Part III. Administrative, Procedural, and Miscellaneous

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

Notice 2008–73

I. PURPOSE

This notice expands the availability of the transition relief for certain small pension plans that was originally provided in Notice 2008–21, 2008–7 I.R.B. 431.

II. BACKGROUND

Section 412 provides minimum funding requirements that generally apply for defined benefit pension plans. Section 430, which was added by the Pension Protection Act of 2006 (PPA), specifies the minimum funding requirements that apply to single employer pension plans (including multiple employer plans) pursuant to § 412. Section 430 generally applies for plan years beginning on or after January 1, 2008. 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 (REG–113891–07, 2007–42 I.R.B. 821 [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.

The House of Representatives and the Senate have both passed similar but not identical bills containing technical corrections to PPA (H.R. 6382, passed by the House of Representatives on July 8, 2008, and S. 1974, passed by the Senate on December 19, 2007). Both of these bills would grant the Treasury Department authority to develop special rules under § 436 with respect to plans with valuation dates other than the first day of the plan year.

Proposed regulations under § 436 were published as § 1.436–1 on August 31, 2007 (REG–113891–07, 2007–42 I.R.B. 821

[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 until 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

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).

2008–38 I.R.B. 717 September 22, 2008

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, contact Mr. Ziegler via e-mail at RetirementPlanQuestions@irs.gov, and contact Mr. Green and Ms. Marshall at (202) 622–6090 (not a toll-free number).

Qualified Transportation Fringes

Notice 2008–74

The purpose of this notice is to delay the effective date of Revenue Ruling 2006–57, 2006–2 C.B. 911. Revenue Ruling 2006–57 provides guidance to employers on the use of smartcards, debit or credit cards, or other electronic media to provide qualified transportation fringes under Internal Revenue Code §§ 132(a)(5) and 132(f). The ruling’s effective date was set for January 1, 2008. In 2007, however, Treasury and the IRS became aware that certain transit systems needed additional time to modify their technology and make it compatible with the requirements for vouchers set forth in Revenue Ruling 2006–57. Consequently, Treasury and the IRS delayed the effective date of Revenue Ruling 2006–57 until January 1, 2009. See Notice 2007–76, 2007–40 I.R.B. 735. Certain transit systems continue to experience technology barriers to achieving compatibility with the requirements for vouchers. Therefore, the ruling’s effective date is further delayed until January 1, 2010. Nevertheless, employers and employees may rely on Revenue Ruling 2006–57 with respect to transactions occurring prior to January 1, 2010. The principal author of this notice is Don M. Parkinson of the Office of Associate Chief Counsel (Tax Exempt & Government Entities). For further information regarding this notice, contact Don M. Parkinson at (202) 622–6040 (not a toll-free call).

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 (REG–139236–07, 2008–9 I.R.B. 491 [72 FR 74215]). Those regulations are proposed to apply to plan years beginning on or after January 1, 2009.

On April 15, 2008, proposed regulations under §§ 430(a), 430(c), 430(e), and 430(j) were published in the Federal Register (REG–108508–08, 2008–19 I.R.B. 923 [73 FR 20203]). Those regulations are proposed to apply to plan years beginning on or after January 1, 2009.

On February 19, 2008, the Service published Notice 2008–21. Part III.B of Notice 2008–21 provides a transition rule for application of § 436 benefit limitations by small plans with end of the plan year valuation dates. Under this transition rule, in the case of a plan that 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, 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.

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). Section IV of Notice 2008–21 describes rules that the Service and the Treasury Department are considering with respect to end-of-year valuation dates in the event that technical corrections are enacted.

Additional transition relief

Because technical corrections to PPA have not yet been enacted, many small plans that would have otherwise retained end-of-year valuation dates will adopt beginning-of-year valuation dates for the 2008 plan year. This change will make those plans ineligible for the transition relief set forth in Section III.B of Notice 2008–21. Accordingly, these plans may have difficulty in complying with the timing requirements for certifying the plan’s AFTAP. To address these difficulties, the transition relief of Section III.B of Notice 2008–21 is expanded to apply with respect to any plan that had an end-of-year valuation date for both the 2006 and 2007 plan years, regardless of the plan’s valuation date for 2008. The Service and the Treasury Department are considering the extent to which automatic approval to change valuation dates and to make other funding method changes should be granted for the 2009 plan year.

DRAFTING INFORMATION

The principal authors of this notice are David Ziegler of the Employee

September 22, 2008 718 2008–38 I.R.B.

