Notice 2007-81 also — Internal Revenue Bulletin 2024-5

bonds (unless the call feature is makewhole) from the bond data set used to construct the daily corporate bond yield curve. The regulations generally retain this exclusion but narrow it. Under the proposed regulations, this exclusion does not apply if the call feature is exercisable

only during the last year before maturity. This type of call feature has recently become more widely used, and the inclusion of bonds with this feature in the data set will result in a significantly larger pool of bonds that more accurately reflects the market for high quality corporate bonds.

One commenter asked how the calculation of the yield of a corporate bond is affected by any options embedded in that bond. The complexity of the calculations involved in quantifying this effect is the reason that corporate bonds with embedded put and call options have been generally excluded from the set of bonds used to determine the corporate bond yield curve in the past. However, as noted in the preceding paragraph, including bonds with a call feature that is exercisable only during the last year before maturity significantly increases the pool of bonds that are taken into account in developing the corporate bond yield curve, and the Treasury Department and the IRS have determined that this feature does not significantly affect the yields of these bonds. Accordingly, no adjustment will be made to reflect the effect of this feature on bond yields.

Applicability Date

These regulations apply for purposes of determining the corporate bond yield curve under section 430(h)(2)(D) for months that begin on or after February 1, 2024.

Statement of Availability of IRS Documents

IRS Revenue Rulings, Revenue Procedures, and Notices cited in this document are published in the Internal Revenue Bulletin (or Cumulative Bulletin) and are available from the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402, or by visiting the IRS website at www.irs.gov.

3 The hump adjustment variable is a mathematical function that is a cubic spline in the interval from 10 years maturity through 30 years maturity made up of two polynomials with a smooth junction at 20 years maturity.

4 Under Notice 2007-81 and the regulations, the data for durations equal to or below ½ year that is used to construct the daily corporate bond yield curve consists of AA financial and AA nonfinancial commercial paper rates, as reported by the Federal Reserve Board.

5 Although section 939A(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376, generally prohibits federal agencies from issuing regulations that apply a standard that is based on credit ratings from statistical rating organizations, this prohibition does not apply to the construction of the daily corporate bond yield curve because the use of those credit ratings is required by section 430(h)(2)(D) of the Code.

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Special Analyses

Regulatory Planning and Review (Executive Orders 12866 and 13563)

Pursuant to the Memorandum of Agreement, Review of Treasury Regulations under Executive Order 12866 (June 9, 2023), tax regulatory actions issued by the IRS are not subject to the requirements of section 6 of Executive Order 12866, as amended. Therefore, a regulatory impact assessment is not required.

Regulatory Flexibility Act

It is hereby certified that this rule will not have a significant economic impact on a substantial number of small entities. The vast majority of plan sponsors of defined benefit plans that are subject to section 430 choose to use the segment rates under section 430(h)(2)(C), rather than the corporate bond yield curve under section 430(h)(2)(D), to determine minimum required contributions. Furthermore, most of the plan sponsors who choose to use the corporate bond yield curve for this purpose are not small employers. Therefore, the methodology set forth in these regulations for constructing the corporate bond yield curve will not have a significant effect on minimum required contributions for small employers. In addition, the insurance companies that are required to use a modified version of the corporate bond yield curve to discount unpaid losses are typically not small employers. Accordingly, a regulatory flexibility analysis under the Regulatory Flexibility Act is not required.

Pursuant to section 7805(f) of the Code, the proposed regulations that preceded these regulations were submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business, and no comments were received.

Unfunded Mandates Reform Act

Section 202 of the Unfunded Mandates Reform Act of 1995 requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any

one year by a State, local, or Tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. These regulations do not include any Federal mandate that may result in expenditures by State, local, or Tribal governments, or by the private sector in excess of that threshold.

Executive Order 13132: Federalism

Executive Order 13132 (Federalism) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on State and local governments, and is not required by statute, or preempts State law, unless the agency meets the consultation and funding requirements of section 6 of the Executive order. These regulations do not have federalism implications, impose substantial direct compliance costs on State and local governments, or preempt State law within the meaning of the Executive order.

Congressional Review Act

Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.), the Office of Information and Regulatory Affairs designated this rule as not a major rule, as defined by 5 U.S.C. 804(2).

