In Notice 2011-96, the Internal Revenue Service (the “IRS”) has extended the deadline to amend a plan to comply with the limitations on benefit accruals and payments imposed by section 436 of the Internal Revenue Code (the “Code”) on an underfunded plan. The Notice also contains a sample amendment that may be adopted to meet section 436.
Section 436 contains the following limitations, which apply to a single-employer defined benefit plan. When a plan’s adjusted funding target attainment percentage (the “AFTP”) for a plan year is less than 60%, section 436(d)(1) prohibits the payment of certain “prohibited payments”, including single lump sum distributions, and section 436(e)(1) requires benefit accruals to cease. Section 436(b)(1) prohibits the payment of an “unpredicatable contingent event benefit”, such as a plant shutdown benefit, when the AFTP for a plan year is less than 60%, or would be less than 60% after taking the event into account. When a plan’s AFTP for a plan year is less than 80%, but not less than 60%, section 436(d)((3) limits the portion of a benefit that may be paid in a single lump sum distribution or other prohibited payment. Section 436(c)(1) prohibits a plan amendment from taking effect if the amendment increases the plan’s benefits and the plan’s AFTP for the plan year is less than 80%, or would be less than 80% taking the benefit increase into account. Section 436 applies in plan years that begin after 2007, with a later effective date for collectively bargained plans.
When does a plan have to be amended to comply with section 436? Under the Notice, in general, the amendment must be adopted by the latest of:
–the last day of the first plan year that begins after 2011;
–the last day of the first plan year for which section 436 applies to the plan; or
–the due date (including extensions) of the employer’s tax return for the tax year that contains the first day of the first plan year for which section 436 applies to the plan.
Caution: The filing of a determination letter application for an individually designed defined benefit plan may accelerate the deadline. In general, for any such application filed after January 31, 2012, the restated plan submitted with the application must have been amended to comply with section 436.
The extension provided by the Notice is conditioned on the amendment being effective as of the effective date of section 436 for the plan, and on the operation of the plan being in accordance with the amendment from and after the amendment’s effective date. An amendment which eliminates or reduces a Code section 411(d)(6) protected benefit will not cause the plan to fail to meet the anti-cutback requirements of that section if the amendment is adopted by the deadline provided in the Notice, and the elimination or reduction is made only to the extent needed to comply with section 436.