Update for Weighted Average Interest Rates, Yield Curves, and Segment Rates

Notice 2008–75

This notice provides guidance as to the corporate bond weighted average interest rate and the permissible range of interest rates specified under § 412(b)(5)(B)(ii)(II) of the Internal Revenue Code as in effect for plan years beginning before 2008. It also provides guidance on the corporate bond monthly yield curve (and the corresponding spot segment rates), the 24-month average segment rates, and the funding transitional segment rates under § 430(h)(2). In addition, this notice provides guidance as to the interest rate on 30-year Treasury securities under § 417(e)(3)(A)(ii)(II) as in effect for plan years beginning before 2008, the 30-year Treasury weighted average rate under § 431(c)(6)(E)(ii)(I), and the min

For Plan Years

Corporate Bond Weighted

imum present value segment rates under § 417(e)(3)(D) as in effect for plan years beginning after 2007.

CORPORATE BOND WEIGHTED AVERAGE INTEREST RATE

Sections 412(b)(5)(B)(ii) and 412(l)(7)(C)(i), as amended by the Pension Funding Equity Act of 2004 and by the Pension Protection Act of 2006 (PPA), provide that the interest rates used to calculate current liability and to determine the required contribution under § 412(l) for plan years beginning in 2004 through 2007 must be within a permissible range based on the weighted average of the rates of interest on amounts invested conservatively in long term investment grade corporate bonds during the 4-year period ending on the last day before the beginning of the plan year.

Notice 2004–34, 2004–1 C.B. 848, provides guidelines for determining the corporate bond weighted average interest rate

and the resulting permissible range of interest rates used to calculate current liability. That notice establishes that the corporate bond weighted average is based on the monthly composite corporate bond rate derived from designated corporate bond indices. The methodology for determining the monthly composite corporate bond rate as set forth in Notice 2004–34 continues to apply in determining that rate. See Notice 2006–75, 2006–2 C.B. 366. The composite corporate bond rate for August 2008 is 6.76 percent. Pursuant to Notice 2004–34, the Service has determined this rate as the average of the monthly yields for the included corporate bond indices for that month.

The following corporate bond weighted average interest rate was determined for plan years beginning in the month shown below.

Beginning in Permissible Range

Month Year

Average 90% to 100%

September 2008 6.10 5.49 6.10

monthly corporate bond yield curve, the 24-month average corporate bond segment rates, and the funding transitional segment rates used to compute the target normal cost and the funding target. Pursuant to Notice 2007–81, the monthly corporate bond yield curve derived from August 2008 data is in Table I at the end of this notice. The spot first, second, and third segment rates for the month of August 2008 are, respectively, 5.21, 6.87, and 6.91. The three 24-month average corporate bond segment rates applicable for September 2008 under the election of § 430(h)(2)(G)(iv) are as follows:

Third Segment

YIELD CURVE AND SEGMENT RATES

Generally for plan years beginning after 2007 (except for delayed effective dates for certain plans under sections 104, 105, and 106 of PPA), § 430 of the Code specifies the minimum funding requirements that apply to single employer plans pursuant to § 412. Section 430(h)(2) specifies the interest rates that must be used to determine a plan’s target normal cost and funding target. Under this provision, present value is generally determined using three 24-month average interest rates

First Segment

(“segment rates”), each of which applies to cash flows during specified periods. However, an election may be made under § 430(h)(2)(D)(ii) to use the monthly yield curve in place of the segment rates. For plan years beginning in 2008 and 2009, a transitional rule under § 430(h)(2)(G) provides that the segment rates are blended with the corporate bond weighted average as specified above. An election may be made under § 430(h)(2)(G)(iv) to use the segment rates without applying the transitional rule.

Notice 2007–81, 2007–44 I.R.B. 899, provides guidelines for determining the

Second Segment

5.07 6.09 6.56

The transitional segment rates under § 430(h)(2)(G) applicable for September 2008, taking into account the corporate

bond weighted average of 6.10 stated above, are as follows:

2008–38 I.R.B. 719 September 22, 2008

For Plan Years

Beginning in

First Segment

Second Segment

Third Segment

2008 5.76 6.10 6.25 2009 5.41 6.09 6.41

tation described in section 431(c)(6)(A), based on the plan’s current liability. Section 431(c)(6)(E)(ii)(I) provides that the interest rate used to calculate current liability for this purpose must be no more than 5 percent above and no more than 10 percent below the weighted average of the rates of interest on 30-year Treasury securities during the four-year period ending on the last day before the beginning of the plan year. Notice 88–73, 1988–2 C.B. 383, provides guidelines for determining the weighted average interest rate. The following rates were determined for plan years beginning in the month shown below.

