Part III. Administrative, Procedural, and Miscellaneous

Transition Guidance for New Funding Rules and Funding-Related Benefit Limitations Under PPA ’06

Notice 2008–21

I. PURPOSE

This notice announces a later effective date than originally proposed for certain proposed regulations under §§ 430 and 436 of the Internal Revenue Code (Code), as added by the Pension Protection Act of 2006, Public Law 109–280 (PPA). In addition, this notice provides transitional guidance for 2008 under § 436 for small plans with end-of-year valuation dates.

II. BACKGROUND

Section 412 provides minimum funding requirements that generally apply for defined benefit pension plans. Section 430, which was added by PPA, specifies the minimum funding requirements that apply to single employer pension plans (including multiple employer plans) pursuant to § 412.

Section 430(h)(3) provides rules regarding the mortality tables to be used for purposes of determining any present value or making any other computation under § 430. Section 430(h)(3)(C) provides rules for a plan sponsor’s use, with the approval of the Secretary, of employer-specific substitute mortality tables in lieu of the standard mortality tables that are otherwise used under § 430(h)(3)(A). On May 31, 2007, proposed regulations under § 430(h)(3)(C) were published in the Federal Register as § 1.430(h)(3)–2 (72 FR 29456). Rev. Proc. 2007–37, 2007–25 I.R.B. 1433, sets forth standards and procedures for obtaining approval to use substitute mortality tables.

Section 430(f) provides for certain funding balances referred to as the prefunding balance and the funding standard carryover balance to be used to reduce the otherwise applicable minimum required contribution for a plan year. On August 31, 2007, proposed regulations under § 430(f)

were published in the Federal Register as § 1.430(f)–1 (72 FR 50544).

Section 401(a)(29) requires that a defined benefit plan (other than a multiemployer plan) satisfy the requirements of § 436. Section 436 sets forth a series of limitations on the accrual and payment of benefits under an underfunded plan. Section 436(b) places limitations on the payment of plant shutdown benefits and other unpredictable contingent event benefits, § 436(c) places limitations on plan amendments that increase liabilities for benefits, § 436(d) places limitations on the payment of accelerated benefit distributions, and § 436(e) places limitations on benefit accruals. These limitations are applied based on the plan’s adjusted funding target attainment percentage (AFTAP) for the plan year, as certified by the plan’s enrolled actuary.

Section 436(j) provides definitions that are used under § 436, including the definition of a plan’s AFTAP. In general, a plan’s AFTAP is based on the plan’s funding target attainment percentage (FTAP) under § 430(d)(2) for the plan year. However, the plan’s AFTAP is determined by adding the aggregate amount of purchases of annuities for employees other than highly compensated employees (within the meaning of § 414(q)) made by the plan during the two preceding plan years to the numerator and the denominator of the fraction used to determine the FTAP.

Section 436(h) sets forth a series of presumptions that apply during the portion of the plan year that is before the plan’s enrolled actuary has certified the plan’s AFTAP for the year. Under § 436(h)(3), if any of the § 436 limitations did not apply to the plan for the preceding year, but the AFTAP of the plan for the preceding year was not more than 10 percentage points greater than the percentage that would have caused a limitation to apply to the plan for the preceding year and, as of the first day of the 4th month of the current plan year, the enrolled actuary of the plan has not certified the actual AFTAP for the current plan year, then, until the enrolled actuary certifies the plan’s actual AFTAP for the current plan year, the plan’s AFTAP for the current plan year is presumed to

be equal to 10 percentage points less than the AFTAP of the plan for the preceding plan year. Under § 436(h)(2), if the plan’s enrolled actuary has not certified the plan’s AFTAP by the first day of the 10th month of the current plan year, the plan’s AFTAP for the current plan year is conclusively presumed to be less than 60 percent as of that day.

Section 430(g)(1) provides that all determinations made under § 430 for a plan year (including the determination of a plan’s FTAP and AFTAP) must be made as of the plan’s valuation date. Section 430(g)(2) provides that, other than for small plans with 100 or fewer participants (determined as provided in § 430(g)(2)(B) and (C)), the valuation date for a plan year must be the first day of the plan year.

