Part III. Administrative, Procedural, and Miscellaneous

Extension of Deadline to Adopt Certain Retirement Plan Amendments

Notice 2010–77

I. Purpose

This notice further extends the deadline for amending qualified defined benefit plans to meet certain requirements of the Internal Revenue Code that were added by the Pension Protection Act of 2006 (PPA ’06), Pub. L. 109–280, and subsequently modified by the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA), Pub. L. 110–458, and the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (PRA 2010), Pub. L. 111–192. This is a further extension of the deadline for adopting certain defined benefit plan amendments as previously extended in Notice 2009–97, 2009–52 I.R.B. 972. The deadline is now extended to the last day of the first plan year that begins on or after January 1, 2011. This extension applies to:

1. The deadline for amending singleemployer defined benefit plans to meet the requirements of §§ 401(a)(29) and 436, relating to funding-based limits on benefits and benefit accruals under single-employer plans; and

2. The deadline for amending cash balance and other applicable defined benefit plans, within the meaning of § 411(a)(13)(C), to meet the requirements of § 411(a)(13) (other than § 411(a)(13)(A)) and § 411(b)(5), relating to vesting and other special rules applicable to these plans.

The notice provides that the additional extension of time to amend also applies for the purpose of a plan’s eligibility for the relief from the requirements of § 411(d)(6) described in Notice 2009–97.

II. Background

Section 401(a)(29) requires single-employer defined benefit plans that are subject to the minimum funding requirements of § 412 to meet the requirements of § 436. Section 436, which was added by section 113(a)(1) of PPA ’06, imposes funding

based limits on benefits and benefit accruals under single-employer plans. The requirements of § 436 generally apply to plan years that begin after December 31, 2007. Final regulations under § 436 were published in the Federal Register on October 15, 2009, 74 FR 53004. The final regulations do not include rules interpreting the amendments with respect to § 436 made by section 101(c)(2) of WRERA, which are generally effective as if included in PPA ‘06, and section 203(a)(2) of PRA 2010, which are generally effective for plan years beginning on or after October 1, 2008.

Section 411(a)(13), which was added by section 701(b)(2) of PPA ’06, contains special rules for cash balance and other applicable defined benefit plans. Section 411(a)(13)(A) provides, in general, that an applicable defined benefit plan will not fail to satisfy the requirements of § 411(a)(2), 411(c), or 417(e) solely because the present value of the participant’s accrued benefit under the plan equals the balance in the participant’s hypothetical account or the accumulated percentage of the participant’s final average compensation. Section 411(a)(13)(B) requires an applicable defined benefit plan to provide 100 percent vesting for employer-derived benefits on completion of three years of service. Section 411(a)(13) is generally effective for years that begin after December 31, 2007, and for distributions made after August 17, 2006.

Section 411(b)(5), which was added by section 701(b)(1) of PPA ’06 and is generally effective for years that begin after December 31, 2007, contains special rules for applicable defined benefit plans with regard to the requirements of § 411(b)(1)(H), which prohibits a defined benefit plan from ceasing an employee’s benefit accruals or reducing an employee’s rate of benefit accrual because of the attainment of any age.

Final and proposed regulations under §§ 411(a)(13) and 411(b)(5) were published in the Federal Register on October 19, 2010 (75 FR 64123 and 75 FR 64197, respectively).

Section 401(b) provides a period during which a plan may be amended retroac

tively to comply with the Code’s qualification requirements. Section 1.401(b)–1 of the Treasury regulations and Rev. Proc. 2007–44, 2007–2 C.B. 54, describe the disqualifying provisions that may be amended retroactively and the remedial amendment period during which retroactive amendments may be adopted. The regulations also grant the Commissioner the discretion to extend the remedial amendment period.

Section 5.05 of Rev. Proc. 2007–44 provides that when there are statutory or regulatory changes to the plan qualification requirements that will impact provisions of the written plan document, the adoption of an interim amendment will generally be required by the later of the end of the plan year in which the change is first effective or the due date of the employer’s tax return for the tax year that includes the date the change is first effective. The filing of a determination letter application for a plan generally requires the plan to be restated to take into account changes in qualification requirements and guidance that are listed in the Cumulative List of Changes in the Plan Qualification Requirements in effect at the time the application is filed. (See sections 4 and 12.03 of Rev. Proc. 2007–44.) Thus, as noted in section 12.03 of Rev. Proc. 2007–44, a determination letter filing may accelerate to an earlier date one or more of the interim amendment deadlines that would otherwise apply to a plan.

Section 411(d)(6) provides generally that a plan will not satisfy § 401(a) if an amendment to the plan decreases a participant’s accrued benefit. For this purpose, a plan amendment which has the effect of eliminating or reducing an early retirement benefit or a retirement-type subsidy or eliminating an optional form of benefit with respect to benefits attributable to service before the amendment is treated as reducing accrued benefits. Section 401(b) does not relieve a plan of the requirement to satisfy § 411(d)(6) with respect to any amendment.

Section 1.411(d)–4, A–2(b)(2)(i), provides that a plan may be amended to eliminate or reduce a § 411(d)(6) protected benefit, within the meaning of § 1.411(d)–4, A–1, if the following three requirements

December 20, 2010 851 2010–51 I.R.B.

III. Extension of Deadline for Adopting Amendments Under §§ 401(a)(29), 436, 411(a)(13) (other than § 411(a)(13)(A)), and 411(b)(5)

The deadline for adopting an interim or discretionary plan amendment under §§ 401(a)(29), 436, 411(a)(13) (other than § 411(a)(13)(A)), and 411(b)(5) is extended to the last day of the first plan year that begins on or after January 1, 2011. A plan must continue to satisfy the operational compliance requirements of section 1107 of PPA ’06 as a condition of the extension of the deadline for adopting plan amendments provided by this notice.

IV. Section 411(d)(6) Relief for Certain Amendments

A. Relief for Amendments Under §§ 401(a)(29) and 436

Pursuant to § 7805(b) and § 1.411(d)–4, A–2(b)(2)(i), an interim plan amendment that eliminates or reduces a § 411(d)(6) protected benefit will not cause a plan to fail to meet the requirements of § 411(d)(6) if the amendment is adopted by the last day of the first plan year that begins on or after January 1, 2011, and the elimination or reduction is made only to the extent necessary to enable the plan to meet the requirements of §§ 401(a)(29) and 436.

B. Relief for Amendments Under § 411(b)(5)

When the regulations under §§ 411(a)(13) and 411(b)(5) that were proposed on October 19, 2010, are finalized, it is expected that relief from the requirements of § 411(d)(6) will be granted for a plan amendment that eliminates or reduces a § 411(d)(6) protected benefit, provided that the amendment is adopted by the last day of the first plan year that begins on or after January 1, 2011, and the elimination or reduction is made only to the extent necessary to enable the plan to meet the requirements of § 411(b)(5). Plan sponsors and their advisers are reminded that the preamble to the proposed regulations specifically requests comments regarding the amendments to a hybrid plan’s interest crediting rate that should be considered “necessary to enable the plan to meet the requirements of § 411(b)(5)”

are met: the amendment constitutes timely compliance with a change in law affecting plan qualification; there is an exercise of § 7805(b) relief by the Commissioner; and the elimination or reduction is made only to the extent necessary to enable the plan to continue to satisfy the requirements for qualified plans.

Section 1107 of PPA ’06 generally requires plans to be amended for the changes in the plan qualification requirements made by PPA ’06 by the last day of the first plan year that begins on or after January 1, 2009 (“the section 1107 date”) and provides relief from the requirements of § 411(d)(6) for plan amendments adopted by that date pursuant to PPA ’06 or regulations thereunder. Section 1107 of PPA ’06 also generally requires that such an amendment be effective as of the effective date of the relevant provision of PPA ’06 and that the plan be operated in accordance with the amendment as of the effective date of the amendment.

Section 5.07(2) of Rev. Proc. 2007–44 provides an exception from the general deadline for adopting interim amendments. This section provides that the deadline for adopting an interim amendment pursuant to a provision of PPA ’06 or regulations thereunder is the section 1107 date. This is also the deadline for adopting a discretionary amendment (within the meaning of section 5.05(2) of Rev. Proc. 2007–44) pursuant to a provision of PPA ’06 or regulations thereunder.

Under the Commissioner’s authority to extend remedial amendment periods under § 401(b), Notice 2009–97 extends the time to adopt interim and discretionary plan amendments for certain requirements of PPA ‘06, including §§ 401(a)(29), 436, 411(a)(13) (other than § 411(a)(13)(A)), and 411(b)(5), to the last day of the first plan year beginning on or after January 1, 2010. Notice 2009–97 also grants relief from the requirements of § 411(d)(6) (pursuant to § 7805(b) and § 1.411(d)–4, A–2(b)(2)(i)) for an interim amendment that eliminates or reduces a § 411(d)(6) protected benefit, provided that the amendment is adopted by the last day of the first plan year that begins on or after January 1, 2010, and the elimination or reduction is made only to the extent

necessary to enable the plan to meet the requirements of §§ 401(a)(29) and 436. Further, Notice 2009–97 states that, once final regulations under §§ 411(a)(13) and 411(b)(5) are issued, it is expected that relief from the requirements of § 411(d)(6) will be granted for a plan amendment that eliminates or reduces a § 411(d)(6) protected benefit, provided that the amendment is adopted by the last day of the first plan year that begins on or after January 1, 2010, and the elimination or reduction is made only to the extent necessary to enable the plan to meet the requirements of § 411(b)(5).

The preamble to the proposed regulations under §§ 411(a)(13) and 411(b)(5) that were published in the Federal Register on October 19, 2010, 75 FR 64197, extends the duration of the expected relief and provides that the relief from the requirements of § 411(d)(6) is expected to apply if the amendment is adopted before regulations that finalize the proposed regulations apply to the plan. The regulations are proposed to be effective for plan years beginning on or after January 1, 2012, and the extensions provided by this notice are tailored to the expectation that this will be the effective date of the regulations when they are finalized. (See footnote six of the preamble to the proposed regulations.)

In order to give plan sponsors time to take the WRERA and PRA 2010 changes to § 436 into account, this notice provides a one-year extension of the time by which plans must be amended for §§ 401(a)(29) and 436, as well as the time by which such amendments must be adopted to be eligible for relief from the requirements of § 411(d)(6). In order to give plan sponsors time to take the final regulations under §§ 411(a)(13) and 411(b)(5) into account when adopting amendments to comply with §§ 411(a)(13) and 411(b)(5) (and consistent with the anticipated duration of the expected § 411(d)(6) relief that is discussed in the preamble to the proposed regulations), this notice also provides a oneyear extension of the time by which plans must be amended for §§ 411(a)(13) (other than § 411(a)(13)(A)) and 411(b)(5). This notice does not extend the deadline for adopting any other plan amendments for PPA ’06.

2010–51 I.R.B. 852 December 20, 2010

for purposes of the expected relief from the requirements of § 411(d)(6).

V. Determination Letters

The Service’s review of an application for a determination letter that is submitted before February 1, 2012, will not take into account the requirements of §§ 401(a)(29) and 436. Accordingly, a determination letter issued with respect to such an application cannot be relied upon with respect to the requirements of §§ 401(a)(29) and 436.

The Service’s review of an application for a determination letter submitted after January 31, 2011, will take into account the requirements of §§ 411(a)(13) and 411(b)(5), including the final regulations under those sections that were published in the Federal Register on October 19, 2010, 75 FR 64123. The Service’s review will not take into account the proposed regulations under §§ 411(a)(13) and 411(b)(5) but will be based on a standard of reasonable interpretation of the statute with respect to matters addressed in those regulations. As noted in section II of this notice, the filing of a determination letter application for a plan after January 31, 2011, may accelerate the time by which the plan’s sponsor must adopt an interim plan amendment for §§ 411(a)(13) (other than § 411(a)(13)(A)) and 411(b)(5).

VI. Effect on Other Documents

Notice 2009–97 and section 5.07(2) of Rev. Proc. 2007–44 are modified.

Drafting Information

The principal author of this notice is James P. Flannery of the Employee Plans, Tax Exempt and Government Entities Division. Questions regarding this notice may be sent via e-mail to retirementplanquestions@irs.gov .

Modification to the Relief and Guidance on Corrections of Certain Failures of a Nonqualified Deferred Compensation Plan to Comply with § 409A(a)

Notice 2010–80

I. PURPOSE

This notice modifies certain provisions of Notice 2008–113, Relief and Guidance on Corrections of Certain Failures of a Nonqualified Deferred Compensation Plan to Comply with § 409A(a) in Operation, 2008–2 C.B. 1305, and Notice 2010–6, Relief and Guidance on Corrections of Certain Failures of a Nonqualified Deferred Compensation Plan to Comply with § 409A(a), 2010–3 I.R.B. 275. Specifically, this notice:

for relief under Notice 2010–6 include a nonqualified plan linked to a qualified plan or another nonqualified plan, provided that the linkage does not affect the time and form of payments under the plans;

relief under Notice 2010–6 to include certain stock rights that were intended to comply with the requirements of § 409A(a) of the Internal Revenue Code (rather than be exempt from the requirements of § 409A(a));

correction under Notice 2010–6 for certain failures involving payments at separation from service subject to the requirement to submit a release of claims or similar document; and provides transition relief permitting the correction of such failures that were in effect on or before December 31, 2010 (including relief from the service provider information reporting requirements);

provider information reporting requirements under Notice 2010–6 for corrections made under the transition relief ending December 31, 2010; and

that service recipients provide certain information to service providers under Notice 2008–113 for corrections made

in the same taxable year as the failure occurs.

II. BACKGROUND

On December 3, 2008, the Treasury Department and the IRS issued Notice 2008–113, providing relief and guidance on corrections of certain failures of a nonqualified deferred compensation plan to comply with the operational requirements applicable under § 409A(a). On January 5, 2010, the Treasury Department and the IRS released Notice 2010–6, providing relief and guidance on corrections of certain failures of a nonqualified deferred compensation plan to comply with the plan document requirements applicable under § 409A(a). Section XI of Notice 2010–6 provided transition relief under which taxpayers generally could avoid income inclusion under § 409A(a) solely due to the failure of the plan language to comply with the requirements of § 409A(a), if the plan document failure and any related operational failure were corrected before January 1, 2011 in accordance with the guidance (although an amount may be required to be included in income under § 409A(a) due to the correction of the related operational failure).

The Treasury Department and the IRS received numerous comments on the guidance regarding the correction of failures to comply with § 409A(a). The Treasury Department and the IRS continue to analyze the comments and anticipate issuing further corrections guidance in the future. However, because certain transition relief provided in Section XI of Notice 2010–6 requires correction of plan document and related operational failures before January 1, 2011, the Treasury Department and the IRS are issuing this guidance to provide immediate relief to taxpayers with respect to certain issues under Notice 2008–113 and Notice 2010–6.

III. GUIDANCE

A. This § III.A. clarifies § III.G. of Notice 2010–6 by providing that the types of plans eligible for relief under Notice 2010–6 include (1) certain linked plans with plan document failures if the linkage does not affect the time and form of payment of amounts under the plans, and (2) certain stock rights (stock options

December 20, 2010 853 2010–51 I.R.B.

event under § 409A that is a permissible payment period under §1.409A–3(b), the amendment must provide either (a) for payment only upon a fixed date either 60 or 90 days following the occurrence of the permissible payment event, or (b) for payment during a specified period not longer than 90 days following the occurrence of the permissible payment event under the condition that if the specified period begins in one taxable year and ends in a second taxable year, the payment will be made in the second taxable year. In addition, a plan may be amended to provide for payment in accordance with clause (b) of the immediately preceding sentence even though the plan was previously amended under § XI of this notice to correct a plan provision that allowed the service provider to delay or accelerate the timing of a payment as a result of the service provider’s action. In each case the amendment may not otherwise change the time or form of payment.”

C. This § III.C modifies § VI.B of Notice 2010–6 by providing additional transition relief through December 31, 2012 for plans that contain certain failures involving payments dependent upon the service provider completing certain employment-related actions (such as the execution and submission of a noncompetition agreement, a nonsolicitation agreement, or a release of claims) as of December 31, 2010, provided that any payments made after March 31, 2011 that could be paid during a period that begins in one taxable year and ends in the subsequent taxable year are made during the subsequent taxable year and provided further that to the extent any amounts remain deferred under the plan, the plan is amended to be compliant by no later than December 31, 2012. Accordingly, the following § VI.B.3 is added to § VI.B of Notice 2010–6:

“3. Transition Relief

For any plan with a provision eligible for correction under this section on or before December 31, 2010, such provision will not be treated as failing to comply with § 409A(a) in form and a payment pursuant to such provision will not be treated as having failed to comply with § 409A(a) in operation with respect to an amount deferred under the plan that is paid on or before March 31, 2011. For

and stock appreciation rights) that were intended at the time of grant (or upon a modification pursuant to applicable transition relief) to be subject to, and compliant with, § 409A but that have a plan document failure. Accordingly, § III.G of Notice 2010–6 is modified to read as follows:

“G. Certain Linked Plans and Stock Rights not Eligible for Relief

Except as specifically provided in § XI.B of this notice, the relief provided under this notice does not apply to a plan to the extent that the document failure is due to the time and form of payment being affected by the amount deferred under, or the payment provisions of, one or more other nonqualified deferred compensation plans or one or more qualified plans (as defined in §1.409A–1(a)(2)). However, a plan does not fail to qualify for the relief provided under this notice merely because the amount paid under one plan is affected by the amount paid under the other plan, provided the time and form of payment under the first plan is not affected by the amount deferred under, or the payment provisions of, the other plan. In addition, the relief provided under this notice does not apply to a stock right (as defined in §1.409A–1(l)) unless pursuant to the terms of the stock right at the time of grant or as modified in accordance with applicable transition relief, the recipient of the stock right has the right to exercise such stock right only upon one or more of the following: (1) a fixed date or a period beginning and ending within one taxable year (generally the calendar year for individual taxpayers); or (2) a permissible payment event under § 409A and §1.409A–3(a) (including any period following a payment event permitted under §1.409A–3(b)). For this purpose, a permissible payment event under § 409A and 1.409A–3(a) includes a payment event eligible for correction under §§ IV and V of this notice. For example, the relief provided under this notice would apply to a stock right subject to § 409A granted to an employee with a calendar year taxable year, where the right had an exercise date of the earlier of a fixed date or the period beginning with the employee’s separation from service and ending on December 31 of the calendar year in which the employee separated

from service, provided that the definition of separation from service either complied with the requirements of §1.409A–1(h) or was eligible for correction under § V.A of this notice. For certain relief with respect to a stock right with an exercise price that is less than the fair market value of the underlying shares of stock at the date of grant, see Notice 2008–113, §§ IV.D and V.E.”

