In employee plans news, Special Edition, October 2009, the IRS reminds us that it recently issued final regulations under Sections 430 and 436 of the Internal Revenue Code (the “Code”). These regulations provide guidance on:
–determining the value of plan assets and benefit liabilities for purposes of computing the funding requirements for single employer defined benefit pension plans;
–using certain funding balances maintained for single employer defined benefit pension plans; and — applying benefit restrictions to certain underfunded defined benefit pension plans.
The IRS points out that many plans will have certified their adjusted funding target attainment percentage (“AFTAP”) by October 1, 2009, and in certain cases may be subject to benefit restrictions. Plans subject to certain benefit restrictions are, under Section 101(j) of ERISA, required to notify participants and beneficiaries within 30 days after these restrictions are imposed.
The IRS also said that it has received questions as to how Section 101(j) of ERISA would apply to participants and beneficiaries who are not directly or indirectly affected by the funding-based limitations. In particular, the IRS has heard that, when a plan can pay only half lump sums under Section 436(d)(3) of the Code, notice should not have to be given to participants or beneficiaries in pay status, because they could not elect a lump sum distribution even if the plan were not subject to the half lump sum limitation. The IRS recognizes that not having to provide notice to participants and beneficiaries to whom the limitation could have no application would reduce costs, administrative burdens and participant confusion. Accordingly, the IRS agrees that Section 101(j) of ERISA does not require notice of a benefit restriction affecting the availability of lump sums to participants and beneficiaries in pay status who — without regard to any Section 436 limitation — can no longer elect a lump sum payment. The IRS expects to set forth this conclusion in upcoming guidance on Section 101(j) of ERISA.