30-YEAR TREASURY SECURITIES INTEREST RATES

Section 417(e)(3)(A)(ii)(II) (prior to amendment by PPA) defines the applicable interest rate, which must be used for purposes of determining the minimum present value of a participant’s benefit under § 417(e)(1) and (2), as the annual rate of interest on 30-year Treasury securities for the month before the date of distribution or such other time as the Secretary may by regulations prescribe. Section 1.417(e)–1(d)(3) of the Income Tax Regulations provides that the applicable interest rate for a month is the annual rate of interest on 30-year Treasury securities as specified by the Commissioner

For Plan Years

for that month in revenue rulings, notices or other guidance published in the Internal Revenue Bulletin.

The rate of interest on 30-year Treasury securities for August 2008 is 4.50 percent. The Service has determined this rate as the average of the yield on the 30-year Treasury bond maturing in February 2038 determined each day through August 6, 2008, and the yield on the 30-year Treasury bond maturing in May 2038 determined each day for the balance of the month.

Generally for plan years beginning after 2007, § 431 specifies the minimum funding requirements that apply to multiemployer plans pursuant to § 412. Section 431(c)(6)(B) specifies a minimum amount for the full-funding limi

30-Year Treasury Weighted

Beginning in Permissible Range

Month Year

Average 90% to 105%

September 2008 4.72 4.24 4.95

minimum present value segment rates. Pursuant to that notice, the minimum present value transitional segment rates determined for August 2008, taking into account the August 2008 30-year Treasury rate of 4.50 stated above, are as follows:

Third Segment

MINIMUM PRESENT VALUE SEGMENT RATES

Generally for plan years beginning after December 31, 2007, the applicable interest rates under § 417(e)(3)(D) are segment rates computed without regard to

For Plan Years

Beginning in

a 24-month average. For plan years beginning in 2008 through 2011, the applicable interest rate is the monthly spot segment rate blended with the applicable rate under § 417(e)(3)(A)(ii)(II) as in effect for plan years beginning in 2007. Notice 2007–81 provides guidelines for determining the

First Segment

Second Segment

2008 4.64 4.97 4.98 2009 4.78 5.45 5.46

DRAFTING INFORMATION

The principal author of this notice is Tony Montanaro of the Employee Plans,

Tax Exempt and Government Entities Division. Mr. Montanaro may be e-mailed at RetirementPlanQuestions@irs.gov .

September 22, 2008 720 2008–38 I.R.B.

Table I

Monthly Yield Curve for August 2008

Maturity Yield Maturity Yield Maturity Yield Maturity Yield Maturity Yield

2008–38 I.R.B. 721 September 22, 2008

rules for determining whether depreciable property is eligible for the Stimulus additional first year depreciation deduction are the same as the rules in § 168(k) in effect before the enactment of the Stimulus Act. This revenue procedure clarifies the application of the revised rules (see section 5 of this revenue procedure).

.04 Section 1400N(d) provides a 50-percent additional first year depreciation deduction (GO Zone additional first year depreciation deduction) for qualified Gulf Opportunity Zone property placed in service by the taxpayer on or before December 31, 2007 (December 31, 2008, in the case of nonresidential real property and residential rental property) (GO Zone property). Section 1400N(d)(6) provides that in the case of any specified GO Zone extension property (GO Zone extension property), the placed-in-service date is extended to December 31, 2010. Section 103(c)(10) of the Stimulus Act amends § 1400N(d)(6) by providing that GO Zone extension property shall not include any property to which § 168(k) applies.

Section 1400N(e)(1) provides that, for purposes of § 179, the dollar amount in effect under § 179(b)(1) for the taxable year is increased by the lesser of $100,000, or the cost of qualified § 179 Gulf Opportunity Zone property (§ 179 GO Zone property) placed in service during the taxable year, and the dollar amount in effect under § 179(b)(2) for the taxable year is increased by the lesser of $600,000, or the cost of § 179 GO Zone property placed in service during the taxable year.

Section 15345 of the Food, Conservation, and Energy Act of 2008, Pub. L. No. 110–246, 122 Stat. 1651 (June 18, 2008) (Farm Bill) provides a 50-percent additional first year depreciation deduction for certain property substantially used in the Kansas disaster area. Section 15345 of the Farm Bill also extends the increased § 179 amounts provided for § 179 GO Zone property to certain property substantially used in the Kansas disaster area.

.05 This revenue procedure clarifies:

(1) how the Stimulus § 179 deduction interacts with the increased § 179 amounts provided under § 1400N(e) for certain § 179 GO Zone property placed in service during 2008 (see section 6.01(1) of this revenue procedure);

26 CFR 1.179–1: Election to expense certain depre- ciable assets. (Also: §§ 168, 179; 1.168(k)–1.)

Rev. Proc. 2008–54