Funding Relief for Single Employer Pension Plans

The Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (the “Act”), enacted June 25, 2010, contains provisions designed to relieve the funding obligations of employers who sponsor single employer defined benefit pension plans. The primary measure of the Act relating to pension funding gives plan sponsors additional time to amortize pension funding shortfalls, resulting in reduced required funding contributions. The following summarizes the key provisions of the Act impacting sponsors of single employer plans.

Extension of Shortfall Amortization Period

The new funding rules imposed by the Pension Protection Act of 2006 (the “PPA”) require funding shortfalls to be amortized in level installments over a 7-year period. The Act permits employers to extend this amortization period in one of two ways. The employer may elect to pay interest only on the shortfall amortization base for 2 years, and then amortize principal over the following 7-year period (the “2 plus 7-year election”). Alternatively, an employer may elect to extend the 7-year amortization period to fifteen years (the “15-year election”). The relief is available for up to 2 plan years beginning in 2008, 2009, 2010 or 2011 for which contributions are due on or after June 25, 2010. The plan years chosen need not be consecutive, but the same form of relief must be used for both years.

The election to apply an extended amortization period must follow rules to be prescribed by the Internal Revenue Service (the “IRS”). Once made, an election may not be revoked without the consent of the Secretary of Treasury. The plan sponsor must notify plan participants and beneficiaries and the Pension Benefit Guaranty Corporation (the “PBGC”) of an election to use this relief. The IRS is expected to issue guidance on the timing and manner of providing the notice.

Installment Acceleration Amount

If an amortization extension is elected, an employer may be required to make an additional contribution referred to as an “installment acceleration amount” during the “restriction period.” An installment acceleration amount is the sum of:

  • the aggregate of all employee’s compensation for the calendar year in which the plan year begins (including the value of deferred compensation under a nonqualified deferred compensation plan as defined by Internal Revenue Code (“IRC”) section 409A) in excess of $1,000,000 per employee (indexed beginning in 2011); plus
  • the aggregate amount of extraordinary dividends and stock redemptions for the plan year.

The “restriction period” generally is 3 years for the 2 plus 7-year election or 5 years for the 15-year election.

For the purpose of determining whether any excess compensation was paid, employee compensation does not include:

  • Remuneration attributable to services performed on or before February 28, 2010
  • Any amount includible in income with respect to a grant of employer stock after February 28, 2010, that is subject to a substantial risk of forfeiture for at least 5 years from the date of the grant
  • Commissions paid solely on account of income generated by an individual’s performance
  • Remuneration consisting of nonqualified deferred compensation, restricted stock, stock options or stock appreciation rights payable or granted under a written binding contract in effect on March 1, 2010, which was not materially modified before remuneration was paid

The amount of extraordinary dividends and redemptions is the excess, if any, of (a) over (b), where:

  • (a) is the sum of:
    • the dividends declared during the plan year by the plan sponsor; plus
    • the aggregate amount paid for the redemption of stock of the plan sponsor redeemed during the plan year; and
  • (b) is the greater of:
    • the adjusted net income of the plan sponsor for the preceding plan year, determined without regard to any reduction by reason of interest, taxes, depreciation, or amortization; or
    • in the case of a plan sponsor that has determined and declared dividends in the same manner for at least 5 consecutive years immediately preceding the plan year, the aggregate amount of dividends determined in such manner and declared for the plan year.

For this purpose, dividends and redemptions do not include:

  • Dividends declared and redemptions occurring on or before February 28, 2010
  • Dividends paid by one member of a controlled group to another member of the controlled group
  • Redemptions made pursuant to a plan maintained with respect to employees, or that are made on account of the death, disability, or termination of employment of an employee or shareholder
  • Dividends and redemptions of preferred stock issued before March 1, 2010, or issued after March 1, 2010, and held by an ERISA employee benefit plan, to the extent that dividends accrue at a specified rate, without regard to the plan sponsor’s income, and interest accrues on unpaid dividends

Notwithstanding the above, in no event will the cumulative payments required during the restriction period exceed the amount that would have been required had relief not been elected.

Special Rules for Plan Subject to Delayed PPA Effective Date

The PPA provides a delayed effective date of its funding rules for multiple-employer plans of certain cooperatives, PBGC settlement plans and single employer plans of government contractors. The Act provides special funding relief for plans subject to this delayed effective date. These plans may elect either of the following for up to 2 plan years beginning in 2008 through 2011 for which contributions are due on or after June 25, 2010:

  • A 2-year look back with regard to the funded current liability percentage used to determine the deficit reduction contribution
  • 15-year amortization payments on the unfunded new liability amount for the year of the election and any future years preceding the PPA effective date

The Act also expands the delayed effective date applicable to a multiple-employer plan of certain cooperatives to an “eligible charity plan” effective for plan years beginning after 2007. An eligible charity plan is a plan maintained by more than one employer, determined without applying the controlled group rules, where all employers are IRC section 501(c)(3) organizations. We note that technical corrections to the Act have been proposed that would significantly narrow the definition of eligible charity plan to include only those plans maintained by one or more 501(c)(3) organizations with employees in at least 20 states and the primary purpose of serving children. In addition, under the technical correction these plans would not be treated as eligible charity plans unless their sponsors affirmatively elected that status.

Benefit Restrictions

The Act provides limited relief for certain PPA benefit restrictions of IRC section 436. For purposes of the restrictions on benefit accruals for plans with an adjusted funding target attainment percentage (“AFTAP”) less than 60%, and the restrictions on paying benefits in the form of a Social Security leveling option for plans with an AFTAP under 80%, a plan’s AFTAP for plan years beginning on or after October 1, 2008 and before October 1, 2010 will be deemed to not be less than the AFTAP for the plan year beginning after October 1, 2007 and before October 1, 2008, under rules to be provided by the IRS.

IRS Notice 2010–55

On July 30, 2010, the IRS issued Notice 2010–55 explaining that plan sponsors eligible for the relief will be able to elect it for a plan year even if they have already filed the Form 5500, including the Schedule SB, for that year. In other words, employers will not be precluded from electing the relief for the 2009 plan year, even if they have already filed a 2009 Form 5500.

The Notice also confirms that the IRS will issue future guidance on the special funding rules, including how a plan sponsor can avail itself of the funding relief when it has already filed the Form 5500 for the plan year. This future guidance may also address the following topics:

  • Calculation of the alternative amortization schedules permitted under the Act (and the effect on funding balances)
  • Rules relating to contributing installment acceleration amounts to plans
  • Procedures for making the election to use an alternative amortization schedule
  • Notice requirements for plan participants, beneficiaries, and the PBGC


The Act has the potential to reduce the required annual funding levels for those plan sponsors who choose to use the relief. Plan sponsors should contact their actuaries to discuss the impact of the Act on the funded status of their plans and weigh the pros and cons of electing the relief. Please also contact us if you have any questions or need any assistance.