Section 436(k) provides that, for purposes of § 436, in the case of plan years beginning in 2008, the FTAP for the preceding plan year may be determined using such methods of estimation as the Secretary may provide.

Proposed regulations under § 436 were published as § 1.436–1 on August 31, 2007 (72 FR 50544)). ¹ Section 1.436–1(j)(2) and (3) of the proposed regulations would provide rules for determining the FTAP and AFTAP for purposes of applying the § 436 benefit limitations. Section 1.436–1(j)(3)(iii)(B) provides that, for purposes of determining the plan’s AFTAP for the first year § 436 applies to the plan, the adjusted funding target is equal to the current liability determined pursuant to § 412(l)(7) as of the plan’s valuation date for the plan year that precedes the first plan year for which § 436 applies to the plan, increased by the aggregate amount of purchases of annuities for employees other than highly compensated employees (as defined in § 414(q)) which were made by the plan during the preceding 2 plan years.

Proposed § 1.436–1(j)(3)(iv) provides that, in any case in which the plan’s enrolled actuary has not issued a certification of the AFTAP of the plan for the plan year preceding the plan year § 436 first applies to the plan (the pre-effective plan year), the AFTAP of the plan for the plan year is presumed to be less than 60 percent un

1 A correction notice was published with respect to this notice of proposed rulemaking in the Federal Register dated November 9, 2007 (72 FR 63528).

2008–7 I.R.B. 431 February 19, 2008

gent event occurring on or after the first day of a plan year beginning during 2008, the benefit limitations of § 436(b) and (c) must be applied based on the AFTAP certified for the current plan year, or, if no such certification has yet been received, on the AFTAP certified for the prior plan year except as provided under § 436(h)(2) or § 436(h)(3). Without the transition guidance provided in Part III(B) of this notice, the enrolled actuary’s certification of the prior year AFTAP for a small plan with an end of year valuation date could not readily be made before these rules would apply. Therefore, in the absence of such transition guidance, the AFTAP of such a plan for the plan year beginning in 2008 would be presumed to be less than 60 percent as of the first day of the fourth month of that plan year for purposes of the limitations under § 436(d) and (e) (and the AFTAP of such a plan would generally be considered to be less than 60 percent in the case of a plan amendment or plant shutdown or similar event as of the first day of the 2008 plan year pursuant to the rules of § 436(b) and (c)).

B. Transition rule for application of § 436 benefit limitations by small plans with end of the plan year valuation dates

In the case of a plan that, under § 430(g), has a valuation date that is the last day of the plan year for each of the plan years beginning in 2006, 2007, and 2008, for purposes of applying the benefit limitations of § 436 for the plan year beginning during 2008, a certification of the plan’s AFTAP for the prior plan year (the 2007 plan year) is permitted to be made by determining the FTAP for the 2007 plan year as follows:

equal to a fraction (expressed as a percentage), the numerator of which is the value of net plan assets as determined below, and the denominator of which is the plan’s current liability determined pursuant to § 412(l)(7) on the valuation date for the second plan year that begins before 2008 (the 2006 plan year), including the increase in current liability for the 2006 plan year.

til the AFTAP of the plan for that pre-effective plan year has been certified. Under the proposed regulations, this rule applies for purposes of § 1.436–1(b) and (c) at the beginning of the first plan year that § 436 applies to the plan and applies for purposes of § 1.436–1(d) and (e) as of the first day of the fourth month of the first plan year that § 436 applies to the plan. The guidance set forth in the proposed § 436 regulations with respect to application of these presumptions does not address how the rules of § 436(h) apply to a plan with a valuation date that is not the first day of the plan year. See proposed § 1.436–1(h)(5).

On December 31, 2007, proposed regulations under §§ 430(d), 430(g), 430(h), and 430(i) were published in the Federal Register (72 FR 74215). Those regulations are proposed to apply to plan years beginning on or after January 1, 2009.