B. This § III.B modifies § VI.B.2 of Notice 2010–6 by providing an additional method of correction for certain failures involving payments dependent upon the service provider completing certain employment-related actions (such as the execution and submission of a noncompetition agreement, a nonsolicitation agreement, or a release of claims). Under this additional method, the failure may be corrected by providing for payment during a specified period not longer than 90 days following a permissible payment event, provided that if the period begins in a service provider taxable year and ends in the subsequent service provider taxable year, the payment will be made in the subsequent taxable year. Accordingly, § VI.B.2 of Notice 2010–6 is modified to read as follows:

“2. Correction

A plan provision eligible for this section may be corrected in accordance with this section before the date an event occurs that would be a permissible payment event under § 409A to which the provision applies. The plan may be corrected by amending the plan to remove the ability of the service provider to delay or accelerate the timing of the payment as a result of the service provider’s action. If the plan provides for payment (subject to the service provider’s action) within a designated period following the permissible payment event under § 409A that is a permissible payment period under §1.409A–3(b), except that the service provider’s action could affect the taxable year of payment, the amendment must provide either (a) for payment only on the last day of such designated period, or (b) for payment in the second taxable year if in any event the designated period begins in a first taxable year and ends in a second taxable year. If the plan does not provide for payment (subject to the service provider’s action) within a designated period following the permissible payment

2010–51 I.R.B. 854 December 20, 2010

any plan provision eligible for correction under this section as of December 31, 2010, with respect to an amount deferred under the plan that is paid after March 31, 2011, such provision will not be treated as failing to comply with § 409A(a) in form for taxable years commencing on or after January 1, 2009, and payment pursuant to such provision will not be treated as failing to comply with § 409A(a) in operation, provided that (a) any amounts paid under the plan pursuant to such provision where the potential payment period begins in a service provider taxable year and ends in a subsequent service provider taxable year are paid in the subsequent taxable year, or if paid in the first taxable year are treated as an operational failure and corrected in accordance with Notice 2008–113; and (b) if any amounts that are subject to such a plan provision remain deferred after December 31, 2012 (other than any remaining installment, annuity or other payments of an amount that has already become payable pursuant to such a plan provision), the plan provision has been corrected in accordance with this section on or before December 31, 2012. For purposes of this § VI.B.3, the failure to pay an amount during the subsequent taxable year may be treated as an operational failure eligible for correction under Notice 2008–113 even though the plan provision under which the amount is paid fails to comply with § 409A. For purposes of this paragraph, a plan includes a substantially similar arrangement under which another service provider commences participation after December 31, 2010 in accordance with the plan terms as of December 31, 2010.”

D. To provide an example of the additional method of correction available for certain failures involving payments dependent upon the service provider completing certain employment-related actions (such as the execution and submission of a noncompetition agreement, a nonsolicitation agreement, or a release of claims), the following examples are added to § VI.C of Notice 2010–6:

“ Example 5 (impermissible payment provision making timing of payment after a permissible pay- ment event dependent upon service provider action) . The facts are the same as in Example 4, except that on April 1, 2011, Employer and Employee N amend Employee N’s employment agreement to provide for payment within 90 days following Employee N’s separation from service, provided that Employee N

has executed and submitted a release of claims and the statutory period during which Employee N is entitled to revoke the release of claims has expired prior to payment during the 90-day period, and further provided that the payment would be made in the second taxable year if the 90-day period began in one taxable year and ended in the subsequent taxable year. Employee N has a separation from service with Employer on December 1, 2011. Employee N executes and submits a release of claims on December 15, 2011. Employer pays Employee N $100x on January 1, 2012.

Conclusion : Because Employer and Employee N corrected the plan before Employee N’s separation from service, Employee N is not required to include any amount in income under § 409A(a) solely due to the pre-correction plan provision.

Example 6 (transition relief - impermissible pay- ment provision making timing of payment after a permissible payment event dependent upon service provider action) . Employee SS is an employee of Employer whose employment agreement, entered into on January 1, 2009, entitles Employee SS to $100x upon a separation from service (defined to comply with § 1.409A–1(h)), paid in ten annual installments (that were not designated as separate payments for purposes of the application of § 409A) commencing within 90 days following Employee SS’s separation from service, provided that Employee SS executes and submits a release of claims and the period during which Employee SS may revoke the release pursuant to applicable law has expired within the 90 day period. Employee SS has a separation from service with Employer on December 15, 2010. Employee SS executes and submits a release of claims on December 20, 2010, and Employer commences the annual installments of $10X to Employee SS on December 31, 2010.

Conclusion : Because Employer paid Employee SS $10X in accordance with the plan terms on or before March 31, 2011, Employee SS is not required to include any amount in income under § 409A(a) solely due to the plan provision or the payment of the $10X.

Example 7 (transition relief - impermissible payment provision making timing of payment after a permissible payment event dependent upon ser- vice provider action) . The facts are the same as in Example 6, except that Employee SS’s separation from service occurs on December 1, 2011, Employee SS executes and submits a release of claims on December 20, 2011, and Employer commences the annual installments of $10X to Employee SS on December 31, 2011. No amounts remain deferred under the plan on December 31, 2011 except for the remaining installments on the amount payable at separation from service.

Conclusion : Provided that Employer and Employee SS treat the commencement of payment in 2011 as an operational failure under Notice 2008–113, and such failure is eligible to be corrected, and is actually corrected as an impermissible payment in accordance with Notice 2008–113, Employee SS is not required to include any amount in income under § 409A(a) solely due to the plan provision. Note that had the payment commenced in accordance with the terms of the plan but during 2012, Employer and Employee SS would not have been

required to treat the commencement of the payment as an operational failure under Notice 2008–113, and Employee SS would not have been required to include any amount in income under § 409A solely due to the plan provision.

Example 8 (transition relief - impermissible pay- ment provision making timing of payment after a permissible payment event dependent upon service provider action) . Employee TT is an employee of Employer. Employer maintains a supplemental executive retirement plan that is a nonaccount balance plan for purposes of § 409A and that, as of December 31, 2010, provides for participation by every Level AA employee of Employer. On April 1, 2011, Employee TT receives a promotion to a Level AA position of employment, and accordingly becomes eligible for, and commences participation in, Employer’s supplemental executive retirement plan. The plan provides for payment of a participant’s benefit in a lump sum within 90 days following the participant’s separation from service (defined to comply with § 1.409A–1(h)), provided that the participant executes and submits a release of claims and the period during which the participant may revoke the release pursuant to applicable law has expired within the 90 day period. On December 1, 2012, Employer corrects the plan provision in accordance with § VI.B.2 of this notice. Employee TT continues in employment continuously through December 31, 2012. Conclusion : Because Employee TT became eligible to participate in accordance with the terms of the supplemental executive retirement plan that were effective as of December 31, 2010, Employee TT is eligible for the relief provided by § VI.B.3 of this notice. Because Employer corrected the plan provision under § VI.B.2 of this notice before December 31, 2012, the plan provision is not treated as having failed to comply with § 409A(a) for periods on or before December 31, 2012.” E. This § III.E modifies § XII.A of Notice 2010–6 to provide relief from the requirement that a service recipient provide certain information to a service provider with respect to a plan document correction made in accordance with the transition relief under § VI.B.3 and § XI of Notice 2010–6. (However, the requirement that a service recipient include information with its own tax return relating to such a correction is not changed.) In addition, the modifications of § XII.A of Notice 2010–6 in this § III.E provide relief from the requirement that a service provider attach a statement to his or her return with respect to a plan correction made in accordance with the transition relief in § VI.B 3 and § XI of Notice 2010–6. Accordingly, § XII.A of Notice 2010–6 is modified to read as follows:

December 20, 2010 855 2010–51 I.R.B.

relief in § IV.B.3 or § XI of Notice 2010–6, § XII.C of Notice 2010–6 is modified to read as follows:

“C. Information to be Provided to Service Provider for Failures Described in any of §§ V through X of this Notice not Eligible for Relief Under § VI.B. 3 or § XI of this Notice

The service recipient must provide the following information to each service provider affected by a failure to comply with § 409A who is entitled to relief under any of §§ V through X of this notice (but is not eligible for and corrected under the relief provided in § VI.B.3 or § XI of this notice) with respect to such failure:

(1) A statement that the service provider is entitled to the relief provided in §§ V through X of this notice (identifying the applicable section of this notice under which the document failure is corrected) with respect to a failure to comply with § 409A, and that the service provider must attach a copy of the statement to the service provider’s income tax return for the taxable year in which the failure was corrected and also to the extent applicable, any subsequent taxable year in which an amount is included in income under § 409A by the service provider as part of the correction.

(2) The information described in §§ XII.B.(1) through (4) of this notice, but only to the extent that the information relates to a deferred amount of that service provider.”

G. To provide relief from the employee information reporting requirements upon use of the transition relief in § VI.B.3 or § XI of Notice 2010–6, § XII.D of Notice 2010–6 is modified to read as follows:

“D. Attachment to Service Provider Tax Return for Failures Described in any of §§ V through X of this Notice not Eligible for Relief under § VI.B.3 or § XI of this Notice

The service provider must attach to the service provider’s income tax return a copy of the statement the service provider received from the service recipient with respect to a failure described in any of §§ V through X of this notice that is not eligible for and corrected under the relief provided in § VI.B.3 or § XI of this notice. If a service provider has included an amount

“A. Information and Reporting Required for Correction of a Document Failure

1. Service Recipient Requirements

A service recipient described in any of §§ V through XI of this notice must attach to its timely-filed (including extensions) original federal income tax return for its taxable year in which it corrects the failure, a statement entitled “§ 409A Document Correction under § [INSERT APPROPRIATE SECTION(S)] of Notice 2010–6” setting out the information required by § XII.B of this notice. This statement must also be attached to the service recipient’s timely-filed (including extensions) original federal income tax return for the service recipient’s taxable year subsequent to the taxable year in which the failure was corrected, but only to the extent that a service provider is required to include an amount in income during such subsequent year to be eligible for the relief under this notice. In addition, a service recipient described in any of §§ V through X of this notice must provide to each such service provider who is affected by such failure a statement entitled “§ 409A Document Correction under § [INSERT APPROPRIATE SECTION(S)] of Notice 2010–6” setting out the information required by § XII.C of this notice not later than the date (with extensions) on which it is required to provide an information return (Form W–2 or 1099) to such service provider (or if no information return is required for such service provider, not later than the January 31 following the calendar year in which it corrects such failure) for the calendar year in which it corrects such failure. The service recipient described in any of §§ V through X of this notice must also provide the same information for the subsequent calendar year to the extent the service provider is required to include an amount in income during such subsequent year to be eligible for relief under this notice. In addition, any service recipient relying on the relief provided in any of §§ V through XI of this notice must make reasonable efforts to provide notice to the examining agent upon the commencement of an examination of such service recipient’s federal tax return that the service recipient was relying upon the relief provided under this notice for years covered by the examination. A service

recipient is not required to provide the information statements described in this § XII.A.1 to affected service providers with respect to a plan that is eligible for, and corrected under, § VI.B.3 or § XI of this notice, but the service recipient must attach the information statement described in this § XII.A.1 to its federal income tax return with respect to such corrections.

2. Service Provider Requirements

A service provider who is relying on the relief provided in any of §§ V through X of this notice for a failure to comply with § 409A(a) must attach to the service provider’s timely filed (including extensions) original federal income tax return for the year in which the failure was corrected the information required by § XII.D of this notice. A service provider relying on the relief provided in any of §§ V through X of this notice for a failure to comply with § 409A(a) must also attach the information required by § XII.D of this notice to that service provider’s timelyfiled (including extensions) original federal income tax return for the year subsequent to the year in which the failure was corrected, but only if the service provider is required to include an amount in income during that year to be eligible for the relief in this notice. In addition, any service provider relying on the relief provided in any of §§ V through X of this notice must make reasonable efforts to provide notice to the examining agent upon the commencement of an examination of such taxpayer’s federal tax return that the taxpayer was relying upon the relief provided under this notice for years covered by the examination. A service provider is not subject to the requirements of this paragraph XII.A.2 with respect to a plan that is eligible for, and corrected under, § VI.B.3 or § XI of this notice.

3. Section References

For purposes of §§ XII.A.1 and XII.A.2, a section of this notice refers to each separate section of this notice, such that §§ VI.A and VI.B are separate sections, and for service recipients includes any use of the transition relief in § IV.B.3 or § XI.”

F. To provide conforming relief with respect to the information to be provided to service providers upon use of the transition

2010–51 I.R.B. 856 December 20, 2010

in income to be eligible for relief under this notice, and that inclusion in income occurs in a year subsequent to the year the plan was corrected, the service provider must include the statement with the return for the year of the correction as well as the return for the year of income inclusion.”

H. To provide relief from the employee information reporting requirements upon the correction of an operational failure in the same taxable year as the failure occurs, § IX.A of Notice 2008–113 is modified to read as follows:

“A. Information Required with Respect to Correction of an Operational Failure in the Same Taxable Year as the Failure Occurs

A service recipient described in § IV of this notice must attach to its timely filed (including extensions) original federal income tax return for its taxable year in which the failure occurred a statement entitled “§ 409A Relief under IV of Notice 2008–113” stating that it is relying upon § IV of this notice with respect to a correction of a failure to comply with § 409A and setting out the following information with respect to each such failure:

1. The name and taxpayer identification number of each service provider affected by the failure and whether such service provider is an insider with respect to the service recipient. Where the same or a substantially similar operational failure has occurred with respect to multiple service providers, the information required in § IX.A.2 through 5 may be supplied only once with respect to such operational failure, provided that the identification of each service provider affected by the operational failure in this § IX.A.1 references such information and the amount involved in the operational failure with respect to such service provider.

2. Identification of the nonqualified deferred compensation plan with respect to which such failure occurred.

3. A brief description of the failure and the circumstances under which it occurred, including the amount involved and date on which the failure occurred.

4. A brief description of the steps taken to correct the failure and the date on which such correction was completed.

5. A statement that the operational failure is eligible for the correction under the

terms of this notice, and that the service recipient has taken all actions required, and otherwise met all requirements, for such correction.

In addition, each service recipient relying on the relief provided in § IV of this notice must make reasonable efforts to provide notice to the examining agent upon the commencement of an examination of the service recipient’s federal tax return that the service recipient was relying upon the relief provided under this notice for years covered by the examination.”

IV. EFFECTIVE DATE

Taxpayers may rely on this Notice 2010–80 for the modifications to Notice 2008–113 for taxable years beginning on or after January 1, 2010. Taxpayers may rely on this Notice 2010–80 for the modifications to Notice 2010–6 for taxable years beginning on or after January 1, 2009.

V. EFFECT ON OTHER DOCUMENTS

Notice 2008–113 and Notice 2010–6 are modified as provided in this notice. Except as explicitly provided, this notice does not otherwise affect the guidance provided in Notice 2010–6 and Notice 2008–113.

VI. DRAFTING INFORMATION

The principal author of this notice is Keith Ranta of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities), although other Treasury and IRS officials participated in its development. For further information on the provisions of this notice, contact Keith Ranta at (202) 927–9639 (not a toll-free number).

Tax Credit for Employee Health Insurance Expenses of Small Employers

Notice 2010–82

I. PURPOSE AND BACKGROUND

Section 45R of the Internal Revenue Code (Code) offers a tax credit to certain small employers that provide health insurance coverage to their employees. The

credit is available for taxable years beginning after December 31, 2009. Both taxable employers and employers that are organizations described in § 501(c) and exempt from tax under § 501(a) (tax-exempt employers) may be eligible for the § 45R credit. Employers that satisfy the requirements for the credit are referred to in this notice as “eligible small employers.”

Notice 2010–44, 2010–22 I.R.B. 717, provides guidance on § 45R as in effect for taxable years beginning before January 1, 2014, including transition relief for taxable years beginning in 2010 with respect to the requirements for a qualifying arrangement under § 45R. This notice expands on the guidance provided in Notice 2010–44 and provides guidance on additional issues relating to the small employer tax credit.

II. ISSUES RELATING TO EMPLOYER’S ELIGIBILITY FOR THE CREDIT

To be an eligible small employer: (1) the employer must have fewer than 25 full-time equivalent employees (FTEs) for the taxable year; (2) the average annual wages of its employees for the year must be less than $50,000 per FTE; and (3) the employer must maintain a “qualifying arrangement.” In general, a qualifying arrangement is an arrangement under which the employer pays premiums for each employee enrolled in health insurance coverage offered by the employer in an amount equal to a uniform percentage (not less than 50 percent) of the premium cost of the coverage.

A. Tax-Exempt Employers Not Described in § 501(c) and Exempt Under § 501(a)

Section 45R(f)(1) provides that the credit is available to a tax-exempt eligible small employer, defined in § 45R(f)(2) as “any organization described in § 501(c) which is exempt from taxation under § 501(a).” Tax-exempt organizations that are not both described in § 501(c) and exempt from taxation under § 501(a) are not eligible to claim the credit. However, a § 521 farmers cooperative that is subject to tax under § 1381 is eligible to claim the credit as a taxable employer, if it otherwise meets the definition of an eligible small employer.

December 20, 2010 857 2010–51 I.R.B.

for which the credit is being claimed are taken into account in computing an employer’s FTEs and annual average wages under § 45R, including, for example, former employees who terminated employment during the year for which the credit is being claimed, employees covered under a collective bargaining agreement, and employees who do not enroll in their employer’s health insurance plan (whether or not they are covered under another health insurance plan).

