Part III. Administrative, Procedural, and Miscellaneous

Asset Valuation under Section 430(g)(3)(B) as amended by WRERA

Notice 2009–22

I. PURPOSE

This notice provides interim rules regarding asset valuation methods that are permitted to be used by single employer defined benefit pension plans for minimum funding purposes pursuant to changes made by the Worker, Retiree, and Employer Recovery Act of 2008, Public Law 110–458 (WRERA). This notice also provides automatic approval for a change in asset valuation method for plan years beginning during 2009 to adopt any permissible asset valuation method.

II. BACKGROUND

Section 412 of the Internal Revenue Code (the Code) provides minimum funding requirements that generally apply for defined benefit pension plans. Section 412(d)(1) provides that any change in funding method is permitted to take effect only if it is approved by the Secretary. A change in the plan’s funding method includes a change in the method for determining the value of the plan’s assets, a change in the method for determining the plan’s liabilities, or a change in the plan’s valuation date.

Section 430, which was added by the Pension Protection Act of 2006, Public Law 109–280 (PPA ’06), provides rules for the determination of the minimum required contribution applicable to single employer pension plans (including multiple employer plans) pursuant to § 412. Section 430 is generally effective for plan years beginning on or after January 1, 2008. Section 430(g)(1) provides that all determinations made under § 430 for a plan year must be made as of the plan’s valuation date. Section 430(g)(2) provides that the valuation date for a plan year must be the first day of the plan year, except in the case of a plan with 100 or fewer participants (determined as provided in § 430(g)(2)(B) and (C)).

Section 430(g)(3) provides rules regarding the determination of the value of plan assets for purposes of § 430. Under § 430(g)(3)(A), except as provided in § 430(g)(3)(B), the fair market value of plan assets must be used for this purpose. As an alternative to the use of fair market value, § 430(g)(3)(B) permits the use of an actuarial value of assets based on the average of fair market values, but only if such method is permitted under regulations prescribed by the Secretary, does not provide for averaging of such values over more than the period beginning on the last day of the 25th month preceding the month in which the valuation date occurs and ending on the valuation date (or a similar period in the case of a valuation date that is not the 1st day of a month), and does not result in a determination of the actuarial value of plan assets that, at any time, is lower than 90 percent or greater than 110 percent of the fair market value of plan assets as of the valuation date.

Section 436 provides certain limitations on a defined benefit plan that are based on the funded status of the plan. For this purpose, the funding status of the plan is based on the adjusted funding target attainment percentage, which in turn is based in part on the value of plan assets as determined under § 430.

Prior to amendment by WRERA, the last sentence of § 430(g)(3)(B) provided that any averaging under § 430(g)(3)(B) must be adjusted for contributions and distributions (as provided by the Secretary). Section 121(b) of WRERA amended the last sentence of § 430(g)(3)(B) to provide that any averaging under § 430(g)(3)(B) must be adjusted for contributions, distributions, and expected earnings (as determined by the plan’s actuary on the basis of an assumed earnings rate specified by the actuary, but not in excess of the third segment rate applicable under § 430(h)(2)(C)(iii)), as specified by the Secretary. This WRERA change is effective for the same periods as the PPA ’06 provision that it amends.

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]) (the proposed regu

lations). Section 1.430(g)–1(c)(2) of the proposed regulations provides rules for a permissible asset valuation method based on the average of fair market values of plan assets, in accordance with § 430(g)(3)(B), prior to amendment by WRERA. Under this asset valuation method, the actuarial value of assets is the average of the fair market value of assets on the valuation date and the adjusted fair market value of assets determined as of one or more earlier determination dates. The adjusted fair market value of assets as of a determination date is the fair market value of plan assets on that date, increased for contributions included in the plan’s asset balance on the valuation date that were not included in the plan’s asset balance on the determination date, and decreased for benefits and administrative expenses paid from plan assets between that determination date and the valuation date. Because the proposed regulations were issued prior to the enactment of WRERA, the proposed regulations do not provide for an adjustment for expected earnings in determining the adjusted fair market value as of an earlier determination date. Section 1.430(g)–1(f)(4) of the proposed regulations provides that any change in a plan’s valuation date or asset valuation method that is made for the first plan year for which § 430 applies to the plan and that is not inconsistent with the requirements of § 430 is treated as having been approved by the Commissioner and does not require the Commissioner’s specific prior approval.

The proposed regulations are proposed to be effective for plan years beginning on or after January 1, 2009. The preamble of the proposed regulations provides that plans may rely on the proposed regulations for plan years beginning during 2008. Notice 2008–21, 2008–7 I.R.B. 431, states generally that the Service will not challenge a reasonable interpretation of an applicable statutory provision under § 430 or § 436 for plan years beginning during 2008, but noted that the use of averaging methods in determining the value of plan assets under § 430(g)(3)(B) is permitted only in accordance with a method prescribed in regulations.

2009–14 I.R.B. 741 April 6, 2009