Guidance on ERISA Notice for Underfunded Pension Plans

By Ken Berry  

The IRS has provided new guidance on notice requirements under the Employee Retirement Income Security Act (ERISA) for single-employer defined plans, like pension plans, when the plan fails to meet certain funding levels (Notice 2012-46). Generally, a plan administrator must provide notice to plan participants and beneficiaries within thirty days if the "funding target attainment percentage" (FTAP) dips below the 60 percent mark. The penalty for each violation can run as high as $1,000 per day.
 
A plan's FTAP is defined as the percentage equal to the value of plan assets for the plan year, divided by the funding target for the plan year. Similarly, an "adjusted funding target attainment percentage" (AFTAP) is determined by adding purchases of employee annuities in the prior two plan years. 

Talking Points

  • Plan administrators must provide notice to participants and beneficiaries within thirty days if the FTAP is below 60 percent.
  • New IRS Notice 2012-46 describes the information that must be included in a proper notification.
  • If notice is required for multiple reasons, it may be combined in a single notice. 
  • The new Notice is effective as of October 22, 2012, but plan administrators can rely on it before then.
 
 
Notice is required within thirty days when:
  • The plan becomes subject to a limit on unpredictable contingent event benefits.
  • The plan becomes subject to a limit on prohibited payments.
  • Benefit accruals must end under the plan.
  • An unpredictable contingent event has occurred.
An unpredictable contingent event benefit is a benefit payable due to a shutdown or similar event, or an event other than one based on age, performance of services, receipt of compensation, death, or disability. The limit on these benefits is triggered on the first measurement date for which the AFTAP is presumed or be, or is certified to be, less than 60 percent. 
 
Prohibited payments include payments exceeding the monthly payment under a single life annuity, and payments to insurers for an irrevocable commitment to pay benefits (but payments of benefits with a value of $5,000 or less aren't prohibited). Limits on making prohibited payments apply if a plan's AFTAP falls below 60 percent or 80 percent (in the case of partial payments), or if the plan sponsor goes bankrupt.
 
Under the new guidance, notification must be provided to plan participants' beneficiaries on the first date that particular limits take effect. The IRS describes in detail the information that must be included when providing notice - such as plan identification, a description of the limits, the conditions under which the limits will no longer apply, and the effective date of the limits - in new Notice 2012-46. A plan may combine notices if more than one limit applies.
 
Finally, be aware that Notice 2012-46 takes effect on October 22, 2012, but plan administrators can rely on it before then. Notice may be provided by electronic means if it is reasonably accessible.
 
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