A minister performing services in the exercise of his or her ministry is treated as self-employed for Social Security and Medicare tax purposes. See §§ 1402(c)(2)(D) and 3121(b)(8)(A). However, for other tax purposes, including § 45R, whether a minister is an employee or self-employed is determined under the common law test for determining worker status. If, under the common law test, a minister is self-employed, the minister is not taken into account in determining an employer’s FTEs and premiums paid because § 45R(e)(A)(i) excludes a self-employed individual from the term “employee” for purposes of the credit. If, under the common law test, the minister is an employee, the minister is taken into account in determining an employer’s FTEs and premiums paid by the employer for the minister’s health insurance coverage can be taken into account in computing the credit, subject to limitations on the credit. (Note that, under § 45R(f)(1)(B), a tax-exempt employer’s § 45R credit cannot exceed the total of the tax-exempt eligible small employer’s income tax and Medicare tax withholding and its Medicare tax liability for the year). Because compensation of a minister performing services in the exercise of his or her ministry is not subject to Social Security or Medicare tax under the Federal Insurance Contributions Act (FICA), a minister has no wages as defined under § 3121(a) for purposes of computing an employer’s average annual wages.

C. Determining Average Annual Wages, Number of Hours Worked, and Number of FTEs

All wages (as defined under § 3121(a) but without regard to the wage base limitation under § 3121(a)) paid (including overtime pay) are taken into account in

B. Employers Not Engaged in a Trade or Business

The statute does not require that, in order for an employer to be an eligible small employer, the employees of the employer must be performing services in a trade or business. Thus, an employer that otherwise meets the requirements for the credit under § 45R for a taxable year beginning before January 1, 2014 does not fail to be an eligible small employer merely because the employees of the employer are not performing services in a trade or business. For example, a household employer that otherwise satisfies the requirements of § 45R is eligible for the credit.

C. Employers Located Outside the United States

For taxable years 2010 through 2013, an eligible small employer’s credit is based on premiums paid for health insurance coverage offered by a health insurance issuer, as described in § 9832(b)(1). Section 9832(b)(2) requires that an insurer be licensed to engage in the business of insurance in a State and that the insurer is subject to State law regulating insurance. For purposes of § 9832(b)(2) and § 45R, “State” is defined in § 7701(a)(10), and means the 50 States plus the District of Columbia. Therefore, an eligible small employer located outside the United States (including an employer located in a U.S. territory), which has income effectively connected with the conduct of a trade or business in the United States, may claim the § 45R credit only if it pays premiums for an employee’s health insurance coverage that is issued in and regulated by one of the 50 States or the District of Columbia. Similarly, a tax-exempt eligible small employer located outside the United States (including an employer located in a U.S. territory) would also be required to pay premiums for an employee’s health insurance coverage that is issued in and regulated by one of the 50 States or the District of Columbia in order to obtain the refundable credit described in § 45R(f).

III. OTHER ISSUES RELATING TO ELIGIBILITY FOR THE CREDIT

A. Determining Employees Taken Into Account — Spouses

Employees who perform services for the employer during the taxable year are taken into account in determining the employer’s FTEs, average wages, and premiums paid, with certain individuals excluded and with employees of certain related employers included. See section II.B of Notice 2010–44. Sole proprietors, partners in a partnership, shareholders owning more than two percent of the stock in an S corporation, and any owners of more than five percent of other businesses are not taken into account as employees for purposes of the credit. Family members of these owners and partners are also not taken into account as employees.

The definition of “family members” for purposes of § 45R does not specifically refer to spouses. However, spouses of certain business owners are excluded from being taken into account as employees by operation of the ownership attribution rules in the Code. Therefore, the following individuals also are not taken into account as employees for purposes of § 45R: (1) the employee-spouse of a shareholder owning more than two percent of the stock of an S corporation; (2) the employee-spouse of an owner of more than five percent of a business; (3) the employee-spouse of a partner owning more than a five percent interest in a partnership; and (4) the employee-spouse of a sole proprietor. See §§ 45R(e)(1)(A); 1372(b), 318, 416(i)(1)(B)(i).

B. Determining Employees Taken Into Account — Leased Employees and Others

Leased employees (as defined in § 414(n)) are counted in computing an employer’s FTEs and average annual wages. See § 45R(e)(1)(B). However, no provision of § 45R supports attributing to the service recipient the leasing organization’s payment of premiums. Therefore, premiums for health insurance coverage paid by a leasing organization for a leased employee are not taken into account by the service recipient in computing the service recipient’s § 45R credit.

Unless specifically excluded, all employees of the employer during the year

2010–51 I.R.B. 858 December 20, 2010

ance coverage provided under a qualifying arrangement under § 45R.

Multiemployer plans may provide welfare-type benefits in addition to health insurance, such as life insurance or short- or long-term disability benefits. Only the employer contributions to the multiemployer plan that are used to purchase health insurance for an employee are permitted to be taken into account in determining premium payments by the employer under § 45R. Thus, if amounts are contributed to a multiemployer plan for health insurance coverage and also for other benefits, the employer must allocate contributions among the benefits provided, and only the amount allocable to health insurance premiums applies in calculating the § 45R credit. An employer contributing to a multiemployer plan is permitted to rely on information provided by the plan to determine the amount of its contribution that is used to purchase health insurance.

F. Qualifying Arrangements - Church Welfare Benefit Plans

As noted above, for taxable years beginning prior to 2014, health insurance coverage for purposes of the credit means benefits consisting of medical care offered by a health insurance issuer, which is an entity licensed to engage in the business of insurance in a State, and which is subject to State law regulating insurance. See §§ 9832(b)(1) and 9832(b)(2). The Church Plan Parity and Entanglement Prevention Act of 1999 (CPPEPA), Pub. L. No. 106–244, clarifies the status of church welfare benefit plans providing medical benefits in the context of State insurance laws. Section 2(d) of CPPEPA provides that “[n]otwithstanding any other provision of this section, for purposes of enforcing provisions of State insurance laws that apply to a church plan that is a welfare plan, the church plan shall be subject to State enforcement as if the church plan were an insurer licensed by the State.” Thus, under § 2(d) of CPPEPA, a church welfare benefit plan is subject to State insurance law enforcement as if it were licensed as an insurance company. Section 2(e) of the CPPEPA provides that § 2 generally shall not be construed as recharacterizing the status, or modifying or affecting the rights, of any plan participant or beneficiary.

computing an employer’s average annual wages. Thus, for example, if an employee works more than 2,080 hours in a year, all wages paid to the employee, including wages for the hours in excess of 2,080, are taken into account in computing the employer’s average annual wages.

Notice 2010–44 provides three methods that employers are permitted to use for calculating employees’ hours of service for the taxable year: (1) counting actual hours worked; (2) using a days-worked equivalency; or (3) using a weeks-worked equivalency. Employers need not use the same method for all employees, but may apply different methods for different classifications of employees, if the classifications are reasonable and consistently applied. For example, an employer may use the actual hours worked method for all hourly employees and the weeks-worked equivalency method for all salaried employees. In addition, employers may change the method for calculating employees’ hours of service for each taxable year.

As explained in Notice 2010–44, the number of an employer’s FTEs is determined by dividing the total hours of service (but not more than 2,080 hours of service for any employee) by 2,080 hours. See § 45R(d)(2). The result, if not a whole number, is then rounded to the next lowest whole number. However, if, after dividing the total hours of service by 2,080, the resulting number is less than one, the employer rounds up to one FTE.

D. HSAs and Self-Insured Plans, including HRAs and FSAs, are not Qualifying Arrangements

An employer’s premium payments are not taken into account for purposes of the § 45R credit unless they are paid for health insurance coverage under a qualifying arrangement. A qualifying arrangement is an arrangement under which the employer pays premiums for each employee enrolled in health insurance coverage offered by the employer in an amount equal to a uniform percentage (not less than 50 percent) of the premium cost of the coverage. Under § 45R(g)(2)(B), for years prior to 2014, health insurance coverage for purposes of the credit is defined in § 9832(b)(1). Among the requirements of § 9832(b)(1) is that the coverage be offered by a health insurance issuer. A health

insurance issuer is defined in § 9832(b)(2) as an entity licensed to engage in the business of insurance in a State and which is subject to State law regulating insurance. See § 9832(b)(1) and section II.G of Notice 2010–44. Thus, an employer’s self-insured plan is not health insurance coverage for purposes of the credit and any employer contribution to such coverage is not a qualifying arrangement for purposes of § 45R.

Because Health Reimbursement Arrangements (HRAs) and health Flexible Spending Arrangements (health FSAs) are self-insured plans, these arrangements are not health insurance coverage. Health Savings Accounts (HSAs) (defined in § 223(d)(1)) are also not health insurance coverage. Thus, employer contributions to HRAs, health FSAs, or HSAs are not taken into account for purposes of the § 45R credit.

E. Multiemployer Health and Welfare Plans Providing Health Insurance Coverage

For purposes of the § 45R credit, contributions by an employer to a multiemployer plan that are used to pay premiums for health insurance coverage for employees covered by the multiemployer plan are treated as payment of health insurance premiums by the employer. Moreover, if 100 percent of the cost of coverage under the multiemployer plan is paid from nonelective employer contributions, and not by employees, each employer in the multiemployer plan is considered to be contributing a uniform percentage of 100 percent of the premium on behalf of each employee covered by the plan. Accordingly, an employer that is otherwise an eligible small employer and that contributes to a multiemployer plan that provides for insured health care coverage does not fail to satisfy the requirements for the § 45R credit merely because the insurance premiums are paid by the plan and not directly paid by the employer. In addition, the employer does not fail to be considered to be contributing a uniform percentage of the premium for each employee if 100 percent of the cost of coverage for all employees covered by the plan is paid through employer nonelective contributions. However, selfinsured health coverage provided through a multiemployer plan is not health insur

December 20, 2010 859 2010–51 I.R.B.

pensive tier of coverage that is the same for all employees and that is no less than the amount that the employer would have contributed toward self-only coverage for that employee. Alternatively, an employer that offers a tier of coverage that is more expensive than self-only coverage may satisfy the requirements of this paragraph (b) by meeting the requirements of paragraph (a) of this subsection G.2 for each tier of coverage that it offers.

(c) Employers offering one plan -selfonly coverage — list billing. An employer satisfies the requirements of this paragraph (c) if the employer either: (i) pays toward the premium an amount equal to a uniform percentage (not less than 50 percent) of the premium charged for each employee or (ii) converts the individual premiums for selfonly coverage into an employer-computed composite rate for self-only coverage, and, if an employee contribution is required, each employee who receives coverage under the plan pays a uniform amount toward the self-only premium that is no more than 50 percent of the employer-computed composite rate for self-only coverage.

(d) Employers offering one plan -other tiers of coverage - list billing. If an employer offers a tier of coverage that is more expensive than self-only coverage, the employer satisfies the requirements of this paragraph (d) by paying toward the premium for each employee covered under that tier of coverage an amount equal to the amount that the employer would have contributed with respect to that employee for self-only coverage, calculated either based upon the actual premium that would have been charged by the insurer for that employee for self-only coverage or based upon the employer-computed composite rate for self-only coverage. Alternatively, an employer that offers a tier of coverage that is more expensive than self-only coverage may satisfy the requirements of this paragraph (d) by meeting the requirements of paragraph (b) of this subsection G.2 for each tier of coverage that it offers and substituting the employer-computed composite rate for that tier of coverage for the employer-computed composite rate for self-only coverage.

3. Employers Offering More than One Plan. If an employer offers more than one health insurance plan ( i.e., more than one benefit package), the employer may satisfy

Pursuant to this notice, because a church welfare benefit plan is subject to State insurance law enforcement as if it were licensed under State law, it will be treated as satisfying the requirements for health insurance coverage for purposes of the § 45R credit. Therefore, for these purposes, an arrangement under which a small church employer pays premiums for employees who receive medical care provided through a church welfare benefit plan may be a qualifying arrangement and a small church employer paying for employees’ medical coverage under such a plan may be a tax-exempt eligible small employer. This treatment of church plan coverage as health insurance coverage applies solely for purposes of § 45R, which applies to the tax treatment of the employer but does not affect the rights of plan participants and beneficiaries.

G. Uniformity Requirement

To receive the tax credit, an eligible small employer must pay a uniform percentage (not less than 50 percent) of the premium for each employee enrolled in health insurance coverage offered by the employer. See § 45R(d)(4). Section V of Notice 2010–44 provides transition relief in applying the uniformity requirement for taxable years beginning in 2010. This section provides rules for applying the uniformity requirement in taxable years beginning after December 31, 2009 and prior to 2014. For taxable years beginning in 2010, an employer may satisfy the uniformity requirement either by meeting the requirements of this section or by meeting the requirements of Section V of Notice 2010–44.

1. Terminology Used in this Notice

For purposes of this notice: (a) Each benefits package is considered a separate health insurance plan. For example, an employer offers a single health insurance plan if the employer makes only one benefits package available to its employees.

(b) A health insurer that charges a uniform premium for each of the employer’s employees or that charges a single aggregate premium for the group of covered employees that the employer may then divide by the number of covered employees to de

termine the uniform premium is referred to as using “composite billing.”

(c) A health insurer that lists a separate premium for each employee based on the age of the employee or other factors is referred to as using “list billing.”

(d) A “tier” of coverage is coverage under a benefits package that varies only by the number of individuals covered. For example, self-only coverage, self plus one coverage, and family coverage would constitute three separate tiers of coverage.

(e) The “employer-computed composite rate” for a tier of coverage is the average rate determined by adding the premiums for that tier of coverage for all employees eligible to participate in the employer’s health insurance plan (whether or not they actually receive coverage under the plan or under that tier of coverage) and dividing by the total number of such eligible employees.

2. Employers Offering One Plan. An employer that offers a single health insurance plan will satisfy the uniformity requirement of section 45R if it satisfies the requirements of this subsection G.2. An employer whose health insurer uses composite billing must satisfy the requirements of paragraph (a) of this subsection G.2 with respect to self-only coverage under the plan. An employer whose health insurer uses list billing must satisfy the requirements of paragraph (c) of this subsection G.2 with respect to self-only coverage under the plan. If an employer offers a more expensive tier of coverage than single coverage, it must also satisfy paragraph (b) of this subsection G.2 with respect to each such more expensive tier if its insurer uses composite billing and paragraph (d) of this subsection G.2 if its insurer uses list billing.

(a) Employers offering one plan -Selfonly coverage - composite billing. An employer satisfies the requirements of this paragraph (a) if it pays the same amount toward the premium for each employee receiving self-only coverage under the plan, so long as that amount is equal to at least 50 percent of the self-only premium. (b) Employers offering one plan -other tiers of coverage - composite billing. If an employer offers a tier of coverage that is more expensive than self-only coverage, the employer satisfies the requirements of this paragraph (b) if it pays an amount for each employee enrolled in that more ex

2010–51 I.R.B. 860 December 20, 2010

the uniformity requirement in either of two ways:

(a) The employer’s payments toward the premium with respect to each plan for which the employer is claiming the credit satisfy subsection G.2 on a plan-by-plan basis. The amounts or percentages of premium paid by the employer for each plan need not be identical, so long as the payments with respect to each plan satisfy subsection G.2, or

(b) If the requirements of subsection G.4 are satisfied, the employer may designate a “reference plan” and make employer contributions in accordance with the following requirements:

(i) The employer determines a level of employer contributions for each employee such that, if all eligible employees enrolled in the reference plan, the contributions would satisfy subsection G.2.

(ii) The employer allows each employee to apply the amount determined under (i) of this paragraph (b) either toward the reference plan or toward the cost of coverage under any of the other available plans.

4. Anti-abuse rule for employers offering more than one plan and using reference plan. The requirements of this subsection G.4 are satisfied if the self-only composite rate for the reference plan is at least 66 percent of the self-only composite rate for each non-reference plan with respect to which the employer claims the credit. For purposes of this paragraph, the self-only composite rate is, in the case of a plan with composite billing, the rate actually charged by the health insurance issuer for self-only coverage, and, in the case of a plan with list billing, the employer-computed composite rate for self-only coverage.

Example 1. (i) In 2011, Employer offers one health insurance plan, Plan A. The premiums for Plan A are $5,000 per year for self-only coverage, and $10,000 for family coverage. Employees can elect self-only or family coverage under Plan A.

(ii) Employer pays $3,000 (60% of the premium) toward self-only coverage under Plan A and $6,000 (60% of the premium) toward family coverage under Plan A.

(iii) Employer’s contributions of 60% of the premium for each tier of coverage satisfy the uniformity requirement in § 45R(d)(4).

Example 2. (i) Same facts as Example 1, except that Employer pays $3,000 (60% of the premium) for each employee electing self-only coverage under Plan A and pays $3,000 (30% of the premium) for each employee electing family coverage under Plan A.

(ii) Employer’s contributions of 60% of the premium toward self-only coverage and the same dollar amount toward the premium for family coverage satisfy the uniformity requirement in § 45R(d)(4).

Example 3. (i) In 2011, Employer offers two health insurance plans, Plan A and Plan B, both of which use composite billing. The premiums for Plan A are $5,000 per year for self-only coverage and $10,000 for family coverage. The premiums for Plan B are $7,000 per year for self-only coverage and $13,000 for family coverage. Employees can elect self-only or family coverage under either Plan A or Plan B.

(ii) Employer pays $3,000 (60% of the premium) for each employee electing self-only coverage under Plan A, $3,000 (30% of the premium) for each employee electing family coverage under Plan A, $3,500 (50% of the premium) for each employee electing self-only coverage under Plan B, and $3,500 (27% of the premium) for each employee electing family coverage under Plan B.

(ii) Employer’s contributions of 60% of the premiums for self-only coverage and the same dollar amounts toward the premium for family coverage under Plan A, and of 50% of the premium for self-only of coverage and the same dollar amount toward the premium for family coverage under Plan B, satisfy the uniformity rule on a plan-by-plan basis; therefore the employer’s contributions to both plans satisfy the uniformity requirement in § 45R(d)(4).