Drafting Information

The principal authors of these regulations are Arslan Malik and Linda S. F. Marshall of the Office of Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes). However, other personnel from the Treasury Department and the IRS participated in the development of these regulations.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

Accordingly, the Treasury Department and the IRS amend 26 CFR part 1 as follows:

Paragraph 1. The authority citation for part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.430(h)(2)-1 is amended by:

Removing the phrase “and transition rules” in the last sentence of paragraph (a) (1);
Revising paragraph (b)(2);
Removing the last sentence in paragraph (c)(1);
In paragraphs (c)(2)(i) through (iii), removing the phrase “under the transition rule of paragraph (h)(4) of this section” and adding the phrase “under the interest rate stabilization rules in section 430(h)(2) (C)(iv)” in its place;
Revising paragraph (d);
Removing paragraph (e)(3) and redesignating paragraph (e)(4) as paragraph (e)(3);
In newly redesignated paragraph (e) (3)(ii), removing the phrase “this paragraph (e)(4)” and adding the phrase “this paragraph (e)(3)” in its place;
Redesignating paragraph (e)(5) as paragraph (e)(4); and
Revising paragraph (h). The revisions read as follows:

§ 1.430(h)(2)-1 Interest rates used to determine present value.

(b) * * * (2) Benefits payable within 5 years . In the case of benefits expected to be payable during the 5-year period beginning on the valuation date for the plan year, the interest rate used in determining the present value of the benefits that are included in the target normal cost and the funding target for the plan is the first segment rate with respect to the applicable month, as described in paragraph (c) (2)(i) of this section.

(d) Monthly corporate bond yield curve —(1) In general —(i) Construction of monthly corporate bond yield curve . For purposes of this section, the monthly corporate bond yield curve for a month is defined as the set of spot rates at specified durations. The specified durations are at

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6-month intervals ranging from 6 months through 100 years and the spot rate at a duration is the yield (when compounded semiannually) for a bond that matures at that duration with a single payment at maturity. The monthly corporate bond yield curve is constructed as the average of the spot rates from the set of daily corporate bond yield curves as specified in paragraph (d)(1)(ii) of this section. Each daily corporate bond yield curve is constructed using the methodology set forth in paragraph (d)(2) of this section based on the data described in paragraph (d)(3) of this section. The yield curve for each month will be published in the Internal Revenue Bulletin. See § 601.601(d) of this chapter.

(ii) Monthly corporate bond yield curve constructed through averaging . Each spot rate at a specified duration on the monthly corporate bond yield curve for a month is equal to the arithmetic average, for each business day of that month, of the spot rates at that duration on the daily corporate bond yield curves.

(2) Construction of the daily corporate bond yield curve— (i) In general —(A) Calculation of spot rates . The spot rate at duration of ½ year on the daily corporate bond yield curve is set equal to the yield at maturity of ½ year from the daily par yield curve described in paragraph (d)(2) (i)(B) of this section. The spot rate for any later duration on the daily corporate bond yield curve is determined by applying an iterative process based on the spot rates at earlier durations and the daily par yield curve.

(B) Calculation of par yield curve . The daily par yield curve (that is, the curve in which the rate at maturity t on the curve is equal to the yield for a bond with maturity of t for which the price is the same as the principal amount) is calculated from the discount function described in paragraph (d)(2)(i) (C) of this section and the hump adjustment variable described in paragraph (d) (2)(iii)(D) of this section.

(C) Derivation of discount function . The discount function for a day at duration t (denoted d(t)) is derived from the forward interest rate function as described in paragraph (d)(2)(ii) of this section (denoted f(z) ) using the following equation:

(ii) Determination of forward interest rates —(A) In general . The forward interest rate function used to derive the discount function is determined as a series of cubic polynomials (referred to as a cubic spline) that have a smooth junction at specified knot points (maturities of 0, 1.5, 3, 7, 15, and 30 years). The requirement that the polynomials have a smooth junction at a knot point is satisfied if the two polynomials that are meeting at the knot have the same value, the same derivative, and the same second derivative at that knot point.

(B) Constraints on the forward interest function . The following three constraints are placed on the forward interest rate function—

( 1 ) The second derivative of the function is set to 0 at maturity 0.

( 2 ) The value of the forward interest rate function at and after 30 years is constrained to equal its average value from 15 to 30 years.

( 3 ) The derivative of the forward interest rate function is set to 0 at maturity 30 years.

(iii) Parameters for daily bond price model —(A) B-spline coefficients . The assumed cubic spline for the forward interest rate function can be described as a linear combination of B-splines, with five parameters, which are determined taking into account the two coefficients for the bond-quality adjustment variables described in paragraphs (d)(2)(iii)(B) and (C) of this section and the coefficient for the hump adjustment variable described in paragraph (d)(2)(iii)(D) of this section. The five parameters and three coefficients are determined using the bond data weighted as described in paragraph (d)(2) (iv) of this section. After this weighting of the bond data, the five parameters and three coefficients are chosen to minimize the sum of the squared differences between the bid price for each of the bonds (or ask price for commercial paper) and the price estimated for each of those bonds determined using the specified parameters and

Equation 1 to Paragraph (d)(2)(i)(C)

t d ( t ) = exp - f ( z ) dz

exp - f ( z ) dz