions for the plan year beginning in 2013 to the plan's prefunding balance, as of the first day of the following plan year.
This rule is expected to be codified in the IRC Section 430(f) regulations.

Redesignation of 2013 Contributions

Notice 2014-53 provides two sets of circumstances for plans that utilize HATFA segment rates for 2013 under which contributions that are made for the 2013 plan year can be redesignated.

Redesignation of IRC Section 436 Contributions

For a plan that applies the HATFA rates retroactively for purposes of IRC Section 436, any IRC Section 436 contribution within the meaning of Treasury Regulation Section 1.436-1(j)(7) that was made in connection with the certified AFTAP for the 2013 plan year and is no longer required to avoid or remove the benefit restriction will be applied toward the minimum required contribution for the 2013 plan year.

Redesignation of 2013 Contributions as 2014 Contributions

The IRS' general position is that a contribution designated for a particular plan year cannot be redesignated to apply to another plan year after the Schedule SB is filed. However, Notice 2014-53 provides that all or a portion of a contribution made in the 2014 plan year (until September 30, 2014) that was originally designated as a 2013 contribution may be redesignated to apply to the 2014 plan year.
Plan sponsors may wish to redesignate the excess portion of 2013 contributions as 2014 contributions if the application of HATFA rates for 2013 results in a reduction of the required minimum contribution for 2013.

Reporting Requirements if HATFA Rates Apply to 2013 Plan Year

Plan sponsors that retroactively apply HATFA segment rates for the 2013 plan year, and do not elect to defer application of these rates to 2014 or beyond, must reflect the use of these segment rates in the plan's Schedule SB for the 2013 plan year.

Application of IRC Section 436 Benefit Restrictions for 2013

IRS Notice 2014-53 provides special rules for applying the benefit restrictions under IRC Section 436 (and related rules) to plans that adopt the modifications made by HATFA to IRC Section 430(h)(2)(C)(iv) for a plan year beginning after December 31, 2012 and before October 1, 2014 (plan years subject to Section VI are referred to as "applicable plan years").
Section VI of the Notice provides technical guidance on applying the HATFA rates when determining a plan's AFTAP, including that:
  • The application of HATFA segment rates do not affect the application of the presumption rules under IRC Section 436 for the first plan year that those rates apply to the plan.
  • If the first AFTAP certification for an applicable plan year is made using HATFA segment rates, the benefit restrictions under IRC Section 436 apply based on that AFTAP in accordance with Treasury Regulation Section 1.461-1(g) and (h).
  • If the plan's AFTAP for an applicable plan year is certified using the MAP-21 segment rates by September 30, 2014, it must also be determined using the HATFA segment rates, and if the HATFA segment rates create a material change, then the AFTAP must be recertified. If the plan sponsor then elects to apply the AFTAP determined using the HATFA rates retroactively, the operations of the plan must be conformed to that updated AFTAP for the period beginning when the AFTAP for the plan year was originally certified using the MAP-21 rates.
  • Similar to the reversal permitted under Section IV of the Notice for the 2013 plan year (see Reversal of Election to Reduce Funding Balances), a plan sponsor may reverse an election made on or before October 1, 2014 to reduce a funding balance or to redesignate a Section 436 contribution for the 2014 plan year, so long as it does not result in the imposition of new benefit restrictions under IRC Section 436 for the 2014 plan year.
The Notice provides extensive guidance on the corrective actions that a plan must take after a plan's AFTAP for an applicable plan year has been certified using the HATFA segment rates. Corrective measures are necessary to conform the plan operations to the certified AFTAP if applying the AFTAP would have changed the application of the IRC Section 436 restrictions for particular periods. If the corrective actions are taken, then the plan's operations are treated as having been consistent with the provisions of the plan document relative to the requirements of IRC Section 436.

Practical Implications

While HATFA potentially reduces the funding burden for companies that sponsor underfunded defined benefit plans, implementing HATFA's pension funding provisions is not a simple task. The plan funding issues covered in Notice 2014-53 are complex and should be reviewed as soon as possible by plan sponsors and their actuaries. Some of the actions outlined in Notice 2014-53 must be completed before September 30, 2014 and, in other cases, by December 31, 2014.