Example 4. (i) Same facts as Example 3, except that Employer designates Plan A as the reference plan. Employer pays $2,500 (50% of the premium) for each employee electing self-only coverage under Plan A and pays $2,500 of the premium for each employee electing family coverage under Plan A or either self-only or family coverage under Plan B.

(iii) The self-only composite rate for Plan A ($5,000) is greater than 66% of the self-only composite rate for Plan B ($7,000). ($5,000 ÷ $7,000 = 71%). (iv) Employer’s contribution of $2,500 toward the premium of each employee enrolled under Plan A or Plan B satisfies the uniformity requirement in § 45R(d)(4).

Example 5. (i) Same facts as Example 4, except that the self-only composite rate for Plan B is $8,000.

(ii) The self-only composite rate for Plan A ($5,000) is less than 66% of the self-only composite rate for Plan B ($8,000). ($5,000 ÷ $8,000 = 63%). Accordingly, Employer may not designate Plan A as the reference plan. The Employer’s contribution of $2,500 toward the premium of each employee enrolled under Plan B fails to satisfy the uniformity requirement in § 45R(d)(4) and the Employer is not eligible for a credit with respect to the premiums paid for Plan B. However, the Employer’s contribution of $2,500 toward the premium of each employee enrolled under Plan A satisfies the uniformity requirement in § 45R(d)(4) and, accordingly, if the other requirements of section 45R are satisfied, the Employer may receive a credit with respect to its contributions to Plan A.

Example 6. (i) For the 2011 taxable year, Employer receives a list billing premium quote from Health Insurance Issuer W for health insurance coverage for each of Employer’s four employees.

(ii) For Employee L, age 20, the self-only premium is $3,000 per year, and the family premium is

$8,000. For Employees M, N and O, each age, 40, the self-only premium is $5,000 per year and the family premium is $10,000.

(iii) The total self-only premium for the four employees is $18,000 ($3,000 + (3 x $5,000)). Employer calculates a employer-computed composite self-only rate of $4,500 ($18,000 ÷ 4).

(iii) Employer offers to make contributions such that each employee would need to pay $2,000 of the premium for self-only coverage. Under this arrangement, Employer would contribute $1,000 toward selfonly coverage for L and $3,000 toward self-only coverage for M, N, and O. In the event an employee elects family coverage, Employer would make the same contribution ($1,000 for L or $3,000 for M, N, or O) toward the family premium.

(v) Employer satisfies the uniformity requirement in § 45R(d)(4), because it offers and makes contributions based on an employer-calculated composite self-only rate such that, to receive self-only coverage, each employee must pay a uniform amount which is not more than 50 percent of the composite rate, and it allows employees to use the same employer contributions toward family coverage.

Example 7. (i) Same facts as Example 6, except that Employer calculates a employer-computed composite family rate of $9,500 (($8,000 + (3 x $10,000)) ÷ 4) and requires each employee to pay $4,000 of the premium for family coverage.

(ii) Employer satisfies the uniformity requirement in § 45R(d)(4), because it offers and makes contributions based on a calculated self-only and family rate such that, to receive either self-only or family coverage, each employee must pay a uniform amount which is not more than 50 percent of the composite rate for coverage of that tier.

Example 8. (i) Same facts as Example 6, except that Employer also receives a list billing premium quote from Health Insurance Issuer X for health insurance coverage for each of Employer’s four employees, in addition to the list billing premium quote from Health Insurance Issuer W.

(ii) Health Insurance Issuer X’s quote for Employee L, age 20, is $4,000 per year for self-only coverage or $12,000 per year for family coverage. For Employees M, N and O, each age 40, the premium is $7,000 per year for self-only coverage or $15,000 per year for family coverage.

(iii) The total self-only premium under Plan X is $25,000 ($4,000 + (3 x $7,000). The employer-computed composite self-only rate is $6,250 ($25,000 ÷ 4). (iv) Employer designates Health Insurance Issuer W’s health care coverage as the reference plan.

(v) Employer offers to make contributions based on the employer-calculated composite premium for the reference plan (Plan W) such that each employee has to contribute $2,000 to receive self-only coverage through Plan W. Under this arrangement, Employer would contribute $1,000 toward self-only coverage for L and $3,000 toward self-only coverage for M, N, and O. In the event an employee elects family coverage through Plan W or either self-only or family coverage through Plan X, Employer would make the same contribution ($1,000 for L or $3,000 for M, N, or O) toward that coverage.

(vi) The self-only composite rate for Plan W ($4,500) is at least 66% of the self-only composite rate for Plan X ($6,250). ($4,500 ÷ $6,250 = 72%).

December 20, 2010 861 2010–51 I.R.B.

Funding Relief For Multiemployer Defined Benefit Plans Under PRA 2010

Notice 2010–83

I. PURPOSE

This notice provides guidance in the form of questions and answers for sponsors of multiemployer defined benefit plans with respect to the special funding rules under § 431(b)(8), as added by section 211(a)(2) of the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (PRA 2010), Pub. L. No. 111–192.

II. BACKGROUND

Section 412 contains minimum funding rules that generally apply to pension plans. Section 431 sets forth the funding rules that apply specifically to multiemployer defined benefit plans. Section 432 sets forth additional rules that apply to multiemployer plans in effect on July 16, 2006, that are in endangered or critical status.

Section 431 provides rules for determining, based on charges and credits to the plan’s funding standard account, the minimum contribution that must be made to a multiemployer defined benefit plan in order to satisfy the funding requirements under § 412. Under § 431(b)(2)(B)(iii) and (b)(3)(B)(ii), net experience losses and gains are amortized by charges (in the case of losses) and credits (in the case of gains) in equal annual installments over 15 plan years.

Section 431(b)(8), added to the Code by section 211(a)(2) of PRA 2010, provides two special funding rules available to multiemployer plans, a special amortization rule in § 431(b)(8)(A) and a special asset valuation rule in § 431(b)(8)(B).

Section 431(b)(8)(A) provides a special amortization rule for certain net investment losses in the case of a multiemployer plan that meets a solvency test. The special rule applies to the portion of the plan’s experience loss or gain for a plan year attributable to net investment losses (if any) incurred in either or both of the first two plan years ending after August 31, 2008 (an eligible loss year). This portion of the experience loss or gain may be treated as an item

(vii) Employer satisfies the uniformity requirement in § 45R(d)(4), because it offers and makes contributions based on the employer-calculated composite self-only premium for the Plan W reference plan such that, in order to receive self-only coverage, each employee must pay a uniform amount which is not more than 50 percent of the self-only composite premium of the reference plan; it allows employees to use the same employer contributions toward family coverage in the reference plan or coverage through another plans; and the self-only composite rate for the reference plan is at least 66% of the self-only composite rate for the non-reference plan.

Section 45R does not impose a coverage requirement (although, other provisions of the Code, such as § 105(h), may impose coverage requirements on the health plan).

IV. ISSUES RELATING TO CALCULATING THE CREDIT

A. Small Group Market — Employees in Multiple States

Under § 45R(b)(2), the credit is limited by the average premium for the small group market in the State (or area within the State) in which the employee enrolls for coverage. See Rev. Rul. 2010–13, 2010–21 I.R.B. 691, for average State premiums for the taxable year beginning after December 31, 2009. If an employer has employees in multiple States, the employer applies the average premium for the small group market in the State (or area within the State) separately for each employee using the average State premium for the State in which the employee works.

B. Application of Average Premium Cap

Under § 45R(b)(2) and 45R(g)(2)(c), the amount of an employer’s premium payments that are taken into account in calculating the credit is limited to the premium payments the employer would have made under the same arrangement if the average premium for the small group market in the State (or an area within the State) in which the employer offers coverage were substituted for the actual premium. See Notice 2010–44 for additional detail. Rev. Rul. 2010–13, 2010–21 I.R.B. 691 lists the applicable average premium for self-only and family plans in the small group market in each State for the 2010 taxable year. For purposes of this calculation, the cap that is used for each employee (be it self-only or family) depends on the coverage the

employee takes. This is not affected by whether the employer’s contribution for that employee is determined with reference to the self-only plan, or whether an employer satisfies the uniformity requirement in § 45R(d)(4) by paying an amount equal to at least 50 percent of the premium for self-only coverage.

Example 9. (i) In 2011, Employer offers one health insurance plan, Plan X. The premiums for Plan X are $4,000 per year for self-only coverage, and $6,000 for family coverage.

(ii) Employer pays 50% of the premiums ($2,000) for each employee electing self-only coverage and pays $2,000 for each employee electing family coverage.

(iii) $2,000 is 50% of the premium for self-only coverage and 33% of the premium for family coverage.

(iv) For employees electing self-only coverage, the limitation to the average State premium for the small group market is 50% of the premium for self-only coverage, and for employees electing family coverage, the limitation to the average State premium for the small group market is 33% of the premium for family coverage.

C. Taxpayers With Fiscal Taxable Years

Section 45R is effective for taxable years beginning after December 31, 2009. If a taxpayer is a calendar year taxpayer, the § 45R credit first applies for the taxable year beginning on January 1, 2010 and ending on December 31, 2010. If the taxpayer is a fiscal year taxpayer with a taxable year beginning, for example, on July 1, 2010, the § 45R credit first applies for the taxable year beginning on July 1, 2010 and ending on June 30, 2011.

EFFECT ON OTHER DOCUMENTS

Notice 2010–44, 2010–22 I.R.B. 717, is amplified.

EFFECTIVE DATE

Section 45R is effective for taxable years beginning after December 31, 2009.

DRAFTING INFORMATION

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

2010–51 I.R.B. 862 December 20, 2010

cause of the changes described above and the changes will be deemed approved by the Secretary.

If the special amortization rule and the special asset valuation rule both apply for any plan year, the plan is required to treat any reduction in the plan’s unfunded accrued liability resulting from the application of the special asset valuation rule as a separate experience amortization base. This separate base is amortized in equal annual installments (until fully amortized) over a period of 30 plan years, rather than the period over which the reduction in unfunded accrued liability would otherwise be amortized.

PRA 2010 also added § 431(b)(8)(C), (D), and (E). Section 431(b)(8)(C) describes the solvency test that a multiemployer plan must meet in order for either or both of the special funding rules to apply. The solvency test is met only if the plan actuary certifies that the plan is projected to have sufficient assets to timely pay expected benefits and anticipated expenditures over the amortization period, taking into account the changes in the funding standard account under § 431(b)(8).

Under § 431(b)(8)(D), if either or both of the special funding rules apply for any plan year, a special restriction on benefit increases applies in addition to any other applicable restrictions on benefit increases. Under the special restriction, a plan amendment increasing benefits may not go into effect during either of the two plan years immediately following that plan year unless (1) the plan actuary certifies that the increase is paid for out of additional contributions not allocated to the plan immediately before the plan’s application of the special amortization rule or the special asset valuation rule and that the plan’s funded percentage and projected credit balances for those two plan years are reasonably expected to be at least as high as they would have been if the benefit increase had not been adopted, or (2) the amendment is required as a condition of qualification under the Code or to comply with other applicable law.

Under § 431(b)(8)(E), the plan sponsor of a multiemployer plan to which either or both of the special funding rules apply must give notice of application of the special rules to plan participants and beneficiaries. In addition, the plan sponsor must inform the Pension Benefit Guaranty

separate from other experience losses, to be amortized in equal annual installments (until fully amortized) over the period beginning with the plan year in which such portion is first recognized in the actuarial value of assets and ending with the last plan year in the 30-plan-year period beginning with the eligible loss year.

For this purpose, net investment losses are determined in the manner prescribed by the Secretary on the basis of the difference between actual and expected returns, including any difference attributable to any criminally fraudulent investment arrangement. The determination as to whether an arrangement is a criminally fraudulent investment arrangement is made under rules substantially similar to the rules prescribed by the Secretary for purposes of § 165.

Section 431(d) provides for the extension of certain amortization periods applicable under § 431. Under § 431(b)(8)(A)(ii)(I), the amortization period under the special amortization rule cannot be further extended under § 431(d). In addition, if an extension of an amortization period was granted under § 431(d) for any plan year before a decision to apply the special amortization rule for the plan year, that extension cannot result in the amortization period under the special amortization rule exceeding 30 years.

Under § 431(c)(2)(A), for purposes of the minimum funding rules, the value of a plan’s assets must be determined on the basis of any reasonable asset valuation method that takes into account fair market value and is permitted under regulations prescribed by the Secretary. Section 1.412(c)(2)–1(b)(6) of the Income Tax Regulations establishes a corridor for the actuarial value of plan assets, under which the actuarial value generally cannot be less than 80 percent or more than 120 percent of fair market value. If the plan’s asset valuation method would result in an actuarial value outside the corridor, the actuarial value must be adjusted to be within the corridor.

Section 1.412(c)(1)–2 permits a collectively bargained plan to use a shortfall funding method that adapts a plan’s underlying funding method for purposes of the minimum funding rules. If a multiemployer plan uses the shortfall method, § 1.412(c)(1)–2(h) provides special rules for the amortization of any net experience gains or losses under which the amortiza

tion charges and credits with respect to the gain or loss are deferred until the earlier of (1) the fifth plan year following the plan year in which the gain or loss arose, or (2) the first plan year beginning after the latest scheduled expiration date of a contract in effect during the plan year in which the net experience gain or loss arose. In such a case, the net experience gain or loss is increased with interest until the first year of the amortization charge or credit and the amortization period is shortened so that it ends with the same year that would apply in the absence of the shortfall method.

Rev. Proc. 2000–40, 2000–2 C.B. 357, provides for certain changes that can be made in a plan’s funding method (including a plan’s asset valuation method) that are automatically approved by the Service. An asset valuation method that recognizes gains and losses in the value of plan assets over a period of more than five plan years is not eligible for automatic approval. Under Rev. Proc. 2000–40, any change in unfunded accrued liability resulting from a change in funding method is amortized over a period of 10 years. Rev. Proc. 2000–41, 2000–2 C.B. 371, provides procedures for obtaining Service approval of a change in funding method that is not eligible for automatic approval. Section 5 of Rev. Proc. 2000–41 provides a procedure for a funding method change “class ruling,” i.e., a ruling that approves an identical change in funding method for more than 40 plans receiving actuarial services from the same insurance company or consulting firm.

Section 431(b)(8)(B) provides a special asset valuation rule in the case of a multiemployer plan that meets a solvency test. The special rule permits a multiemployer plan to change its asset valuation method in a manner that (1) spreads the difference between expected returns and actual returns for either or both of the eligible loss years over a period of not more than 10 years, (2) provides that, for either or both of the first two plan years beginning after August 31, 2008, the value of plan assets at any time is not permitted to be less than 80 percent or greater than 130 percent of the fair market value of the assets at that time, or (3) provides for both (1) and (2). Section 431(b)(8)(B)(ii) provides that, if the special asset valuation rule applies, the Secretary will not treat the plan’s asset valuation method as unreasonable solely be

December 20, 2010 863 2010–51 I.R.B.

Corporation (PBGC) of the application of the special funding rules in such form and manner as the Director of the PBGC may prescribe.

Under section 211(b) of PRA 2010, § 431(b)(8) takes effect as of the first day of the first plan year ending after August 31, 2008. However, if the application of the special funding rules affects the plan’s funding standard account for the first plan year beginning after August 31, 2008, application of the special funding rules is disregarded for purposes of applying § 432 (and § 305 of the Employee Retirement Income Security Act of 1974, as amended (ERISA)), relating to multiemployer plans in endangered or critical status. In addition,

the restriction on plan amendments under § 431(b)(8)(D) is effective on June 25, 2010, the date of the enactment of PRA 2010.

Section 304(b)(8) of ERISA, added to ERISA by section 211(a)(1) of PRA 2010, is parallel to § 431(b)(8). Under section 101 of Reorganization Plan No. 4 of 1978 (43 FR 47713), the Secretary of Treasury has interpretive jurisdiction over the subject matter of this notice for purposes of ERISA as well as the Code. Thus, this notice applies to the provisions of § 304(b)(8) of ERISA as well as the Code.

Notice 2010–56, 2010–33 I.R.B. 254, states that the Service expects to issue future guidance on the special funding rules under PRA 2010 for multiemployer plans.

A – Extended Amortization Period for Eligible Net Investment Losses V - Asset Valuation Rules S - Solvency Test R – Restrictions on Plan Amendments Increasing Benefits D – Decision to Apply the Special Funding Rules N – Notification to Participants, Beneficiaries, and the PBGC C – Certification of Status under § 432 F – Form 5500 Requirements

Notice 2010–56 also states that in the case of a plan year that ends before the guidance is issued, the special rules may be applied without regard to whether the Form 5500 (and Schedule MB) has been filed for that plan year. This notice constitutes the guidance anticipated in Notice 2010–56.

III. QUESTIONS AND ANSWERS

The following questions and answers address issues relating to the special amortization rule and special asset valuation rule under § 431(b)(8), using the following designations to indicate the topic addressed.

which a loss would be treated as a theft loss under § 165 if § 165 applied.

Q A–3. If a plan has a net experience loss for a recognition year (i.e., a plan year in which a portion of an eligible net investment loss is recognized in the value of plan assets), how does the special amortization rule in § 431(b)(8)(A) affect the treatment of the portion of that loss that is attributable to an eligible net investment loss?

A A–3. If a plan has a net experience loss for a recognition year and the special amortization rule under § 431(b)(8)(A) applies, the net experience loss is bifurcated into the portion attributable to the eligible net investment loss (as determined under Q&A A–5) and the portion not attributable to the eligible net investment loss ( i.e., the portion attributable to other gains or losses).

A separate amortization base is established for the portion attributable to the eligible net investment loss, and that portion is amortized over the period beginning with the recognition year and ending with the last plan year in the 30-plan-year period beginning with the eligible loss year. Thus, if a plan uses a valuation date of the first day of the plan year, so that a por

A. Extended Amortization Period for Eligible Net Investment Losses

Q A–1. For purposes of the special amortization rule in § 431(b)(8)(A), how is the net investment loss incurred in an eligible loss year determined?

