Plan Amendments Required in 2013 for Single-Employer Defined Benefit Plans to Comply with IRC Section 436 | Practical Law

Plan Amendments Required in 2013 for Single-Employer Defined Benefit Plans to Comply with IRC Section 436 | Practical Law

An amendment to comply with IRC Section 436 regarding limitations on the accrual and payment of benefits is generally required in 2013 for single-employer defined benefit plans.

Plan Amendments Required in 2013 for Single-Employer Defined Benefit Plans to Comply with IRC Section 436

by PLC Employee Benefits & Executive Compensation
Published on 05 Feb 2013 • USA (National/Federal)
An amendment to comply with IRC Section 436 regarding limitations on the accrual and payment of benefits is generally required in 2013 for single-employer defined benefit plans.

IRC Section 436

IRC Section 412 provides minimum funding requirements that apply to defined benefit plans. IRC Section 401(a)(29) requires single-employer defined benefit plans, including multiple employer plans, that are subject to the minimum funding requirements to meet the requirements of IRC Section 436.
IRC Section 436 provides several limitations on the accrual and payment of benefits under an underfunded defined benefit plan when a plan's adjusted funding target attainment percentage (AFTAP) for the plan year is less than:
  • 60%.
  • 80% but not less than 60%.
  • 80%.
  • 100% and the plan sponsor is in bankruptcy.

AFTAP Less than 60%

If the plan's AFTAP is less than 60%:
  • The plan may not pay any lump sum distribution or other optional form of benefit that includes a prohibited payment with an annuity starting date on or after the IRC Section 436 measurement date.
  • Benefit accruals must cease as of the IRC Section 436 measurement date unless the employer makes:
    • a contribution to increase the AFTAP to 60%; and
    • the minimum required contribution.

AFTAP Less than 80% but not Less than 60%

If the plan's AFTAP is less than 80% but not less than 60%, the plan may not pay a lump sum or other optional form of benefit that includes a prohibited payment to the extent the amount of the payment exceeds the lesser of:
  • 50% of the amount of the payment that would apply if there were no restrictions.
  • The present value of the maximum amount guaranteed by the PBGC under ERISA Section 4022(b)(3)(B).

AFTAP Less than 80%

If the plan's AFTAP is less than 80% (or would be less than 80% taking into account the plan amendment) for a plan year, an amendment to the plan may not take effect if it:
  • Increases benefits.
  • Establishes new benefits.
  • Increases the rate of accrual.
  • Accelerates the vesting schedule.
This limitation does not apply if:
  • The plan sponsor makes a contribution to fund the benefit increase.
  • The plan becomes 80% funded.
  • The amendment to the plan provides for a benefit increase under a plan formula that is not based on compensation as long as the increase is not greater than the contemporaneous rate of increase in average wages for affected employees.

AFTAP Less than 100% and the Plan Sponsor is in Bankruptcy

If the plan's AFTAP is less than 100% and the plan sponsor is in bankruptcy, the plan may not pay any lump sum distribution or other accelerated distribution subject to IRC Section 417(e)(3) with an annuity starting date on or after the bankruptcy filing until the AFTAP is certified at no less than 100%.

AFTAP Equal to or Greater than 100%

If a plan's AFTAP is greater than 100%, there are no restrictions on the accrual and payment of benefits.

Plan Amendment

The effective date of the amendment for most plans will be the last day of the plan year beginning on or after January 1, 2013. An application for a determination letter for an individually designed plan filed on or after February 1, 2013, must incorporate an IRC Section 436 amendment in the restated plan that is submitted to the IRS.
The IRS published a sample amendment in Notice 2011-96. For a sample amendment based on the model published by the IRS with integrated notes, important explanations and drafting tips, see Standard Clauses, Plan Language, Benefit Limitations under IRC Section 436 for Defined Benefit Plans.