Pension Protection Act of 2006 Tax Issues

Guidance on timing of PPA-related amendments for calculating plan cash-outs starting in 2008

IRS has issued guidance, in question and answer format, that addresses the timing of plan amendments made to comply with Sec. 302 of the Pension Protection Act of 2006 (PPA 2006, P.L. 109-280, Sec. 302), which changed the statutory assumptions that must be used beginning in 2008 for calculating the present value of plan cash-outs.

Background. For purposes of the Code Sec. 417(e)(3) cash-out requirements under the minimum survivor annuity rules, the present value of plan benefits cannot be less than the present value calculated by using the “applicable mortality table” and the “applicable interest rate” (collectively, the “statutory assumptions”). PPA Sec. 302 changed the definitions of those statutory assumptions, effective for plan years beginning on or after Jan. 1, 2008.

For plan years beginning before Jan. 1, 2008:

o the “applicable interest rate” was, generally, the annual rate of interest on 30-year Treasury securities (the “pre-PPA ’06 applicable interest rate”); and
o the “applicable mortality table” was the mortality table prescribed by IRS, based on the prevailing commissioners’ standard table used to determine group reserves for group annuity contracts issued on the date as of which the present value was determined (the “pre-PPA ’06 applicable mortality table”).

For plan years beginning on or after Jan. 1, 2008:

o the “applicable interest rate” is the adjusted first, second, and third segment rates applied under rules similar to the rules under Code Sec. 430(h)(2)(C) for the month before the date of the distribution, or such other time as IRS regs prescribe, determined without regard to the Code Sec. 430(h)(2)(D)(i) 24-month averaging, with a transition rule that phases in the use of the segment rates over five years (the “post-PPA ’06 applicable interest rate”); and
o the “applicable mortality table” is a mortality table, modified as appropriate by IRS, based on the mortality table specified for the plan year under Code Sec. 430(h)(3)(A) (without regard to subparagraph (C) or (D)), the “post-PPA ’06 applicable mortality table.” There is no transition rule for the applicable mortality table.

Although PPA Sec. 302 is effective for plan years beginning on or after Jan. 1, 2008 (the “PPA Sec. 302 effective date”), PPA Sec. 1107 permits a plan sponsor to delay adopting plan amendments under statutory provisions of the PPA (or under any regulation issued under the PPA) until the last day of the first plan year beginning on or after Jan. 1, 2009 (Jan. 1, 2011, for governmental plans). IRS has now issued guidance that addresses specific questions related to the timing of plan amendments made to comply with the requirements of PPA Sec. 302, while taking into account the delayed amendment period provided under PPA Sec. 1107.

Guidance on timing of plan amendments. If, after the PPA Sec. 302 effective date, a plan is amended during the period provided in PPA Sec. 1107, to provide that the amount payable under an optional form of benefit is calculated as the more favorable to participants of the amount calculated by using either (1) the pre-PPA ’06 statutory assumptions, or (2) the post-PPA ’06 statutory assumptions, the plan won’t fail to satisfy the requirement that a qualified joint and survivor annuity (QJSA) for a married participant be at least as valuable as any other form of benefit payable under the plan at the same time. IRS cautioned, however, that this special treatment permitting use of the pre-PPA ’06 statutory assumptions applies only through the end of the period described in PPA Sec. 1107. (Notice 2008-30, Q&A-16)

If a plan is amended as described in Q&A-16 (above), but provides that benefits cease to be calculated by using the pre-PPA ’06 statutory assumptions after a specified period, relief under PPA Sec. 1107, as described in Rev Rul 2007-67, 2007-48 IRB (see Federal Taxes Weekly Alert 11/08/2007), generally applies to the amendment.

In general, relief under PPA Sec. 1107 applies to an amendment that provides the more favorable to participants of an amount calculated by using either (1) the pre-PPA ’06 statutory assumptions, or (2) the post-PPA ’06 statutory assumptions, even if the pre-PPA ’06 statutory assumptions apply only for a specified period of time (as long as the amendment is adopted during the period provided in PPA Sec. 1107). However, for a particular plan provision, relief under PPA Sec. 1107 applies only to the first plan amendment that implements the post-PPA ’06 statutory assumptions for the provision, and any later amendment for the provision will not be treated as adopted “pursuant to” statutory provisions under PPA ’06, as required for relief under PPA Sec. 1107.

For purposes of determining whether an amendment that implements the post-PPA ’06 statutory assumptions for a particular plan provision is the first such amendment, amendments adopted on or before June 30, 2008, are disregarded. Thus, if a plan amendment is adopted that provides that the amount payable under an optional form of benefit is calculated in the manner described in Q&A-16, and the plan is later amended (during the period provided in PPA Sec. 1107) so that the amount payable is calculated without reference to the pre-PPA ’06 statutory assumptions, then the relief under PPA Sec. 1107 will apply to the later amendment only if the initial amendment was adopted on or before June 30, 2008. (Notice 2008-30, Q&A-17)

The relief under PPA Sec. 1107, as described in Rev Rul 2007-67 and Notice 2008-30, applies to a plan amendment that replaces a plan reference to the pre-PPA ’06 statutory assumptions with a reference to the post-PPA ’06 statutory assumptions, without regard to whether PPA Sec. 302 requires that amendment.

IRS provided the following example to illustrate how this rule applies to a plan that is subject to the Code Sec. 401(a)(11) qualified survivor annuity rules. If a plan calculates the amount of an optional form of benefit that is not subject to the Code Sec. 417(e)(3) minimum present value requirements by reference to the pre-PPA ’06 statutory assumptions, and the plan is amended pursuant to an amendment adopted during the period established in PPA Sec. 1107 so that the plan calculates the amount of the optional form of benefit by reference to the post-PPA ’06 statutory assumptions, then the plan will not fail to satisfy the Code Sec. 411(d)(6) anti-cutback rules by reason of the amendment. (Notice 2008-30, Q&A-18)