§436 Funding-based limits on benefits and benefit accruals under single-employer plans

Summary

Stops or limits things a single-employer defined benefit pension plan can do when the plan is not well funded. If the plan’s “adjusted funding target attainment percentage” (see definitions below) is under 60%, the plan must not pay certain special benefits, must stop new benefit accruals as of the plan’s valuation date, and may not make other “prohibited payments.” If the percentage is 60% or more but less than 80%, the plan cannot adopt amendments that increase liabilities or pay prohibited payments above a limited amount after the valuation date. If the percentage is less than 80%, an amendment that would make funding drop below 80% also may not take effect. Special one-time payments while a plan is between 60% and 80% are limited to the smaller of half of what would otherwise be paid or the present value of the maximum PBGC guarantee for that participant. Only one such prohibited payment per participant is allowed during the affected years. Benefits that are payable only because of unpredictable events (for example, a plant shutdown) cannot be paid if funding is under 60% or would drop below 60% because of that event. A plan sponsor can avoid or end these limits by making an extra contribution (in addition to any minimum required contribution under section 430) equal to either the added funding target amount caused by the change or enough to raise the adjusted funding percentage to the required 60% or 80%. While a plan sponsor is a debtor in bankruptcy, the plan cannot pay prohibited payments unless the plan’s enrolled actuary certifies the adjusted funding percentage is at least 100% (with a specified technical adjustment). Plans are exempt from the benefit-accrual and amendment limits for their first 5 plan years. Short definitions and special rules: “Funding target attainment percentage” is the funding measure used in section 430(d)(2). “Adjusted funding target attainment percentage” is that measure increased by the total cost of annuity purchases for non-highly compensated employees made by the plan in the prior two plan years. A plan may count certain kinds of security as plan assets when computing the adjusted percentage if the security is an acceptable corporate surety bond, cash or U.S. obligations maturing in 3 years or less held in escrow, or another form the Secretary accepts; such security can be enforced on plan termination, on failure to make a required contribution when due, or if funding is under 60% for 7 straight years, and can be partly released under rules from the Secretary. Plans may not use prefunding balances or funding standard carryovers to meet the extra-contribution requirements in the limits, except a collective-bargaining plan sponsor may be treated as electing to reduce those balances in certain cases. If a limit applied in the prior year, the current year’s percentage is presumed the same until the enrolled actuary certifies the current year. If no certification is made before the first day of the 10th month of the plan year, the first day of that month is treated as the valuation date and the adjusted percentage is conclusively presumed to be less than 60% as of that day. The Secretary may set rules when a plan uses a valuation date other than the plan year start. A “single-employer plan” is any plan that is not a multiemployer plan.