A A–1. Except as otherwise provided in this Q&A A–1, if the valuation date for a plan is either the first day of the plan year or the last day of the plan year, then the net investment loss incurred in an eligible loss year (an eligible net investment loss) is equal to the excess of the expected market value of plan assets as of the end of the eligible loss year over the market value of the assets as of that date, including any difference attributable to a criminally fraudulent investment arrangement. For this purpose, the expected market value of plan assets as of the end of the eligible loss year is equal to (1) the market value of plan assets at the beginning of the eligible loss year, plus (2) contributions made during the eligible loss year, minus (3) disbursements made during the eligible loss year, with all such amounts adjusted to the end of the eligible loss year with interest at the plan’s valuation rate for the plan year.

However, if the determination of the actuarial value of assets under the plan’s asset valuation method involves a calculation of the difference between the actual return for the plan year (determined on a market value basis) and the expected return on the actuarial value of assets for the plan year, then the eligible net investment loss for the plan year is equal to that actual return minus the expected return.

If the valuation date for a plan year is neither the first day of the plan year nor the last day of the plan year, the calculation of the eligible net investment loss for the plan year is made as of the valuation date, based on the difference between the actual return (determined on a market value basis as of the valuation date) and the expected return (based on either market or actuarial value, as the case may be, as of the valuation date for the prior year).

Q A–2. For purposes of determining an eligible net investment loss, what is a criminally fraudulent investment arrangement?

A A–2. For purposes of determining an eligible net investment loss, a criminally fraudulent investment arrangement is an investment arrangement with respect to

2010–51 I.R.B. 864 December 20, 2010

tion of an eligible net investment loss is first recognized in the actuarial value of assets for the plan year after the eligible loss year, the amortization period for that portion is the 29-plan-year period beginning with that recognition year.

The portion of the net experience loss that is not attributable to the eligible net investment loss is amortized over 15 plan years, as provided in § 431(b)(2)(B)(iii). Thus, if the net experience loss for a plan year exceeds the amount attributable to the eligible net investment loss, then the balance of the net experience loss ( i.e., the amount by which the net experience loss exceeds the amount attributable to the eligible net investment loss) is amortized over 15 plan years.

The establishment of a special amortization period for the portion of the net experience loss attributable to the eligible net investment loss continues for each plan year that the plan applies the provisions of § 431(b)(8)(A) and without regard to whether the portion of the eligible net investment loss recognized in a plan year is a positive or negative number. For example, if, as a result of the application of the requirement that the actuarial value of assets not exceed 120 percent of market value, the portion of the eligible net investment loss that is recognized in the actuarial value of plan assets for the first recognition year exceeds the combined portions that would otherwise be recognized for the first and second recognition years, then the portion of the eligible net investment loss that is recognized in the second year’s actuarial

value of assets could instead be an actuarial gain. In such a case, the gain would be recognized over 28 plan years. However, in that case, the plan sponsor could decide to no longer apply the special amortization rule. See Q&A A–8 and Q&A D–3.

See Q&A A–4 for the rules that apply if the net experience loss for a plan year is less than the amount attributable to the eligible net investment loss, if the amount attributable to the eligible net investment loss that is recognized in a recognition year is an actuarial gain, or if there is an overall experience gain for the plan year.

Q A–4. What is the appropriate treatment with respect to a plan year for which the special amortization rule applies, if the net experience loss for the plan year is less than the amount attributable to the eligible net investment loss, if the amount attributable to the eligible net investment loss is an actuarial gain, or if there is an overall experience gain for the plan year?

A A–4. In any of these cases, in lieu of the bifurcation described in Q&A A–3, two amortization bases are established. The initial balance of the first base (which can be a gain base or a loss base) is the amount attributable to the eligible net investment loss, and that base is amortized over the extended period described in Q&A A–3. The initial balance of the second base (which can also be a gain base or a loss base) is the amount that, when combined with the initial balance of the first base, equals the plan’s net experience gain or loss for that plan year, and that base is amortized over 15 plan years.

For instance, if the amount attributable to an eligible net investment loss is an actuarial loss that exceeds the net experience loss for the plan year, then the amount attributable to the eligible net investment loss is amortized over the extended period described in Q&A A–3 and an offsetting gain base equal to the excess is established and amortized over 15 plan years. Similarly, if there is an overall experience gain for the plan year and the amount attributable to an eligible net investment loss is an actuarial loss, then the amount attributable to the eligible net investment loss is amortized over the extended period described in Q&A A–3, and an offsetting gain base equal to the sum of that amount and the amount of the overall experience gain is established and amortized over 15 plan years.

The following examples illustrate the application of the rules in Q&A A–3 and Q&A A–4:

Example (1) Assume that the sponsor of a multiemployer plan that uses the calendar year as its plan year and a beginning of year valuation date decides to apply the special amortization rule in § 431(b)(8)(A) in order to extend the amortization period for the eligible net investment loss of $1,000,000 incurred in the 2008 plan year. The valuation interest rate for the plan is 7 percent. The plan has a net experience loss in 2010 that is first reflected in the January 1, 2011, valuation that exceeds the portion attributable to the 2008 eligible net investment loss, as shown in the table below:

The combined amortization charges are $50,197 annually for the first 15 plan years ( i.e., $3,509 plus $46,688), and $3,509 annually for the succeeding 12 plan years. This results in a reduction in amortization charges of $1,109 ( i.e., $51,306 – $50,197) during those first 15 plan years and an increase in amortization charges of $3,509

Under § 431(b)(2)(B)(iii), amortization of the experience loss of $500,000 would be over 15 plan years at $51,306 per year ( i.e., $500,000/9.745468). Under the special amortization rule, the net experience loss of $500,000 is bifurcated into two pieces: (a) the portion attributable to the 2008 eligible net investment loss, resulting

in an amortization charge base of $45,000, amortized over 27 plan years at $3,509 per year ( i.e., $45,000/12.825779), plus (b) the remaining loss, resulting in an amortization charge base of $455,000 amortized over 15 plan years at $46,688 per year ( i.e., $455,000/9.745468).

December 20, 2010 865 2010–51 I.R.B.

year. For this purpose, the reconstructed hypothetical value of plan assets is the value that would have resulted under the plan’s asset valuation method if the plan had earned the expected rate of return for the eligible loss year and actual rates of return for any subsequent years. Based on this determination, the accumulated recognized eligible loss (as defined in the preceding paragraph) is determined as of the valuation date for the future plan year as the reconstructed hypothetical value of plan assets minus the actuarial value of plan assets as of that date. The portion of the eligible net investment loss that is recognized for that future year is (1) the accumulated recognized eligible loss for that future year, minus (2) the accumulated recognized eligible loss for the plan year immediately preceding that future year.

In either case, if the determination of actuarial value of assets under the plan’s asset valuation method requires distinguishing between realized or unrealized appreciation and other types of investment return (such as the average value described in § 1.412(c)(2)–1(b)(8)), then the hypothetical value of plan assets, the projected hypothetical value of plan assets, the projected actuarial value of plan assets, and the reconstructed hypothetical value of plan assets are determined by assuming that the expected rate of return for the relevant plan year did not include any realized or unrealized appreciation.

The following example illustrates the application of the rules in Q&A A–5:

Example (a) A multiemployer plan with a calendar year plan year and a beginning of year valuation date determines the actuarial value of assets by spreading the difference between actual and expected investment return on a level basis over five years (as described in approval 15 of Rev. Proc. 2000–40), subject to the limitation that the actuarial value of assets be no less than 80 percent of fair market value and no greater than 120 percent of fair market value. The market value of assets as of January 1, 2008, is $150. The valuation interest rate used for all years after 2007 is 7 percent, although the actual rate of return on a market value basis for 2008 was -25 percent. The difference between expected and actual return for past years is

per year for each of those succeeding 12 plan years, as contrasted with the schedule of charges under § 431(b)(2)(B)(iii).

Example (2) The facts are the same as in Example (1), except that the plan has a net experience loss in 2010 of $30,000 that is first reflected in the January 1, 2011, actuarial valuation.

Under § 431(b)(2)(B)(iii), amortization of the net experience loss of $30,000 would be over 15 plan years at $3,078 per year ( i.e., $30,000/9.745468). Under the special amortization rule, the experience loss of $30,000 is bifurcated into two pieces: (a) the portion attributable to the 2008 eligible net investment loss, resulting in an amortization charge base of $45,000, amortized over 27 plan years at $3,509 per year ( i.e., $45,000/12.825779), plus (b) an offsetting gain base, resulting in an amortization credit base of $15,000 amortized over 15 plan years at $1,539 per year ( i.e., $15,000/9.745468).

Example (3) The facts are the same as in Example (1), except that the plan has a net experience gain in 2010 of $100,000 that is first reflected in the January 1, 2011, actuarial valuation.

Under § 431(b)(3)(B)(ii), amortization of the net experience gain of $100,000 would be over 15 plan years at $10,261 per year ( i.e., $100,000/9.745468). Under the special amortization rule, the experience gain of $100,000 is bifurcated into two pieces: (a) the portion attributable to the 2008 eligible net investment loss, resulting in an amortization charge base of $45,000, amortized over 27 plan years at $3,509 per year ( i.e., $45,000/12.825779), plus (b) an offsetting gain base, resulting in an amortization credit base of $145,000 amortized over 15 plan years at $14,879 per year ( i.e., $145,000/9.745468).

Q A–5. How is the portion of the net experience gain or loss for a recognition year that is attributable to an eligible net investment loss determined?

A A–5. The portion of the net experience loss or gain for a recognition year that is attributable to an eligible net investment loss is permitted to be determined under either the prospective or retrospective method described in this Q&A A–5. Whichever method is chosen becomes part of the plan’s funding method and can only be changed with the consent of the Commissioner.

Under the prospective method, the portion of an eligible net investment loss that is recognized for the first recognition year and for each future plan year is fixed as of the first recognition year, based on a projection of asset values. Specifically, the amount of an eligible net investment loss that is recognized in the first recognition year is the hypothetical value of plan assets as of the valuation date for that plan year minus the actuarial value of plan assets as of that date. For this purpose, the hypothetical value of plan assets is the value that would have resulted under the plan’s asset valuation method if the plan had earned the expected rate of return for the eligible loss year.

In order to determine the portion of an eligible net investment loss that is to be recognized in any future recognition year, the hypothetical value of plan assets and the actuarial value of plan assets must be projected to that future year assuming that the plan assets earn the expected rate of return for all future years and based on a reasonable projection of future contributions and distributions. Based on this projection, the accumulated portion of the eligible net investment loss recognized as of the valuation date for a future plan year (the accumulated recognized eligible loss) is determined as the projected hypothetical value of plan assets minus the projected actuarial value of plan assets as of that date. The portion of the eligible net investment loss that is recognized for that future year is (1) the accumulated recognized eligible loss for that future year, minus (2) the accumulated recognized eligible loss for the plan year immediately preceding that future year.

Under the retrospective method, the portion of an eligible net investment loss that is recognized for any recognition year ( i.e., the first recognition year or any later recognition year) is determined as of the valuation date for the relevant recognition year, taking into account actual rates of return since the eligible loss year. The portion of an eligible net investment loss that is recognized in the first recognition year is the same as under the prospective method. For a recognition year after the first recognition year, a reconstructed hypothetical value of plan assets is determined for that year which is then compared with the actuarial value of plan assets for that

2010–51 I.R.B. 866 December 20, 2010

For 2008, contributions and disbursements, increased with interest at the expected rate through the end of the plan

year, are $10 and $9, respectively. As of January 1, 2009, projected contributions and disbursements, increased with interest

at the expected rate through the end of each plan year is

uary 1, 2010, is projected to be $123.45

[($113.50 - 1.07) + $12 - $10] and there is projected to be no difference between actual and expected returns for 2009.

the plan, the actuarial value of assets at January 1, 2010, prior to applying the 80/120 percent corridor is projected to be $153.25 [$123.45 + (20% - $15) (40% - $5) + (60% - $48) + (80% $0)]. After applying the 80/120 percent corridor, the actuarial value of assets is projected to be $148.14 (120% of $123.45).

of return during 2008, the market value of assets as of January 1, 2010, would have been projected to be $174.81

[($161.50 * 1.07) + $12 - $10].

the plan, the actuarial value of assets at January 1, 2010, prior to applying the 80/120 percent corridor would have been $175.81 [$174.81 + (20% * $15)

• (40% - $5) + (60% - $0) + (80% $0)]. After applying the 80/120 percent corridor the actuarial value of assets would have been $175.81.

loss as of the January 1, 2010, valuation date is $27.67 (the difference between the projected hypothetical value of assets ($175.81) and the projected actuarial value of assets ($148.14)).

(b) The expected market value of assets as of the end of 2008 is $161.50 [($150 1.07) + $10 - $9]. (c) The net investment loss for 2008 is $48 (determined as the expected market value as of the end of 2008 ($161.50) minus the actual market value as of the end of 2008 ($113.50)) and the plan sponsor has decided to apply the special amortization rule of § 431(b)(8)(A) to that eligible net investment loss.

(d) Under the asset valuation method for the plan, the actuarial value of assets on January 1, 2009, prior to applying the 80/120 percent corridor is $150.90

[$113.50 - (20% - $20) + (40% - $15)

• (60% - $5) + (80% - $48)]. After applying the 80/120 percent corridor, the actuarial value of assets is $136.20 (120% of $113.50).

(e) The plan actuary determines the hypothetical value of assets for the 2009 plan year by determining what the actuarial value of assets would have been had the plan assets earned the expected return during 2008. In such a case, the market value of assets would have been $161.50 and the actuarial value of assets prior to applying the 80/120 percent corridor would have been $160.50 [$161.50 - (20% - $20) + (40% - $15) - (60% - $5) + (80% - $0)]. After applying the 80/120 percent corridor the hypothetical value of assets would have been $160.50.

(f) Accordingly, the accumulated recognized eligible loss ( i.e., the portion of

the eligible net investment loss that would have been recognized in the actuarial value of assets) as of January 1, 2009, is $24.30 (the difference between the hypothetical value of assets on that date ($160.50) and the actuarial value of assets on that date ($136.20)).

(g) 2009 is the first recognition year ( i.e., the first year for which any portion of the eligible net investment loss is recognized in the actuarial value of plan assets), and the portion of the eligible net investment loss that is recognized in the actuarial value of assets on January 1, 2009, is $24.30 ($24.30, the accumulated recognized eligible loss for 2009, minus zero, the accumulated recognized eligible loss for the preceding year).

(h) If the plan is using the prospective method of determining the portion of the eligible net investment loss that is recognized each plan year, then the calculations set forth in steps (d) through (f) are repeated for each future recognition year up to the plan year as of which the entire eligible net investment loss will have been recognized. This calculation is a projection of future results made as of January 1, 2009, and, for this purpose, it is assumed that the plan assets earn the assumed rate of return for each year after 2008. The portion of the eligible net investment loss recognized for a future year is the result in step (f) for that future year minus the result in step (f) for the year immediately preceding that future year. For example,

December 20, 2010 867 2010–51 I.R.B.

ment loss that is projected to be first recognized in the January 1, 2010, actuarial value of assets is $3.37 (the accumulated recognized eligible loss as of January 1, 2010 ($27.67) minus the accumulated recognized eligible loss as of January 1, 2009 ($24.30)).

(i) If the plan is using the retrospective method of determining the portion of the eligible net investment loss that is recognized each plan year, then calculations set forth in steps (d) through (f) are repeated for each future recognition year up to the plan year as of which the entire eligible net investment loss will have been recognized. This calculation is made as of a valuation date for each future plan year and takes into account the actual earnings on plan assets for each year after 2008. The portion of the eligible net investment loss recognized for a future year is the result in step (f) for that future year minus the result in step (f) for the year immediately preceding that future year. For example, if the plan assets earned 10 percent during 2009, and assuming that the contributions and disbursements during 2009 were as projected,

January 1, 2010, will be $126.85

[($113.50 - 1.10) + $12 - $10] and the difference between actual and expected returns for 2009 will be $3.40.

the plan, the actuarial value of assets on January 1, 2010, prior to applying the 80/120 percent corridor will be $153.93 [$126.85 + (20% - $15)

• (40% - $5) + (60% - $48) - (80%

• $3.40)]. After applying the 80/120 percent corridor, the actuarial value of assets will be $152.22 (120% of $126.85).

of return during 2008, the market value of assets as of January 1, 2010, will be $179.65 [($161.50 - 1.10) + $12 $10] and the difference between actual and expected returns for 2009 will be $4.84.

the plan, the actuarial value of assets on January 1, 2010, prior to applying the 80/120 percent corridor will be $176.78 [$179.65 + (20% - $15)

• (40% - $5) + (60% - $0) - (80%

• $4.84)]. After applying the 80/120 percent corridor, the actuarial value of assets will be $176.78. This value is the reconstructed hypothetical value of plan assets.

loss as of the January 1, 2010, valuation date is $24.56 (the difference between the reconstructed hypothetical value of assets ($176.78) and the actuarial value of assets ($152.22)).

ment loss that will be first recognized in the January 1, 2010, actuarial value of assets is $0.26 (the accumulated recognized eligible loss as of January 1, 2010 ($24.56) minus the accumulated recognized eligible loss as of January 1, 2009 ($24.30)).

Q A–6. If a plan uses the shortfall method, how does the special amortization rule apply to the amortization of experience gain or loss under § 1.412(c)(1)–2(h)?

A A–6. If a multiemployer plan uses the shortfall method, the net experience gain or loss for a plan year is bifurcated into the portion attributable to the eligible net investment loss and the portion not attributable to the eligible net investment loss in the same manner as in the case of a plan that is not using the shortfall method. The amortization of each of these portions is deferred until the earlier of (1) the fifth plan year following the plan year in which the net experience gain or loss arose, or (2) the first plan year beginning after the latest scheduled expiration date of a contract in effect during the plan year in which the net experience gain or loss arose. In such a case, the net experience gain or loss is increased with interest at the rate used for determining the plan’s normal cost until the first year of the amortization charge or credit, and the amortization period is shortened so that it ends with the same year that would apply in the absence of the shortfall method.

