Under Internal Revenue Code Section 436, which was added by the Pension Protection Act of 2006 (“PPA”), calendar year defined benefit pension plans must be amended by December 31, 2012. Section 436 provides a series of limitations on the accrual and payment of benefits under an underfunded plan.
The provisions of Section 436 apply only to significantly underfunded pension plans. However, all defined benefit plans must be amended to reflect these benefit restriction provisions. The amendment period was extended by the Internal Revenue Service from 2009 to the last day of the first plan year that begins on or after January 1, 2012, i.e., December 31, 2012, for calendar year plans.
Most plan sponsors adopted PPA amendments in 2009. Those PPA amendments may not have included the benefit restrictions required by Code Section 436 because the IRS extended the deadline for adopting the benefit restriction amendments.
In December 2011, the IRS issued Notice 2011-96, which included IRS model language as a safe harbor for the Code Section 436 provisions. Even employers who previously adopted the Code Section 436 benefit restriction provisions with their PPA amendments should consider amending their plans to adopt the IRS’ safe harbor model language. Upon an IRS audit or the next IRS determination letter application review, the adoption of this safe harbor language will be helpful and will avoid the risk that an amendment adopted to comply with Code Section 436 does not actually comply with the Internal Revenue Code requirements. Of course, for those plans that have not adopted Code Section 436 benefit restriction provisions at all, the safe harbor model language should be adopted in a timely manner.