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Pension Plans Subject to Benefit Restrictions Following the Pension Protection Act of 2006

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Pension Plans Subject to Benefit Restrictions Following the Pension Protection Act of 2006

04 Apr, 2011
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Employees, executives, retirees and soon-to-be retirees in Chicago participating in a single-employer defined benefit pension plan may encounter unpleasant benefit restrictions because of plan underfunding. According to a study by Mercer, in 2007 large employers’ pension plans were over 100% funded. Just three years later, in 2010, the same test group of plans were only 73% funded. Following the passage of the Pension Protection Act of 2006, which took effect in 2008, certain benefit restrictions would begin to apply to some underfunded plans, with the various restrictions depending on the funding level.

For purposes of benefit restrictions, the funding level is derived from the Adjusted Funding Target Attainment Percentage (“AFTAP”), defined in I.R.C. § 436(j)(2). The Internal Revenue Code proscribes a complex scheme of applying presumed AFTAPs, until the plan provides an actual AFTAP certified by an enrolled actuary. An employer may not amend the plan in a way that would increase benefit liabilities if the AFTAP is below 80%, or the amendment would cause it to dip below 80%. Id. § 436(c). Also, plans less than 80% funded will become subject to partial payment restrictions, limiting accelerated payments (e.g., lump sum distributions) to half the value of the benefits. Id. § 436(d).

Plans funded less than 60% can pay no accelerated benefits. Id. In these cases, the participant will be forced to leave the money in the plan, except for a monthly annuity distribution based on a single life expectancy. Plans under 60% funded also must freeze the annual benefit accruals of participants still working. Id. § 436(e). These under 60% funded plans also may not pay any “unpredictable contingent event” benefits, commonly dubbed plant shutdown benefits. Id. § 436(b).

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