IRS Issues Sample Amendment for PPA Funding-Based Restrictions and Extends Deadline for Amending Plans

Internal Revenue Code Section 436, as added by the Pension Protection Act of 2006 (PPA), includes provisions that limit the ability of defined benefit pension plans that fall below certain funding levels to increase plan benefits or pay benefits in an accelerated form, effective for plan years beginning on or after January 1, 2009. For more information on the PPA “funding-based restrictions,” click here to review Seyfarth’s November 2008 Management Alert on pension plan funding under PPA. Although these funding-based restrictions apply only to underfunded plans, all defined benefit plans are required to contain provisions that incorporate these restrictions, and the IRS was charged with issuing a sample amendment to do this.

Recently-issued IRS Notice 2011-96 is likely the last of a series of extensions of the deadline for adopting a PPA amendment incorporating funding-based restrictions. The Notice provides a sample amendment and extends the deadline to amend for this requirement to the end of the plan year beginning on or after January 1, 2012. It also extends the corresponding relief period that allows plan sponsors to amend for funding-based restrictions without violating anti-cutback rules.

Employer Action Steps

• Amend Plan. Plan sponsors should amend their defined benefit plans to reflect the funding-based restriction provisions no later than December 31, 2012 (for calendar year plans). The deadline may be earlier for plan sponsors seeking to file a determination letter application, or later for collectively bargained plans or off-calendar year plans.
• Evaluate Sample Amendment. The Notice confirms that the sample amendment will satisfy the Code Section 436 amendment requirements. Plan sponsors may modify the notice to conform to the plan’s terminology, provided that the changes do not materially modify the substance of the amendment. Plan sponsors who have already adopted an amendment intended to comply with Code Section 436 should evaluate whether their current plan language is consistent with the IRS sample amendment.
• Ensure Current Compliance. Note that the PPA funding-based restrictions are already in effect for underfunded plans, even though the amendment deadline has been extended.