III. TRANSITIONAL GUIDANCE

A. Delay of effective date of regulations under §§ 430(f), 430(h)(3)(C), and 436

In order to maintain a uniform effective date for guidance under § 430, this notice announces that, when regulations proposed under § 1.430(f)–1 (regarding maintenance of certain funding balances) and § 1.430(h)(3)–2 (regarding substitute mortality tables) are finalized, those final regulations will not apply to plan years beginning before January 1, 2009. ² In addition, because of the close interaction between the § 430 and § 436 rules and requirements, when regulations proposed under § 1.436–1 are finalized, those final regulations also will not apply to plan years beginning before January 1, 2009. For plan years beginning during 2008, taxpayers must follow applicable statutory provisions and can rely on the proposed regulations for compliance with those statutory provisions. Taking into account the items with respect to which guidance is provided in this Part III(A), the Service will not challenge a reasonable interpretation of an applicable statutory provision under § 430 or 436 for plan years beginning during 2008. In applying the statutory provisions of §§ 430 and 436 for plan years beginning during 2008, taxpayers should note the following:

ply to plan years beginning before January 1, 2009, taxpayers can use substitute mortality tables for plan years beginning during 2008 only if those mortality tables are approved by the Service under the procedures set forth in Rev. Proc. 2007–37.

eraging methods in determining the value of plan assets is permitted only in accordance with methods prescribed in Treasury regulations. Accordingly, under current law, for plan years beginning in 2008, taxpayers cannot use asset valuation methods other than fair market value (as described in § 430(g)(3)(A)) except as provided in the Treasury regulations. The final regulations will permit the averaging method set forth in the proposed regulations to apply for plan years beginning during 2008.

in the case of plan years beginning in 2008, the FTAP for the preceding plan year may be determined using such methods of estimation as the Secretary may provide. Thus, methods of estimating the FTAP for the 2007 plan year can be used for purposes of applying the rules of § 436 for the 2008 plan year only if those methods are permitted in Treasury regulations. Final regulations will permit the estimation methods set forth in the proposed regulations to be used for the 2008 plan year, and will also permit the rules set forth in Part III(B) to be used for this purpose for small plans with end-of-year valuation dates. Taxpayers should not assume that other methods will be permitted except as set forth in published guidance.

For plan years beginning during 2008, benefit restrictions under § 436(d) and (e) will apply beginning with the first day of the fourth month of the plan year if no certification of the plan’s AFTAP for either the prior plan year or the current plan year is received by that date. In addition, in the case of a plan amendment or plant shutdown or other unpredictable contin

2 It is planned that, when proposed § 1.430(h)(3)–1 (which provides generally applicable mortality tables) is finalized, that section will apply to plan years beginning on or after January 1, 2008, as originally proposed.

February 19, 2008 432 2008–7 I.R.B.

for the 2007 plan year, the value of net plan assets is determined as the value of plan assets under § 412(c)(2) as in effect for the 2006 plan year, adjusted as follows: (1) contributions made for the 2006 plan year are taken into account, regardless of whether those contributions are made during the plan year or after the end of the plan year and within the period specified under § 412(c)(10); (2) the value of plan assets taking into account the amount of contributions made for the 2006 plan year is increased or decreased, as necessary, so that it is neither less than 90 percent of the fair market value of plan assets nor greater than 110 percent of the fair market value of plan assets on the valuation date for the 2006 plan year (taking into account assets attributable to contributions for the 2006 plan year); and (3) the plan’s funding standard account credit balance as of the end of the 2006 plan year is subtracted (unless the value of plan assets is greater than or equal to 90 percent of the plan’s current liability determined under § 412(l)(7) on the valuation date for the 2006 plan year).

A plan that determines the prior year AFTAP for the 2008 plan year in accordance with the rules of this Part III(B) cannot increase plan assets for purposes of this computation through elective reduction of the 2008 prefunding balance. If the plan sponsor wishes to increase plan assets for purposes of determining the prior year AFTAP through elective reduction of the prefunding balance, the plan sponsor should use generally applicable rules for determination of the prior year AFTAP (which would require use of the plan’s 2007 valuation rather than the plan’s 2006 valuation).