Q A–7. Can the special amortization rule for eligible net investment losses be applied to a multiemployer plan that does not use a funding method that determines experience gains or losses?

A A–7. The special amortization rule for eligible net investment losses is not permitted to be applied to a multiemployer plan that does not use a funding method

that determines experience gains or losses. However, a multiemployer plan that does not use a funding method that determines an experience gain or loss for each plan year may change its funding method to an immediate gain method under which an experience gain or loss is determined for each plan year. Such a change in funding method is automatically approved and, pursuant to Rev. Proc. 2000–40, the amortization period applicable to any change in unfunded accrued liability attributable to the change in funding method is 10 years.

Q A–8. For what plan years does the special amortization rule in § 431(b)(8)(A) apply?

A A–8. The special amortization rule under § 431(b)(8)(A) applies beginning with the first recognition year with respect to an eligible net investment loss and ending with the earliest of:

1. The plan year in which the entire unrecognized balance of the eligible net investment loss as of the preceding plan year is recognized in the actuarial value of assets,

2. The plan year for which, if the special amortization rule were to apply to establish a new special amortization base, the amortization period applicable to that base would be 15 plan years, or

3. The plan year for which the plan sponsor chooses to end the application of the special amortization rule in accordance with Q&A D–3.

If the special amortization rule no longer applies, then no new amortization bases are established under Q&A A–3 (and any portion of an eligible net investment loss recognized in a subsequent year is taken into account under the regular rules of § 431(b)(2) or (b)(3)). However, the annual charges or credits to the funding standard account with respect to any amortization base previously established are unaffected.

Q A–9. How do the rules in this notice apply if the special amortization rule in § 431(b)(8)(A) applies with respect to net investment losses incurred in two eligible loss years?

A A–9. If the special amortization rule in § 431(b)(8)(A) applies with respect to net investment losses incurred in two eligible loss years, the rules in this notice apply separately to each portion of a net experience gain or loss that is attributable to an eligible net investment loss incurred in a

2010–51 I.R.B. 868 December 20, 2010

Q S–1. What is the period that applies for purposes of a plan actuary’s certification of the solvency test (solvency certification) under § 431(b)(8)(C)?

A S–1. The period that applies for purposes of a solvency certification under § 431(b)(8)(C) is the period beginning with the plan year in which the solvency certification is made. If the special amortization rule (but not the special asset valuation rule) applies with respect to a multiemployer plan, such period ends with the last plan year in the 30-plan-year period beginning with the eligible loss year. If the special asset valuation rule (but not the special amortization rule) applies, such period ends with the last plan year in the 10-year period over which the change in unfunded accrued liability attributable to the change in asset valuation method is amortized. If both the special amortization rule and the special asset valuation rule apply, such period ends with the last plan year in the 30-plan-year period over which the change in unfunded accrued liability attributable to the change in asset valuation method is amortized.

Q S–2. When must the solvency certification be made?

A S–2. The solvency certification must be made before a formal decision is made to apply either or both of the special funding rules in accordance with Q&A D–1. If the plan passes the solvency test as of the plan year in which a formal decision is made to apply either or both of the special funding rules, the plan is deemed to pass the test as of any preceding plan year.

Q S–3. What is the actuarial basis for the solvency certification under § 431(b)(8)(C)?

A S–3. In making the solvency certification under § 431(b)(8)(C), the plan actuary must use the same actuarial basis ( e.g., actuarial assumptions, data, and terms of any existing funding improvement plan or rehabilitation plan) that is used for purposes of the certification of the plan’s status under § 432(b)(3) for the plan year in which the solvency certification is made. The actuarial assumptions with respect to plan years that are after the plan years that are taken into account for purposes of that certification of plan status under § 432(b)(3) must be consistent with the assumptions used for purposes of that certification of plan status. In making a solvency certification, the plan actuary is not permit

different eligible loss year. For example, in applying the rules in Q&A A–3, the plan’s net experience loss would be divided into three portions: the portion attributable to the eligible net investment loss (as determined under Q&A A–5) incurred in one eligible loss year; the portion attributable to the eligible net investment loss (as determined under Q&A A–5) incurred in the other eligible loss year; and the portion not attributable to the eligible net investment loss incurred in any eligible loss year. A separate amortization base would be established for each portion attributable to the eligible net investment loss incurred in a different eligible loss year, and each of those portions would be amortized over an extended period described in Q&A A–3. The portion of the net experience loss that is not attributable to eligible net investment loss would be amortized over 15 plan years, as provided in § 431(b)(2)(B)(iii).

V. Asset Valuation Rules Q V–1. What does § 431(b)(8)(B)(i)(I) permit with respect to the period over which the difference between actual and expected returns for an eligible loss year is recognized in the value of plan assets as determined under a plan’s asset valuation method?

A V–1. Subject to the solvency test under § 431(b)(8)(C), a plan’s asset valuation method may be changed so as to recognize the difference between actual and expected returns for an eligible loss year ( i.e., an eligible net investment loss) in the value of plan assets on a level basis over a period of not more than 10 years. An asset valuation method is not considered unreasonable for purposes of § 431(c)(2)(A) merely because of such a change, without regard to the period over which the difference between actual and expected returns is otherwise recognized under the plan’s method.

Q V–2. Is there automatic approval for the change in method described in Q&A V–1?

A V–2. If the asset valuation method for a multiemployer plan provides for a spreading of the difference between expected and actual returns on a level basis over a fixed number of years, then a change in the asset valuation method to extend the period-to not more than 10 years-over which an eligible net investment loss is recognized in the value of plan assets on a level basis is automatically approved. This applies even though the difference be

tween expected and actual returns for other plan years is spread over a different number of years. For this purpose, a plan that uses market value of assets as the asset valuation method spreads the difference between expected and actual returns over one plan year.

If the plan uses some other asset valuation method, the plan will need to obtain approval from the Service for the change. This approval may be requested using the class-rulings procedure prescribed under section 5 of Rev. Proc. 2000–41, if it otherwise meets the requirements for using the class-rulings procedure.

Q V–3. What does § 431(b)(8)(B)(i)(II) permit with respect to the extent to which the actuarial value of plan assets can vary from the market value of plan assets?

A V–3. Subject to the solvency test under § 431(b)(8)(C), a plan’s asset valuation method may be changed so that, for either or both of the first two plan years beginning after August 31, 2008, the otherwise applicable corridor limits under § 1.412(c)(2)–1(b)(6) are expanded to permit the actuarial value of plan assets to be as much as 130 percent of the fair market value of plan assets. An asset valuation method is not considered unreasonable for purposes of § 431(c)(2)(A) merely because of such a change, and such a change is automatically approved.

Q V–4. What amortization period applies to a change in a plan’s unfunded accrued liability attributable to a change in asset valuation method as described in Q&A V–1 or Q&A V–3 (or both)?

A V–4. In general, pursuant to Rev. Proc. 2000–40, the amortization period applicable to the change in unfunded accrued liability attributable to a change in asset valuation method as described in Q&A V–1 or Q&A V–3 (or both) is 10 years. However, if a plan’s asset valuation method is changed under § 431(b)(8)(B) for a plan year and the special amortization rule in § 431(b)(8)(A) also applies, then the net experience gain or loss for the plan year and the portion of that experience gain or loss attributable to the eligible net investment loss are determined disregarding the change in asset valuation method. In such a case, the change in unfunded accrued liability attributable to the change in asset valuation method is then amortized over 30 plan years.

S. Solvency Test

December 20, 2010 869 2010–51 I.R.B.

Q D–3. May a plan sponsor decide to stop applying the special amortization rule as of a future plan year?

A D–3. A plan sponsor may decide to stop applying the special amortization rule as of a plan year, provided that a formal decision is made by the plan sponsor. If the special amortization rule no longer applies, then no new amortization bases are established under Q&A A–3 (and any portion of an eligible net investment loss recognized in a subsequent year is taken into account under the regular rules of § 431(b)(2) or (b)(3)). However, the annual charges or credits to the funding standard account with respect to any amortization base previously established are unaffected.

N – Notification to Participants, Ben- eficiaries, and the PBGC

Q N–1. When must notice of the application of the special funding rules be provided to participants and beneficiaries?

A N–1. If the special amortization rule or special asset valuation rule, or both, apply with respect to a multiemployer plan, the plan sponsor must give notice to participants and beneficiaries that the special rule (or rules) applies, within 30 days after the deadline for the plan sponsor’s formal decision to apply the special rule or rules. Notice need be provided only once, even if the special funding rules under § 431(b)(8) apply for more than one plan year.

Q N–2. Which participants and beneficiaries must receive the notice?

A N–2. Except as otherwise provided in the following sentence, notice is required to be provided to all plan participants and beneficiaries. However, the notice does not have to be provided to any person who either became a plan participant or beneficiary after the last day of the last plan year ending before the notice is due or ceased to be a participant or beneficiary prior to the date on which the notice is provided.

Q N–3. What information must the notice to participants and beneficiaries contain?

A N–3. The notice must provide (1) the name of the plan, along with the taxpayer identification number and plan number for the plan, (2) an explanation of which of the special funding rules apply and the plan year or years for which they apply, (3) the effect of the application of the special funding rules ( i.e., the amortization of losses beyond the otherwise applicable 15-plan-year period and/or the recog

ted to take into account any benefit reductions under § 418D or § 418E projected for future years.

R. Restrictions on Plan Amendments Increasing Benefits

Q R–1. How does the restriction on plan amendments under § 431(b)(8)(D) apply if the special amortization rule in § 431(b)(8)(A) applies?

A R–1. If the special amortization rule applies with respect to the portion of an eligible net investment loss that is recognized in a plan year ( i.e., if a new amortization base with an extended amortization period under § 431(b)(8)(A) is established in the plan year for a portion of the eligible net investment loss), a plan amendment increasing benefits may not go into effect during either of the two plan years immediately following that plan year unless one of the two conditions in the following paragraph are met.

The restriction in the preceding paragraph does not apply if (1) the plan actuary certifies that (i) the increase is paid for out of additional contributions not allocated to the plan as of the end of the immediately preceding plan year, and (ii) the plan’s funded percentage and projected credit balances for the two plan years are reasonably expected to be at least as high as they would have been if the benefit increase had not been adopted, or (2) the amendment is required as a condition of qualification under the Code or to comply with other applicable law.

Q R–2. How does the restriction on plan amendments under § 431(b)(8)(D) apply if the special asset valuation rule in § 431(b)(8)(B) applies?

A R–2. If the special asset valuation rule applies for a plan year ( i.e., the plan’s asset valuation method for that plan year is changed in accordance with § 431(b)(8)(B)), a plan amendment increasing benefits may not go into effect during either of the two plan years immediately following that plan year unless one of the two conditions in the following paragraph are met.

The restriction in the preceding paragraph does not apply if (1) the plan actuary certifies that (i) the increase is paid for out of additional contributions not allocated to the plan as of the end of the immediately preceding plan year, and (ii) the plan’s funded percentage and projected credit balances for the two plan years are

reasonably expected to be at least as high as they would have been if the benefit increase had not been adopted, or (2) the amendment is required as a condition of qualification under the Code or to comply with other applicable law.

Q R–3. How does the effective date provision of section 211(b)(2) of PRA 2010 affect the application of the restriction on plan amendments increasing benefits?

A R–3. Under section 211(b)(2) of PRA 2010, the restriction on plan amendments increasing benefits is effective on June 25, 2010, the date of the enactment of PRA 2010. Thus, benefit increases that went into effect before June 25, 2010, are not subject to the restriction under § 431(b)(8)(D). Benefit increases that are effective on or after June 25, 2010, are subject to the restriction, even if adopted before that date.

D. Decision to Apply the Special Funding Rules

Q D–1. How must a decision to apply either or both of the special funding rules under § 431(b)(8) be made?

A D–1. A decision to apply either or both of the special funding rules under § 431(b)(8) with respect to a multiemployer plan must be made as a formal decision by the plan sponsor using its normal procedures for making such decisions.

Q D–2. What is the deadline for a formal decision to apply either or both of the special funding rules?

A D–2. The deadline for a formal decision to apply either or both of the special funding rules with respect to a multiemployer plan is the earliest of:

1. The deadline for certification of the plan’s status under § 432(b)(3) for the first plan year beginning on or after January 1, 2011,

2. The date of certification of the plan’s status under § 432(b)(3) for the first plan year beginning on or after January 1, 2011, or

3. June 30, 2011. However, if, as of the otherwise applicable deadline, a plan sponsor has been unable to reach agreement as to whether to apply either or both of the special funding rules, and, before the otherwise applicable deadline, formally decides to resolve the issue through arbitration, then the deadline is extended until 30 days after the resolution of the arbitration.

2010–51 I.R.B. 870 December 20, 2010

Q C–2. Is a plan sponsor permitted to modify a funding improvement plan or rehabilitation plan that was previously adopted to take into account the application of the special funding rules under § 431(b)(8)?

A C–2. A plan sponsor is permitted to update a previously adopted funding improvement plan or rehabilitation plan to take into account the application of the special funding rules under § 431(b)(8), even if an update is not otherwise required under § 432.

Q C–3. If a multiemployer plan’s status under § 432 for a plan year was already certified before a plan sponsor’s formal decision to apply either or both of the special funding rules under § 431(b)(8), can the plan’s status for the plan year be recertified to take into account the application of the special funding rules?

A C–3. Normally, a formal decision to apply the special funding rules under § 431(b)(8) will be reflected in any certifications of a plan’s status under § 432(b)(3) made after the formal decision. Thus, if a formal decision to apply the special funding rules under § 431(b)(8) is made after the certification of a plan’s status under § 432(b)(3) for a plan year, the application of the special funding rules will not be reflected in the certification of the plan’s status until the following plan year. However, the plan sponsor is permitted to request that the plan actuary redetermine the plan’s status under § 432(b)(3) for a plan year, taking into account the application of the special funding rules. The redetermined status will be treated as the certified status for the entire plan year (including for purposes of the requirement to adopt or update a funding improvement or rehabilitation plan in that plan year), provided that (1) a revised certification of the plan’s status for the plan year is made and sent to the plan sponsor and the Service before the end of the plan year, (2) the revised certification otherwise satisfies the requirements of § 432(b)(3), (3) notice of the revised certification is provided to participants and beneficiaries, the bargaining parties, the PBGC, and the Secretary of Labor within 30 days after the revised certification is made, (4) any measures previously taken that would not be permitted pursuant to the plan’s status under the revised certification (such as restrictions on distributions as described

nition of losses in the value of plan assets over a period as long as 10 years), (4) a general description of the effect of applying the special funding rules, including the fact that applying the special rules will decrease the amount of required minimum contributions that are taken into account in determining the appropriate contribution rates under collective bargaining agreements and may also affect the plan’s status under § 432(b) for the current and future plan years, (5) a statement that the plan is not permitted to increase benefits during the two plan years immediately following any plan year in which either or both of the special funding rules apply, unless certain conditions are met, and (6) the name, address, and telephone number of the plan administrator or other contact person from whom more information may be obtained.

The notice must be written in a manner calculated to be understood by the average plan participant or beneficiary. In addition, the notice must be written in such a manner that the average participant or beneficiary will understand the significance of the required information in the notice. While the notice may include any additional information that is necessary or helpful for recipients to understand the required information in the notice, the notice should not have the effect of misleading or misinforming recipients or of distracting recipients from the required information in the notice. The notice must be a separate notice and cannot be combined with other information. However, the notice can be provided at the same time as another notice is provided; for example, the notice does not fail to meet the requirements of this Q&A N–3 merely because it is provided at the same time as a notice under section 101(f) of ERISA.

Q N–4. What are the acceptable methods of providing the required notice? In particular, can the notice be provided electronically?

A N–4. The notice must be in writing and may be furnished in any paper or electronic form to the extent such form is reasonably accessible to persons to whom the notice is required to be provided. Permissible electronic methods include those permitted under regulations of the Department of Labor at 29 C.F.R. § 2520.104b–1(c) and those described at § 54.4980F–1, Q&A–13(c).

Q N–5. How does a plan sponsor making a formal decision to apply either or both of the special funding rules comply with the requirement to inform PBGC of such application?

A N–5. The PBGC has informed the Treasury Department and the Service that the plan sponsor must provide the PBGC with a copy of the notice provided to participants and beneficiaries under Q&A N–3, by the deadline described in Q&A N–6. The notice must be provided by mail or e-mail. Hard copies of the notice must be mailed to the Pension Benefit Guaranty Corporation, ATTN: Multiemployer Data Coordinator, 1200 K Street, NW, Suite 930, Washington, DC 20005–4026. Electronic copies of the notice must be e-mailed to the PBGC at Multiemployerprogram@pbgc.gov . The subject line of the e-mail, or the notice sent by mail, must contain the plan’s taxpayer identification number, plan number, and the name of the plan.

Q N–6. What is the deadline for notifying the PBGC?

A N–6. The plan sponsor must give notice of the application of the special funding rules by the later of: (i) 30 days after the date the plan sponsor makes a formal decision to apply either or both of the special funding rules, or (ii) January 18, 2011. If the plan sponsor makes separate decisions on different dates regarding which of the special funding rules will apply, or the plan years for which they apply, the plan sponsor must send separate notices with respect to each application of the special funding rules. The deadline in this Q&A N–6 also applies to any formal decision to apply the special funding rules made prior to the issuance of this notice.

C – Certification of Status under § 432

Q C–1. To what extent must the application of the special funding rules under § 431(b)(8) be taken into account for purposes of § 432?

A C–1. Once a formal decision to apply either or both of the special funding rules under § 431(b)(8) has been made, the application of the special rules must be taken into account in any contemporaneous or subsequent certification of status required under § 432(b)(3) and in any contemporaneous or subsequent required adoption or update of a funding improvement plan or rehabilitation plan.

December 20, 2010 871 2010–51 I.R.B.

tion Act of 1995 (44 U.S.C. § 3507) under control number 1545–2196.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid OMB control number.

