3746 / What other special requirements applied in plan years prior to 2008 when a qualified plan was subject to the minimum funding standard?

Under the full funding limitation, a plan generally was required to fund for certain expected increases due to benefits accruing during the plan year.¹ Any resulting increase in unfunded liability must be amortized over 30 years. Although a change in benefit provisions of a plan may not be assumed under a reasonable funding method, future salary may be assumed to change without being considered a benefit change. Thus, funding was to be based on projected benefits reflecting expected salary history, but only to the extent that the projected benefits do not exceed the maximum benefit permitted under the current plan provisions. For example, funding for a benefit of 90 percent of the participant’s salary for his or her high three consecutive years may be based on 90 percent of the participant’s projected salary, but not in excess of the maximum dollar benefit provided under the plan for the current year.²

Experience gains and losses were to be determined and plan liability valued at least once a year.³ Normal costs, accrued liabilities, and experience gains and losses were to be determined under the funding method used to determine costs under the plan. Plan assets were to be valued by any reasonable actuarial method that takes into account fair market value and is permitted under regulations.⁴ Asset valuations were not to be based on a range of 85 percent to 115 percent of average value.⁵

Ordinarily, the annual valuation was to be made during the plan year or within one month prior to the beginning of the plan year. A valuation date from the immediately preceding plan year could be used provided that, as of that date, the plan assets were not less than 100 percent of the plan’s current liability.⁶ A change to a prior year valuation could not be made unless plan assets were not less than 125 percent of the plan’s current liability.⁷

Each actuarial assumption must be reasonable or, when aggregated, result in a total contribution equal to the amount that would be determined if each were reasonable. In the case of multiemployer plans, actuarial assumptions only need be reasonable in the aggregate. Of course, all actuarial assumptions must offer the actuary’s best estimate of anticipated
experience.⁸

Automatic approval is available for certain changes in a plan’s funding method. Examples of such automatic approvals include:

(1)  to remedy unreasonable allocation of costs;

(2)  for fully funded terminated plans;

(3)  for takeover plans;

(4)  for changes in valuation software;

(5)  for de minimis mergers;

(6)  for certain mergers with the same plan year and a merger date of first or last day of plan year; and

(7)  for certain mergers involving a designated transition period.⁹

Defined benefit pension plans generally are not permitted to anticipate amendments (even if adopted within the remedial amendment period) in determining funding, except as specifically required by IRC Section 412(c)(12).¹⁰

For a multiemployer plan maintained pursuant to a collective bargaining agreement, the minimum funding standard is determined as if all participants in the plan were employed by a single employer.¹¹ Projected benefit increases scheduled to take effect during the term of the agreement must be taken into account.¹² In contrast, each employer in a multiple employer plan generally is treated as maintaining a separate plan for purposes of the minimum funding rules, unless the plan uses a method for determining required contributions under which each employer contributes at least the amount that would be required if each employer maintained a separate plan.¹³

If the employer maintaining the plan is a member of a group treated as a single employer under the controlled group, common control, or affiliated service provisions ( Q 3933, Q 3935), then each member of the group is jointly and severally liable for the amount of any contributions required under the minimum funding standard or the amount of any required installments to the plan.¹⁴

The minimum funding standard continues to apply even if the plan later becomes nonqualified. It does not apply in years after the end of the plan year in which the plan terminates completely. For guidelines as to the application of the minimum funding standard to the plan year in which a plan terminates, see Revenue Ruling 89-87¹⁵ and Proposed Treasury Regulation § 1.412(b)-4. The minimum funding standard must be re-established if the terminated plan is restored to the sponsoring employer by the PBGC.¹⁶