IV. COMMENTS REQUESTED AND FUTURE REGULATIONS

The transitional guidance provided in Part III applies for plan years beginning in 2008. Section 2(c)(2)(F) of both S. 1974 (passed by the Senate on December 19, 2007) and H.R. 3361 (as introduced in the House of Representatives), which would provide technical corrections to provisions enacted under PPA, would add a new pro

vision to § 436 to provide the Secretary of the Treasury with authority to prescribe rules for the application of § 436 to plans with valuation dates other than the first day of the plan year. If statutory authority similar to that in these technical correction provisions is enacted, the IRS and the Treasury Department are considering including rules in the final regulations substantially similar to those set forth in Part III(B) for the determination of the prior year AFTAP for a plan with an end-of-year valuation date with respect to plan years after 2008. Similarly, if such authority is enacted, the IRS and the Treasury Department are considering including rules in the final regulations under which the certification of an AFTAP as of the last day of the prior plan year will be treated as the certification of the AFTAP for the current plan year for a plan with an end-of-year valuation date. The IRS and the Treasury Department are not contemplating any additional special rules under § 436 for small plans that have a valuation date other than the first day of the plan year. Thus, a plan with a mid-year valuation date may have difficulty in obtaining the required actuarial certification in time to avoid the imposition of benefit limitations under § 436. Comments are requested regarding the proposals set forth in this Part IV and whether there is a need for any other special rules for plans with valuation dates other than the first day of the plan year.

Written comments should be submitted by April 21, 2008. Send submissions to CC:PA:LPD:DRU (Notice 2008–21), Room 5203, Internal Revenue Service, POB 7604 Ben Franklin Station, Washington, D.C. 20044. Comments may be hand delivered between the hours of 8 a.m. and 4 p.m., Monday through Friday, to CC:PA:LPD:DRU (Notice 2008–21), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC, or sent electronically via the Federal eRulemaking portal at http://www.regulations.gov (Notice 2008–21). All comments will be available for public inspection.

DRAFTING INFORMATION

The principal authors of this notice are David Ziegler of the Employee Plans, Tax Exempt and Government Entities Division, and Lauson C. Green

and Linda S. F. Marshall of the Office of the Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). For further information regarding this notice, please contact Mr. Ziegler via e-mail at RetirementPlanQuestions@irs.gov, or you may contact Mr. Green and Ms. Marshall at (202) 622–6090 (not a toll-free number).

Supplemental Health Insurance Coverage as Excepted Benefits Under HIPAA and Related Legislation

Notice 2008–23

PURPOSE

This notice provides a safe harbor for supplemental group health insurance to be considered excepted from the requirements that generally apply under Chapter 100 of the Internal Revenue Code (sections 9801 - 9833) to benefits provided under a group health plan. It is expected that the standards of this safe harbor will be incorporated as requirements (rather than just as a safe harbor) in a notice of proposed rulemaking in the future.

BACKGROUND

HIPAA Health Reform and Related Legislation

Titles I and IV of the Health Insurance Portability and Accountability Act of 1996, Pub. L. 104–191, 110 Stat. 1936 (HIPAA) amended the Code, the Employee Retirement Income Security Act (ERISA), and the Public Health Service Act (PHS Act) to improve portability, access, and continuity with respect to group health plan coverage provided in connection with employment. These laws include limitations on preexisting condition exclusions, require issuance of certificates of creditable coverage, provide special enrollment rights, and prohibit discrimination on the basis of any health factor. Later amendments to these laws provide protections relating to mental health parity and hospital lengths of stay following childbirth. Regulations issued by the Departments of the Treasury, of Labor, and of

2008–7 I.R.B. 433 February 19, 2008

Health and Human Services (the Departments) on these group market provisions are contained in 26 CFR Part 54, 29 CFR Part 2590, and 45 CFR Parts 144 and 146. Additional reforms were provided in the PHS Act for health coverage in the individual market and are contained in 45 CFR Parts 144 and 148.