The collections of information in this notice are in section III. The information is required in order to determine the application of the special funding rules under § 431(b)(8) and to provide the required notice of the decision to apply the special funding rules. The collections of information are mandatory for those plan sponsors who decide to use the special funding rules. The likely respondents are sponsors of multiemployer defined benefit plans. The estimated total number of respondents for 2010 and 2011 is 1,500.

The estimated annual burden per respondent varies from 45 minutes to 65 minutes, depending on individual circumstances, with an estimated average of 55 minutes.

The estimated total annual reporting and/or recordkeeping burden is 1,375 hours.

Estimates of the annualized cost to respondents for the hour burdens shown are not available at this time.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by § 6103.

V. DRAFTING INFORMATION

The principal authors of this notice are Adrien LaBombarde and Yaguo Zhang of the Employee Plans, Tax Exempt and Government Entities Division. Questions regarding this notice may be sent via e-mail to RetirementPlanQuestions@irs.gov .

Guidance on In-Plan Roth Rollovers

Notice 2010–84

I. PURPOSE

This notice provides guidance under § 402A(c)(4) of the Internal Revenue Code, relating to rollovers from § 401(k)

in § 432(f)(2), reductions as described in § 432(e)(8) in benefits that are protected under the anti-cutback rules of § 411(d)(6), and the imposition of employer surcharges under § 432(e)(7)) are reversed, and (5) the plan actuary certifies that reversing the measures described in clause (4) would not cause the plan to fail to meet the solvency test under § 431(b)(8)(C).

Q C–4. How does the effective date provision of section 211(b)(1) of PRA 2010 affect the application of the special funding rules for purposes of § 432 for the first plan year beginning after August 31, 2008? A C–4. Under section 211(b)(1) of PRA 2010, the application of the special funding rules is disregarded for purposes of applying § 432 for the first plan year beginning after August 31, 2008. Thus, application of the special funding rules is not taken into account in any certification of plan status under § 432(b)(3) for that plan year or the adoption or update of a funding improvement plan or rehabilitation plan for that plan year.

F – Form 5500 Requirements Q F–1. How should the effect of the application of the special funding rules under § 431(b)(8) for a plan year be reported if the plan sponsor decides to apply either or both of the special funding rules for that plan year and a Form 5500 and Schedule MB were filed for the plan year that did not reflect application of the special funding rules, as permitted under Notice 2010–56?

A F–1. If a plan sponsor decides to apply either or both of the special funding rules under § 431(b)(8) for a plan year after the filing of a Form 5500 and Schedule MB for that plan year that did not reflect application of the special funding rules, as permitted under Notice 2010–56, an amended Form 5500 and Schedule MB for that plan year are not required to be filed for that plan year. Instead, the Schedule MB filed for a subsequent plan year that is no later than the plan year beginning in 2010 must include an attachment showing how the information on a Schedule MB filed for any previous plan year would have differed if it had reflected application of the special funding rules (to the extent applicable) for any such previous plan year. The attachment already described in the instructions for Line 9f of the Schedule MB is an appropriate means for providing an explanation of this difference.

Q F–2. How should the effect of the application of the special funding rules under § 431(b)(8) for a plan year be reported if the plan sponsor decided to apply either or both of the special funding rules for that plan year and a Form 5500 and Schedule MB were filed for that plan year that reflected application of the special funding rules, but the calculations were different from the calculations required by this notice?

A F–2. If a plan sponsor decided to apply either or both of the special funding rules under § 431(b)(8) for a plan year and a Form 5500 and Schedule MB were filed for that plan year that reflected application of the special funding rules, but the calculations were different from the calculations required by this notice, an amended Form 5500 and Schedule MB are not required to be filed for that plan year. Instead, the Schedule MB filed for a subsequent plan year that is no later than the plan year beginning in 2010 must include an attachment showing how the information on a Schedule MB filed for any previous plan year would have differed if it had reflected application of the special funding rules (to the extent applicable) in accordance with this notice for any such previous plan year. The attachment already described in the instructions for Line 9f of the Schedule MB is an appropriate means for providing an explanation of this difference.

Q F–3. As an alternative to Q&A F–1 or Q&A F–2, if the special funding rules under § 431(b)(8) apply to a plan for which a Form 5500 and Schedule MB have already been filed as described in Q&A F–1 or Q&A F–2, may an amended Form 5500 with a revised Schedule MB be filed?

A F–3. As an alternative to Q&A F–1 or Q&A F–2, if the special funding rules under § 431(b)(8) apply to a plan for which a Form 5500 and Schedule MB have already been filed as described in Q&A F–1 or Q&A F–2, an amended Form 5500 with a revised Schedule MB showing corrected information for a previous plan year may be filed.

IV. PAPERWORK REDUCTION ACT

The collections of information contained in this notice have been approved by the Office of Management and Budget in accordance with the Paperwork Reduc

2010–51 I.R.B. 872 December 20, 2010

Section 402A(c)(4)(B) of the Code provides that in-plan Roth rollovers of eligible rollover distributions may only be made within a plan containing a qualified Roth contribution program from accounts other than designated Roth accounts and only if the otherwise applicable rollover requirements of §§ 402(c), 403(b)(8) and 457(e)(16) are satisfied. Section 402A(c)(4)(D) of the Code provides that the rules of § 408A(d)(3)(D), (E), and (F) apply for purposes of § 402A(c)(4).

The Joint Committee on Taxation’s Technical Explanation of H.R. 5297, which became SBJA, states that an employer may add new, permissible distribution options to a plan that are conditioned on the employee directly rolling over the distribution to his or her designated Roth account under the plan. (JCX–47–10, September 16, 2010, at page 42.)

III. GUIDANCE

Q–1. What is an “in-plan Roth rollover”?

A–1. An “in-plan Roth rollover” is a distribution from an individual’s plan account, other than a designated Roth account, that is rolled over to the individual’s designated Roth account in the same plan, pursuant to new § 402A(c)(4) of the Code. The rollover may be accomplished by a direct rollover (an “in-plan Roth direct rollover”) or by a distribution of funds to the individual who then rolls over the funds into his or her designated Roth account in the plan within 60 days (an “in-plan Roth 60-day rollover”). Section 402A(c)(4) applies to distributions made after September 27, 2010.

Q–2. What amounts are eligible for in-plan Roth rollovers?

A–2. Any vested amount held in a plan account for a plan participant (other than an amount held in a designated Roth account) is eligible for an in-plan Roth rollover to a designated Roth account in the same plan. However, an amount is not eligible for an in-plan Roth rollover unless it satisfies the rules for distribution under the Code and is an eligible rollover distribution as defined in § 402(c)(4). Thus, in the case of a § 401(k) plan participant who has not had a severance from employment, an in-plan Roth rollover from the participant’s pre-tax elective deferral account is

plans to designated Roth accounts in the same plan (“in-plan Roth rollovers”), as added by § 2112 of the Small Business Jobs Act of 2010 (“SBJA”), P.L. 111–240. The guidance in this notice also generally applies to rollovers from § 403(b) plans to designated Roth accounts in the same plan.

II. BACKGROUND

Section 402A of the Code sets forth the rules for designated Roth contributions. A designated Roth contribution is an elective deferral that would otherwise be excludable from gross income but that has been designated by the plan participant who elects the deferral as not being so excludable. An employee’s designated Roth contributions and attributable earnings must be maintained by the plan in a separate account (a designated Roth account). A qualified distribution, as defined in § 402A(d)(2), from an employee’s designated Roth account is excludable from gross income. A distribution from an employee’s designated Roth account that is not a qualified distribution is includible in gross income pursuant to § 72 in proportion to the employee’s investment in the contract (basis) and earnings on the contract.

Section 408A of the Code sets forth the rules for Roth IRAs. A Roth IRA is a type of IRA under which contributions are not deductible from the owner’s gross income and qualified distributions, as defined in § 408A(d)(2), are excludable from gross income. Section 408A(d)(4) prescribes a special ordering rule for distributions from a Roth IRA.

Section 408A(d)(3)(A) of the Code provides that, generally, the taxable amount of a rollover or conversion to a Roth IRA is includible in gross income as if it were not rolled over or converted. For taxable years beginning in 2010 only, however, the taxable amount of a rollover or a conversion to a Roth IRA that would otherwise be includible in gross income for the taxable year beginning in 2010 is includible half in the taxable year beginning in 2011 and half in the taxable year beginning in 2012, unless the taxpayer elects to include the entire taxable amount in the taxable year beginning in 2010.

Section 408A(d)(3)(D) of the Code provides for such additional reporting “as

the Secretary may require to ensure that amounts required to be included in gross income under [§ 408A(d)(3)(A)] are so included.”

Under section 408A(d)(3)(E) of the Code, in the case of a taxpayer who is deferring income inclusion of the taxable amount of a rollover to a Roth IRA made in the taxpayer’s taxable year beginning in 2010, the taxpayer’s gross income for the taxable year beginning in 2010 or 2011 is increased by the amount of any distribution in such year from the Roth IRA that is allocable to the taxable amount of the rollover.

Section 408A(d)(3)(F) of the Code provides that any distribution from a Roth IRA that is allocable to the taxable amount of a rollover to the Roth IRA (other than from another Roth IRA or a designated Roth account) made within the preceding 5 taxable years is treated as includible in gross income for purposes of applying the 10% additional tax under § 72(t). The 5-year recapture rule also applies if the rollover to the Roth IRA is from a designated Roth account and the distribution is allocable to the taxable amount of an in-plan Roth rollover made within the preceding 5 years. (See Q&A–12 of this notice.)

Section 2112 of SBJA adds § 402A(c)(4) to the Code, effective for distributions made after September 27, 2010, to permit plans that include a qualified Roth contribution program to allow individuals to roll over amounts from their accounts other than designated Roth accounts to their designated Roth accounts in the plan. Currently, only § 401(k) plans and § 403(b) plans are permitted to include qualified Roth contribution programs. For taxable years beginning after 2010, § 2111 of SBJA permits governmental § 457(b) plans to include designated Roth accounts.

Section 402A(c)(4)(A) of the Code provides that any distribution described in § 402A(c)(4) is included in gross income as if it were not rolled over to a designated Roth account. However, for such distributions made in taxable years beginning in 2010, unless the individual elects to include the taxable amount of the distribution in gross income for the taxable year beginning in 2010, the taxable amount of the distribution is includible half in the taxable year beginning in 2011 and half in the taxable year beginning in 2012.

December 20, 2010 873 2010–51 I.R.B.

permitted to be made only if the participant has reached age 59 ¹ /2, has died or become disabled, or receives a qualified reservist distribution as defined in § 72(t)(2)(G)(iii). See Rev. Rul. 2004–12, 2004–1 C.B. 478, for a discussion of the various distribution timing restrictions applicable to amounts held in a plan. An amount is eligible for an in-plan Roth rollover only if the plan provides for such rollovers. But see Q&As–15 through –20 of this notice, permitting retroactive amendments for this purpose.

Q–3. Is an in-plan Roth direct rollover treated as a distribution for all purposes?

A–3. No. Because an in-plan Roth direct rollover merely changes the account in a plan under which an amount is held and the tax character of the amount, a distribution that is rolled over in an in-plan Roth direct rollover is not treated as a distribution for the following purposes:

(a) Section 72(p) (relating to plan loans) . A plan loan transferred in an in-plan Roth direct rollover without changing the repayment schedule is not treated as a new loan (so the rule in § 1.72(p)–1, Q&A–20, of the Income Tax Regulations does not apply).

(b) Section 401(a)(11) (relating to spousal annuities) . A married plan participant is not required to obtain spousal consent in connection with an election to make an in-plan Roth direct rollover.

(c) Section 411(a)(11) (relating to par- ticipant consent before an immediate dis- tribution of an accrued benefit in excess of $5,000) . The amount rolled over continues to be taken into account in determining whether the participant’s accrued benefit exceeds $5,000, and a notice of the participant’s right to defer receipt of the distribution is not triggered by the in-plan Roth direct rollover.

(d) Section 411(d)(6)(B)(ii) (relating to elimination of optional forms of benefit) . A participant who had a distribution right (such as a right to an immediate distribution of the amount rolled over) prior to the rollover cannot have this right eliminated through an in-plan Roth direct rollover.

Q–4. Can a plan add an in-plan Roth direct rollover option for amounts that are not otherwise distributable under the terms of the plan but that would be permitted to be distributed under the Code if the plan so provided?

A–4. Yes. A plan may be amended to add an in-plan Roth direct rollover option for amounts that are permitted to be distributed under the Code but that have not been distributable under more restrictive terms contained in the plan. Moreover, such an amendment is not required to permit any other rollover or distribution option for these amounts. For example, a plan that does not currently allow for in-service distributions from a participant’s pre-tax elective deferral account may be amended to permit in-plan Roth direct rollovers from this account by participants who have attained age 59 ¹ /2, while not otherwise permitting distribution of these amounts. (However, a plan amendment imposing such a restriction on a pre-existing distribution option would violate § 411(d)(6).)

Q–5. Must a plan that offers in-plan Roth rollovers include a description of this feature in the written explanation the plan provides pursuant to § 402(f) to an individual receiving an eligible rollover distribution?

A–5. Yes. For example, if the plan administrator generally bases its explanation under § 402(f) on the safe harbor explanation published in Notice 2009–68, 2009–39 I.R.B. 423, the safe harbor explanation for payments not from a designated Roth account could be revised by adding a new section in the “SPECIAL RULES AND OPTIONS” portion of the explanation that describes the consequences if the distributee were to roll over a payment to a designated Roth account in the same plan, including the following information:

ment to a designated Roth account in the plan, the amount of the payment rolled over (reduced by any after-tax amounts directly rolled over) will be taxed. However, the 10% additional tax on early distributions will not apply (unless the distributee takes the amount rolled over out of the designated Roth account within the 5-year period that begins on January 1 of the year of the rollover). For payments from the plan in 2010 that are rolled over to a designated Roth account in the plan (and that are not distributed from that account until after 2011), the taxable amount of the rollover will be taxed half in 2011 and half in 2012, un

less the distributee elects to be taxed in 2010.

ment to a designated Roth account in the plan, later payments from the designated Roth account that are qualified distributions will not be taxed (including earnings after the rollover). A qualified distribution from a designated Roth account is a payment made both after the distributee attains age 59 ¹ /2 (or after the distributee’s death or disability) and after the distributee has had a designated Roth account in the plan for a period of at least 5 years. The 5-year period described in the preceding sentence begins on January 1 of the year the distributee’s first contribution was made to the designated Roth account. However, if the distributee made a direct rollover to a designated Roth account in the plan from a designated Roth account in a plan of another employer, the 5-year period begins on January 1 of the year the distributee’s first contribution was made to the designated Roth account in the plan or, if earlier, to the designated Roth account in the plan of the other employer. Payments from the designated Roth account that are not qualified distributions will be taxed to the extent allocable to earnings after the rollover, including the 10% additional tax on early distributions (unless an exception applies). The section in the safe harbor explanation on payments to a Roth IRA would also need to be revised to reflect that rollovers to the plan’s designated Roth account are permitted. Further, for an in-plan Roth direct rollover for in which other distribution alternatives are not available, the safe harbor explanation would need to be revised to reflect the inapplicability of information in the explanation about other distribution alternatives.

Q–6. If a participant elects an in-plan Roth rollover, can he or she later unwind the in-plan Roth rollover, as can be done with rollovers to Roth IRAs?

A–6. No. The recharacterization rule in § 408A(d)(6) applies only to contributions to IRAs.

Q–7. What are the tax consequences of an in-plan Roth rollover?

2010–51 I.R.B. 874 December 20, 2010

that is rolled over to another designated Roth account of the participant or to a Roth IRA owned by the participant; however, the rule does apply to subsequent distributions made from such other designated Roth account or Roth IRA in 2010 or 2011. For purposes of this Q&A–11, the rules in §§ 1.408A–4, Q&A–11, and 1.408A–6, Q&A–6, on income acceleration (as modified by substituting the 2-year spread under § 2112 of SBJA for the 4-year spread in the regulations under § 408A of the Code) also apply. See Q&A–13 of this notice for rules on allocating distributions to in-plan Roth rollovers.

Q–12. Are there any special rules relating to the application of the 10% additional tax under § 72(t) for distributions allocable to the taxable amount of an in-plan Roth rollover made within the preceding 5 years?

A–12. Yes, pursuant to §§ 402A(c)(4)(D) and 408A(d)(3)(F), if an amount allocable to the taxable amount of an in-plan Roth rollover is distributed within the 5-taxable-year period beginning with the first day of the participant’s taxable year in which the rollover was made, the amount distributed is treated as includible in gross income for the purpose of applying § 72(t) to the distribution. The 5-taxable-year period ends on the last day of the participant’s fifth taxable year in the period. Thus, if a participant withdraws an amount that includes $6,000 allocable to the taxable amount of an in-plan Roth rollover made within the preceding 5 years, the $6,000 is treated as includible in the participant’s gross income for purposes of applying § 72(t) to the distribution. In such a case, the participant would owe an additional tax of $600 unless an exception under § 72(t)(2) applies. The 5-year recapture rule in this Q&A–12 does not apply to a distribution that is rolled over to another designated Roth account of the participant or to a Roth IRA owned by the participant; however, the rule does apply to subsequent distributions made from such other designated Roth account or Roth IRA within the 5-taxable-year period. For purposes of this Q&A–12, the rules in § 1.408A–6, Q&A–5, on the application of § 72(t) also apply. See Q&A–13 of this notice for rules on allocating distributions to the taxable amount of in-plan Roth rollovers.

A–7. The taxable amount of the in-plan Roth rollover must be included in the participant’s gross income. The taxable amount of an in-plan Roth rollover is the amount that would be includible in a participant’s gross income if the rollover were made to a Roth IRA. This amount is equal to the fair market value of the distribution reduced by any basis the participant has in the distribution. (See Notice 2009–75, 2009–35 I.R.B. 436.) Thus, if the distribution includes employer securities attributable to employee contributions, the fair market value includes any net unrealized appreciation within the meaning of § 402(e)(4). If an outstanding loan is rolled over in an in-plan Roth rollover, the amount includible in gross income is the balance of the loan.

