3742 / What is the minimum funding standard that applied in plan years before 2008?

The Pension Protection Act of 2006 (PPA 2006) replaced the minimum funding standard with a single minimum required contribution ( Q 3743). The PPA 2006 funding provisions generally took effect for plan years beginning after 2007. For plan years beginning before 2008, the IRC provided for a minimum funding standard requiring at least a minimum level of funding for qualified defined benefit plans. A second “deficit reduction contribution” applied in the case of certain plans with over 100 participants.

The minimum amount that an employer is required to contribute to fund a money purchase pension plan (both before and after PPA 2006) is the contribution amount required under the terms of the plan for each year, as stated in the plan formula.¹

Profit sharing and stock bonus plans ( Q 3749 to Q 3816), certain government and church plans, certain employee-pay-all plans, and fully insured plans (known as 412(i) plans) ( Q 3813) are exempt from the minimum funding requirements, both before and after PPAPPA 2006.²

The minimum funding requirements are not qualification requirements.³ Waiver of the minimum funding standard because of hardship may be available in some circumstances ( Q 3747).⁴

Under the minimum funding standard, the employer must contribute at least a minimum amount to its qualified defined benefit, money purchase pension, or annuity plan.⁵

To determine its minimum contribution, an employer must establish a separate funding standard account for each plan.⁶ A plan that has a funding method requiring contributions at least equal to those required under the entry age normal cost method also may maintain an alternative minimum funding standard account.⁷

Under the regular funding rules, the funding standard account (and the alternative account, if one is maintained) is to be charged with certain liabilities and credited with certain amounts each plan year. If the charges to the funding standard account for all plan years beginning after the standard is first applicable to the plan exceed the credits (or, if less, the excess of the charges to the alternative minimum funding standard account for the same years over the credits), the plan has an “accumulated funding deficiency” to the extent of the excess. The minimum funding standard is satisfied when there is no accumulated funding deficiency; that is, when the balance in the funding standard account (or the alternative minimum funding standard account) at the end of the year is zero.⁸

Charges

The liabilities that must be currently funded and charged to the funding standard account under the regular funding rules are the “normal cost” (the level annual amount that would be required to fund the employee’s pension from his date of employment to his retirement), and the amounts required to amortize, in equal installments, until fully amortized:

(1)  the unfunded past service liability that existed on the first day the section applied to the plan over a period of 30 years (40 years if the plan was in existence on
January 1, 1974);

(2)  any net increase in unfunded past service liability because of plan amendments in the year over a period of 30 years;

(3)  any net experience loss over a period of five years (15 years if a multiemployer plan);

(4)  any net loss from changes in actuarial assumptions over a period of 10 years (30 years if a multiemployer plan);

(5)  each previously waived funding deficiency over a period of five years (15 years if a multiemployer plan); and

(6)  any amount previously credited to the account as a result of using the alternative minimum funding standard account as the funding standard over a period of five years.⁹

Employers generally must amortize the amount that they would have been required to contribute, but for the increase, over 20 years ( Q 3724).¹⁰ Special rules apply to funding methods that do not provide for amortization bases.¹¹

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Planning Point: In October, 2017 the IRS released final regulations regarding new official mortality tables and the application of mortality to the computation of plan liabilities to all plans subject to minimum funding standards. These new mortality tables for 2018 will generally increase plan liabilities because of greater longevity reflected in the tables. At the same time, the IRS released Rev. Proc. 2017-55 that allows for integrating the tables to specific plans, and Rev. Proc 2017-60 that allows for application of the new tables for about one year. Plan sponsors will wish to explore the potential to delay application for one year and to reduce the application impact by review its application to specific plans, especially if derisking or termination of a plan is under consideration since the tables will increase the liabilities of the plan and make derisking and termination more expensive.

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Credits

Amounts that are credited to the funding standard account under the regular funding rules include:

(1)  employer contributions;

(2)  amounts necessary to amortize, in equal installments (1) any net decrease in unfunded past service liability arising from amendments over a period of 30 years, (2) any net experience gain over a period of five years (15 years if a multiemployer plan), and (3) any gain from changes in actuarial assumptions over a period of 10 years (30 years if a multiemployer plan);

(3)  the amount of the funding standard that has been waived by the Secretary of Treasury because of substantial business hardship; and

(4)  an adjustment, if the alternative minimum funding standard was used in a previous year.¹²

Amortization periods may be longer in certain circumstances.¹³

Guidelines for determining experience gains and losses are set forth in Revenue Ruling 81-213.¹⁴ Dividends, rate credits, and forfeitures are treated as experience gains if:

(1)  the plan is funded solely through a group deferred annuity contract;

(2)  the annual single premium is treated as the normal cost; and

(3)  an amount necessary to pay, in equal annual installments over the amortization period, the single premium necessary to provide all past service benefits not initially funded, is treated as the annual amortization amount.¹⁵

Alternative Minimum Funding Standard Account

The alternative minimum funding standard account is charged only with the lesser of
(1) normal cost under the plan’s funding method or under the unit credit method, any excess of the value of accrued benefits over the fair market value of plan assets, and any excess of credits over charges to the account in all prior years. The alternative funding standard account is credited with the employer’s contribution and is also charged or credited with interest.¹⁶

Interest

The funding standard account also is charged or credited with interest at a rate consistent with that used to determine plan costs. For plan years beginning in 2006 and 2007, the interest rate was based on a yield curve derived from a two year weighted average of interest rates on investment grade corporate bonds. This amendment extended the relief implemented by PFEA 2004.¹⁷

Deficit Reduction Contributions

An additional charge to the funding standard account (and, thus, an increased contribution) is required for certain defined benefit plans (other than multiemployer plans) that have more than 100 participants and have a funded current liability percentage for any plan year below certain limits.¹⁸ Relief from this requirement is available for certain airlines and steel
manufacturers.¹⁹