In general, these health reform provisions apply to group health plans (generally plans established or maintained by employers or employee organizations, or both) and health insurance issuers in the group or individual market. However, these provisions do not apply to certain excepted benefits. In general, if all benefits under a plan or coverage are excepted benefits, then the plan and any health insurance coverage under the plan do not have to comply with the health reform requirements, and the coverage may not qualify as creditable coverage.

Supplemental Health Insurance Coverage

One category of excepted benefits is supplemental excepted benefits. Benefits are supplemental excepted benefits only if they are provided under a separate policy, certificate, or contract of insurance and are either Medicare supplemental health insurance, TRICARE supplemental programs, or similar supplemental coverage provided to coverage under a group health plan. The phrase “similar supplemental coverage provided to coverage under a group health plan” is not defined in the statute or regulations. However, the regulations clarify that one requirement to be similar supplemental coverage is that the coverage must be specifically designed to fill gaps in primary coverage, such as coinsurance or deductibles (but similar supplemental coverage does not include coverage that becomes secondary or supplemental only under a coordination-of-benefits provision). § 54.9831–1(c)(5)(i)(C) of the Miscellaneous Excise Tax Regulations, 29 CFR 2590.732(c)(5)(i)(C), and 45 CFR 146.145(c)(5)(i)(C).

Coordination of Administration

Various situations have come to the attention of the Departments that raise concerns about whether all of the coverage

that is being marketed as similar supplemental coverage actually qualifies as such.

Section 104 of HIPAA requires the Secretaries of the Treasury, of Labor, and of Health and Human Services to ensure that guidance under HIPAA issued by the Departments that relates to the same matter be administered so as to have the same effect at all times. In accordance with section 104 of HIPAA, each of the Departments is issuing guidance for “similar supplemental coverage” to be considered benefits excepted from the requirements of HIPAA. The guidance being issued has been developed on a coordinated basis by the Departments. HHS is also issuing guidance on similar supplemental coverage for the individual market.

DISCUSSION

The section immediately below (SAFE HARBOR STANDARDS) provides that if the standards in that section are satisfied, the supplemental health insurance will be considered to satisfy the conditions for being excepted benefits for purposes of chapter 100. Supplemental health insurance not satisfying the conditions for the safe harbor is subject to further examination for a determination whether it is not “similar supplemental coverage to coverage under a group health plan” and thus is subject to all the requirements of chapter 100.

To fall within that safe harbor, the policy, certificate, or contract of insurance must be issued by an entity that does not provide the primary coverage under the plan and must be specifically designed to fill gaps in primary coverage.

To be “similar supplemental coverage to coverage under a group health plan”, the value of the supplemental coverage must be significantly less than the value of the primary coverage that it supplements. To fall within the safe harbor below, the cost of supplemental coverage may not exceed 15 percent of the cost of the plan’s primary coverage. Cost is determined in the same manner as the “applicable premium” is calculated under a COBRA continuation provision. ¹ Some plans subject to HIPAA titles I or IV are not subject to the COBRA continuation coverage requirements, such as church plans and plans maintained by an employer with fewer than 20 employ

ees. These plans should compute cost as if they were subject to COBRA. (For insured coverage — all supplemental coverage and primary coverage to the extent insured — the COBRA cost is, for purposes of this notice, the cost of the insurance coverage.)

Issuers of Medicare supplemental health insurance (commonly referred to as “Medigap”) generally are subject to prohibitions against discrimination based on enrollees’ or potential enrollees’ health status. Accordingly, to fall within the safe harbor below, supplemental health insurance also must not differentiate among individuals in eligibility, benefits, or premiums based upon any health factor of the individual.