Q–8. Are in-plan Roth direct rollovers subject to 20% mandatory withholding?

A–8. No, 20% mandatory withholding under § 3405(c) does not apply to an in-plan Roth direct rollover. However, a participant electing an in-plan Roth rollover may have to increase his or her withholding or make estimated tax payments to avoid an underpayment penalty. See Publication 505, Tax Withholding and Estimated Tax.

Q–9. When is the taxable amount of an in-plan Roth rollover includible in gross income?

A–9. Generally, the taxable amount of a distribution that an individual rolls over in an in-plan Roth rollover is includible in gross income in the taxable year in which the distribution occurs.

Q–10. Is there an exception to the general rule regarding the year of income inclusion for in-plan Roth rollovers made in 2010? A–10. Yes. For distributions made in 2010 that are rolled over in an in-plan Roth rollover, the taxable amount is includible in gross income half in 2011 and half in 2012 unless the individual elects to include the taxable amount in gross income in 2010 (or unless the special rules described in Q&A–11 of this notice apply). An individual’s election of 2010 income inclusion may not be changed after the due date (including extensions) for filing the individual’s 2010 income tax return. The election applies to all of an individual’s 2010 distributions that are rolled over in an in-plan Roth rollover. The election is independent of any election made

with respect to qualified rollover contributions (as defined in § 408A(e)) to a Roth IRA from either a non-Roth IRA or a plan account other than a designated Roth account. The rules in this Q&A–10 and in Q&A–11 relating to the years 2010, 2011 and 2012 apply to calendar-year taxpayers; parallel rules apply to taxable years beginning in 2010, 2011 and 2012 for individuals who are not calendar-year taxpayers.

Q–11. If a plan participant is deferring, to 2011 and 2012, inclusion in income of the taxable amount from a 2010 in-plan Roth rollover, are there any special income acceleration rules for distributions allocable to the 2010 in-plan Roth rollover?

A–11. Yes, pursuant to §§ 402A(c)(4)(D) and 408A(d)(3)(E), if the participant receives a distribution of an amount in 2010 or 2011 allocable to the taxable amount of a 2010 in-plan Roth rollover that would otherwise not be includible in gross income until 2011 and 2012, then the participant’s gross income for the year of the distribution is increased by the amount of the distribution that would otherwise not be includible in gross income until a later year. In such a case, the amount that would otherwise be includible in the participant’s gross income in 2012 is reduced by the income accelerated. Also, if the distribution is made in 2010, the amount that would otherwise be includible in the participant’s gross income in 2011 is reduced by the amount the income accelerated to 2010 exceeds the amount that would otherwise be includible in income in 2012.

For example, if a participant makes an in-plan Roth rollover in 2010 with the taxable amount of the rollover, $8,000, being deferred to 2011 and 2012 and then takes a distribution in 2010 or 2011 from the designated Roth account that consists of $5,000 allocable to the taxable amount of the 2010 in-plan Roth rollover, then the participant’s gross income for the year of the distribution must be increased by the taxable amount of the rollover that would otherwise be deferred to a later year. If this distribution occurred in 2010, the $5,000 is included in the participant’s 2010 gross income and the remaining taxable amount of the 2010 in-plan Roth rollover, $3,000, is included in the participant’s 2011 gross income.

The income acceleration rule in this Q&A–11 does not apply to a distribution

December 20, 2010 875 2010–51 I.R.B.

Example. In 2010, Participant P, age 45, makes a $100,000 in-plan Roth direct rollover from his profit-sharing account and defers the inclusion of the $90,000 taxable amount of the rollover to 2011 and 2012 ($45,000 in 2011 and $45,000 in 2012). At the time of the in-plan Roth direct rollover, P’s designated Roth account contains $78,000 of regular Roth contributions and $25,000 of earnings. Since this is an in-plan Roth direct rollover, the rollover amount is separately accounted for within the designated Roth account. Later in 2010, P takes a $106,000 in-service withdrawal from his designated Roth account. The source can only be the in-plan Roth rollover account, since P is under age 59 ¹ /2, which is the earliest the plan allows in-service distributions of elective deferrals from a designated Roth account. At the time of the distribution, P’s designated Roth account consists of:

Q–13. How is an amount distributed from a plan allocated to the taxable amount of an in-plan Roth rollover for purposes of Q&As–11 and –12 of this notice?

A–13. Solely for purposes of the income acceleration rule in Q&A–11 and the 5-year recapture rule in Q&A–12, an amount distributed that, under the terms of the plan, is paid from a separate account maintained solely for in-plan Roth rollovers (an in-plan Roth rollover account) is treated as attributable to an in-plan Roth rollover to the extent the amount distributed constitutes recovery of basis determined under the rules of § 72 and § 1.402A–1, Q&A–9.

Any amount distributed from a designated Roth account that, under the terms

In-Plan Roth Rollover Account:

of the plan is not paid from an in-plan Roth rollover account, is treated as attributable to an in-plan Roth rollover to the extent the portion of the distribution that represents a recovery of basis under the rules of § 72 and § 1.402A–1, Q&A–9, exceeds the basis in the designated Roth account other than the basis resulting from in-plan Roth rollovers.

If an amount distributed is treated as attributable to an in-plan Roth rollover, then the rules of § 408A(d)(4)(B)(ii)(II) and the last sentence of § 408A(d)(4) apply. Thus, a distribution is attributed to an in-plan Roth rollover on a first-in-first-out basis and any amount attributed to such a rollover is allocated first to the taxable amount of the rollover.

Regular Roth Account:

In-plan Roth rollover contributions ($10,000 basis) . . . . . . . . . . . . . . . . . . . . . . . $100,000

Earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,000

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $106,000

Regular Roth contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $80,000

Earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $24,000

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $104,000

Total in designated Roth account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $210,000

Under the pro-rata rules of § 72, of the $106,000 distribution, $106,000 x 30,000/210,000, or $15,143, is includible in P’s gross income. All of the $90,857 of the distribution that is a return of basis is allocated to the in-plan Roth rollover account. P is subject to the additional 10% tax under § 72(t) on $105,143 (the $90,000 taxable amount of the in-plan Roth rollover under the 5-year recapture rule plus $15,143 that is includible in P’s gross income under the pro-rata rules of § 72). Also, the entire $90,000 taxable amount of the in-plan Roth rollover is includible in P’s gross income for 2010 (rather than being includible in gross income half in 2011 and half in 2012).

Since the amount of the in-plan Roth rollover was $100,000, there is $9,143 that may still be allocated to the rollover. This will be reported on a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., by the trustee if another distribution within 5 years is allocable to this rollover, but none of it will be subject to § 72(t) under the 5-year recapture rule because all the taxable amount of the in-plan Roth rollover has been used up.

If P were eligible for a distribution from his regular Roth account within his designated Roth account, he could have withdrawn $93,333 and none of it would be allocable to the in-plan Roth rollover (because, of the $93,333 distribution, $80,000 is a return of basis and that would be absorbed by the $80,000 basis in P’s regular Roth account). If P withdrew more than $93,333, some would be allocated to the taxable amount of the in-plan Roth rollover even if P

asked that the distribution be made from his regular Roth account.

Q–14. Is a beneficiary or alternate payee eligible to elect an in-plan Roth rollover?

A–14. An in-plan Roth rollover can be elected by a beneficiary only if he or she is a surviving spouse and by an alternate payee only if he or she is a spouse or former spouse. This is because in-plan Roth rollovers can only be elected with respect to distributions that are eligible rollover distributions as defined in § 402(c)(4) that can be rolled over to § 401(k) plans. Section 402(c)(4) defines an eligible rollover distribution as any of certain distributions “to an employee.” Section 402(c)(9) and § 402(e)(1)(B) provide that a spousal beneficiary, and an alternate payee who is a spouse or former spouse, is treated as the employee for purposes of § 402(c)(4). (While § 402(c)(11) permits a non-spouse beneficiary to elect rollover treatment of certain amounts, that provision does not apply to rollovers to qualified plans.)

Q–15. Is a plan amendment providing for in-plan Roth rollovers in a § 401(k)

plan required to be adopted by the end of the 2010 plan year?

A–15. No. Under section 5.02 of Rev. Proc. 2007–44, 2007–2 C.B. 54, which sets forth certain deadlines for adopting amendments to qualified plans, a plan amendment that provides for in-plan Roth rollovers is a discretionary amendment and ordinarily the amendment would have to be adopted by the last day of the plan year in which the amendment is effective. However, to give plan sponsors sufficient time to adopt plan amendments and thereby enable plan participants to make in-plan Roth rollovers before the end of the 2010 plan year, the Service is extending the deadline for adopting a plan amendment described in Q&A–17 (including amendments to provide for in-plan Roth rollovers in a § 401(k) plan) to the later of the last day of the plan year in which the amendment is effective or December 31, 2011, provided that the amendment is effective as of the date the plan first operates in accordance with the amendment.

2010–51 I.R.B. 876 December 20, 2010

DRAFTING INFORMATION

The principal author of this notice is Roger Kuehnle of the Employee Plans, Tax Exempt and Government Entities Division. Questions regarding this notice may be sent via e-mail to RetirementPlanQuestions@irs.gov .

Undue Hardship Waiver of the Section 6011(e)(3) Electronic Filing Requirement and Taxpayer Choice Statements to File in Paper Format

Notice 2010–85

PURPOSE

This notice contains a proposed revenue procedure that provides guidance to specified tax return preparers regarding the format and content of requests for waiver of the magnetic media (electronic) filing requirement due to undue hardship, under section 6011(e)(3) of the Internal Revenue Code and proposed § 301.6011–6 of the Regulations on Procedure and Administration (26 CFR Part 301), which is being published contemporaneously with this notice. The proposed revenue procedure also provides guidance regarding the time and manner in which specified tax return preparers who seek an undue hardship waiver of the electronic filing requirement must submit their written requests for consideration by the IRS. Finally, the proposed revenue procedure provides guidance to tax return preparers, specified tax return preparers, and taxpayers regarding how to document a taxpayer’s choice to file the taxpayer’s individual income tax return in paper format when the return is prepared by a tax return preparer or specified tax return preparer but filed by the taxpayer.

Proposed § 301.6011–6 implements the requirement under newly enacted section 6011(e)(3) that all specified tax return preparers, generally tax return preparers who reasonably expect to file (if the preparer is a member of a firm, whose firm’s members in the aggregate reasonably expect to file) more than 10 individual income tax returns in a calendar year, electronically file all individual income tax returns they prepare

Q–16. What is the deadline for adopting a plan amendment providing for in-plan Roth rollovers in a § 403(b) plan?

A–16. Announcement 2009–89, 2009–52 I.R.B. 1009, provides that if an employer adopts, on or before December 31, 2009 (or, if later, the date the plan is established) a written § 403(b) plan intended to satisfy the requirements of § 403(b) and the regulations, the employer will have a remedial amendment period in which to amend the plan to correct any form defects retroactive to January 1, 2010 (or the date the plan is established), provided that the employer subsequently adopts a pre-approved plan that has received a favorable opinion letter from the Service or applies for an individual determination letter, under forthcoming procedures. In this case, the employer will have reliance that the form of its written plan satisfies the requirements of § 403(b) and the regulations, provided that, during the remedial amendment period, the plan is amended to correct any defects retroactive to January 1, 2010 (or the date the plan is established). In the case of a § 403(b) plan that has a remedial amendment period pursuant to Announcement 2009–89, a plan amendment described in Q&A–17 (including a plan amendment providing for in-plan Roth rollovers) is not required to be adopted before the later of the end of that remedial amendment period or the last day of the first plan year in which the amendment is effective, provided the amendment is effective as of the date the plan first operates in accordance with the amendment.

Q–17. What plan amendments does the extension of time under Q&A–15 or Q&A–16 apply to?

A–17. The extension of time to adopt a plan amendment under Q&A–15 or Q&A–16 applies to any plan amendment that is adopted pursuant to § 2112 of SBJA. Thus, for example, if a § 401(k) plan or a § 403(b) plan is amended to permit in-plan Roth rollovers, the applicable extension of time under Q&A–15 or Q&A–16 applies to a plan amendment that permits elective deferrals under the plan to be designated as Roth contributions, a plan amendment that provides for the acceptance of rollover contributions by the designated Roth account, and the plan amendment that permits in-plan Roth rollovers, including a plan amendment described in

Q&A–4. However, the extension of time to adopt a plan amendment does not apply to a plan amendment that adds a § 401(k) cash or deferred arrangement to the plan. See § 1.401(k)–1(a)(3)(iii)(A).

Q–18. Does the extension of time described in Q&As–15 through –17 of this notice apply to § 401(k) safe harbor plans described in § 401(k)(12) or (13)?

A–18. Yes, however, instead of the extension being to the later of the last day of the plan year in which the amendment is effective or December 31, 2011, the extension for a § 401(k) safe harbor plan described in § 401(k)(12) or (13) is to the later of December 31, 2011, or the time specified in § 1.401(k)–3(e)(1) (requiring, generally, that safe harbor plan provisions be adopted before the first day of the plan year in which they are effective). Thus, for example, a § 401(k) safe harbor plan with a plan year beginning July 1 may operationally comply with § 2112 of SBJA during the plan year beginning July 1, 2010 (for distributions made after September 27, 2010) and the plan year beginning July 1, 2011, without having to be amended for such change in operation until December 31, 2011.

Q–19. Must a plan have a qualified Roth contribution program in place at the time a rollover contribution to a designated Roth account is made in an in-plan Roth rollover?

A–19. Yes. Thus, for participants to be eligible for the 2-year income deferral described in Q&A–10 of this notice, the distribution must be made no later than December 31, 2010, and, at the time of the rollover contribution to the designated Roth account, the plan must have a qualified Roth contribution program in place.

Q–20. For purposes of Q&A–19 of this notice, when is a qualified Roth contribution program in place?

A–20. Although, pursuant to Q&As–15 through –18 of this notice, a plan may be amended retroactively to add a qualified Roth contribution program, such a program is in place on a given date only if, with respect to compensation that could be deferred beginning with that date, eligible employees are given an opportunity to elect on that date to have designated Roth contributions made to the plan (or would have such an opportunity but for a statutory or plan limitation on the amount of an employee’s elective deferrals).

December 20, 2010 877 2010–51 I.R.B.

7604, Ben Franklin Station, Washington, DC 20224. Alternatively, comments may be hand-delivered Monday through Friday between the hours of 8:00 a.m. to 4:00 p.m. to: CC:PA:LPD:PR (Notice 2010–85), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Comments may also be submitted electronically via the following e-mail address: Notice.Comments@irscounsel.treas.gov . Please include “Notice 2010–85” in the subject line of any electronic submission.

For calendar year 2011 only, and only until such time that the proposed revenue procedure is published in final form or Form 8944 is finalized and approved, tax return preparers who meet the definition of a specified tax return preparer for calendar year 2011 and who believe they may qualify for an undue hardship waiver may voluntarily submit written waiver requests to the IRS, and will not be required to use Form 8944 if the form is not yet publically available, provided each hardship waiver request contains the information described in sections 6.02(1) — (12) and 6.03 of the proposed revenue procedure. The IRS will provide further information on processing these hardship waiver requests, including time, place and date information, in a later announcement or notice.

For further information regarding this notice, contact Keith Brau of the Office of Associate Chief Counsel (Procedure & Administration). Mr. Brau may be contacted at 202–622–4940 (not a toll-free call).

and file. To promote the effective and efficient administration of the electronic filing requirement in section 6011(e)(3), proposed § 301.6011–6(a)(3) provides a transition rule for 2011, based upon the number of individual income tax returns a tax return preparer reasonably expects (if the preparer is a member of a firm, the preparer’s firm members in the aggregate reasonably expect) to file, to permit the IRS and affected tax return preparers sufficient time to prepare for and implement the requirement of section 6011(e)(3) and proposed § 301.6011–6. Beginning January 1, 2011, tax return preparers who reasonably expect to file (if a preparer is a member of a firm, the firm’s members in the aggregate reasonably expect to file) 100 or more individual income tax returns in calendar year 2011 are specified tax return preparers who are subject to these regulations in 2011. Beginning January 1, 2012, tax return preparers who reasonably expect to file (if a preparer is a member of a firm, the firm’s members in the aggregate reasonably expect to file) 11 or more individual income tax returns in a calendar year are specified tax return preparers who are subject to these regulations for that calendar year.

Proposed § 301.6011–6(c)(1) authorizes the IRS to grant to a specified tax return preparer a waiver of this requirement in the case of undue hardship upon application by the specified tax return preparer consistent with instructions provided in additional published guidance and as prescribed in relevant forms and instructions. Proposed § 301.6011–6(a)(4)(ii) also provides that a specified tax return

preparer is not required to electronically file individual income tax returns that taxpayers choose to file in paper format and which the taxpayers file with the IRS themselves, and that the IRS may provide guidance through forms, instructions, or other appropriate guidance regarding how a preparer can document a taxpayer’s choice to file in paper format. The proposed revenue procedure provides such additional guidance regarding undue hardship waiver requests and regarding how the preparer can document a taxpayer’s choice to file individual income tax returns in paper format.

The IRS requests comments on this proposed revenue procedure. In particular, the IRS requests comments regarding the procedures and methods for how a specified tax return preparer can request and obtain an undue hardship waiver, the proposed time period for making an undue hardship waiver request, and the elements required to be provided in an undue hardship waiver request, as well as comments on the Paperwork Reduction Act burden estimates contained in Section 11 of the proposed revenue procedure. The IRS also requests comments on the proposed procedures for how a preparer can document a taxpayer’s choice to file an individual income tax return in paper format. The comments should address procedures or mechanisms intended to make the proposed revenue procedure more efficient or functional.

Interested parties are invited to submit comments on this notice by January 3, 2011. Comments should be submitted to: Internal Revenue Service, CC:PA:LPD:PR (Notice 2010–85), Room 5205, P.O. Box

APPENDIX (PROPOSED REVENUE PROCEDURE)