Final pension funding rules include key changes for large plan sponsors

The Internal Revenue Service recently released final regulations (T.D. 9467) on determining the value of pension plan assets and liabilities for funding purposes (under Internal Revenue Code section 430), and on applying the benefit restrictions to underfunded plans (under section 436). The regulations apply to single-employer pension plans for plan years beginning on or after January 1, 2010, although plans are permitted to rely on them for earlier years.

The lengthy final regulations are similar to the proposed versions, but with some notable additions and clarifications. The following are key changes of most interest to large plan sponsors.


Excess contributions added to prefunding balance

The final rules permit an excess contribution to be added to the prefunding balance even though the amount is an excess contribution only because an election was made for the plan year to use the funding standard carryover balance or prefunding balance to offset minimum required contributions (or required installments). The preamble suggests that this change is in response to comments that the proposed rule would prevent plan sponsors from adding excess contributions to the prefunding balance in situations where balance amounts were used to offset minimum contributions earlier for reasons other than interest arbitrage.

However, under the final rules, the interest adjustment with respect to the contribution is made using the plan's actual investment experience. In a change from the proposed regulations, the deadline for making this election is the deadline for contributions for the year for which the excess contributions are made (e.g., an election to add excess contributions for a 2009 calendar year plan to the prefunding balance needs to be made by September 15, 2010).


Standing elections permitted

For improved administrability, sponsors may provide a written standing election to the Enrolled Actuary to use the prefunding and funding standard carryover balances to the extent needed to avoid an unpaid minimum contribution. A standing election may also be established to add the maximum amount possible to the prefunding balance. Note that the standing election only applies to the Enrolled Actuary to whom it is addressed.


Automatic approval for 2009 & 2010 interest rate changes

Any change to the interest rate election that is made for the first plan year beginning in 2009 or 2010 is automatically approved.