SAFE HABOR STANDARDS

Supplemental health insurance under a group health plan will be considered to be “similar supplemental coverage provided to coverage under a group health plan” under § 54.9831–1(c)(5)(i)(C) if it is provided through a policy, certificate, or contract of insurance separate from the primary coverage under the plan and if it satisfies all of the following requirements:

(1) Independent of Primary Coverage . The supplemental policy, certificate, or contract of insurance must be issued by an entity that does not provide the primary coverage under the plan. For this purpose, entities that are part of the same controlled group of corporations or part of the same group of trades or businesses under common control, within the meaning of section 52(a) or (b) of the Code, are considered a single entity.

(2) Supplemental for Gaps in Primary Coverage . The supplemental policy, certificate, or contract of insurance must be specifically designed to fill gaps in primary coverage, such as coinsurance or deductibles, but does not include a policy, certificate, or contract of insurance that becomes secondary or supplemental only under a coordination-of-benefits provision.

(3) Supplemental in Value of Coverage . The cost of coverage under the supplemental policy, certificate, or contract of insurance must not exceed 15 percent of the cost of primary coverage. Cost is determined in the same manner as the applicable pre

1 Under the COBRA rules, plans are generally permitted to charge up to 102 percent of the applicable premium. Thus, COBRA cost for purposes of this notice is 100 percent of the applicable premium, not 102 percent of the applicable premium that the plan is generally permitted to charge under the COBRA rules.

February 19, 2008 434 2008–7 I.R.B.

be shown on the return for the taxable year over the amount of the tax that is shown on the return reduced by any rebate (within the meaning of section 6211(b)(2)).

.03 In the case of an item not attributable to a tax shelter, section 6662(d)(2)(B)(ii) provides that the amount of the understatement is reduced by the portion of the understatement attributable to any item with respect to which the relevant facts affecting the item’s tax treatment are adequately disclosed in the return or in a statement attached to the return, and there is a reasonable basis for the tax treatment of the item by the taxpayer.

.04 Section 6694(a) imposes a penalty on a tax return preparer for filing a return or claim for refund that results in an understatement of liability due to a position of which the preparer knew or should have known, if the preparer did not have a reasonable belief that the position would more likely than not be sustained on the merits and the position was not disclosed in accordance with section 6662(d)(2)(B)(ii). The penalty is equal to the greater of $1,000 or 50% of the income derived (or to be derived) by the preparer with respect to the return or claim.

.05 In general, this revenue procedure provides guidance for determining when disclosure is adequate for purposes of section 6662(d)(2)(B)(ii) and section 6694(a)(2)(C)(i). For purposes of this revenue procedure, the taxpayer must furnish all required information in accordance with the applicable forms and instructions, and the money amounts entered on these forms must be verifiable. Annual guidance under Treas. Reg. § 1.6662–4(f)(2) and Treas. Reg. § 1.6694–3(e)(1) and (2) for returns filed on 2006, 2005, and 2004 tax forms is provided in Rev. Proc. 2006–48, 2006–47 I.R.B. 934, Rev. Proc. 2005–75, 2005–2 C.B. 1137, and Rev. Proc. 2004–73, 2004–2 C.B. 999, respectively.

.06 Fiscal and short tax year returns. (a) In general. This revenue procedure may apply to a return for a fiscal tax year that begins in 2007 and ends in 2008. This revenue procedure may also apply to a short year return for a period beginning in 2008 if the return is to be filed before the 2008 forms are available. (Note that individuals are generally not put in this position as a decedent’s final return for a fractional part of a year is due the fifteenth day of

mium is calculated under a COBRA continuation provision.

(4) Similar to Medicare Supplemental Coverage . The supplemental policy, certificate, or contract of insurance that is group health insurance coverage must not differentiate among individuals in eligibility, benefits, or premiums based on any health factor of an individual (or any dependent of the individual).

DRAFTING INFORMATION

The principal author of this notice is Russ Weinheimer of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt & Government Entities). For further information regarding this notice, contact Russ Weinheimer at (202) 622–6080 (not a toll-free call).

26 CFR 601.105: Examination of returns and claims for refund, credit or abatement; determination of cor- rect tax liability. (Also Part 1, §§ 6662, 6694, 1.6662–4, 1.6694–2.)

Rev. Proc. 2008–14