BENEFIT RESTRICTIONS FOR UNDERFUNDED DEFINED BENEFIT PLANS

The Pension Protection Act of 2006 (PPA) established new funding requirements as part of the Act's sweeping changes for qualified retirement plans. These new changes include a requirement for additional actuarial certifications to determine if the plan is subject to new benefit restrictions. Restrictions apply if the plan does not meet specific funding percentage levels.

Under PPA new actuarial funding rules were created. A plan's "Adjusted Funding Target Attainment Percentage" (AFTAP) is calculated. Benefit restrictions apply if the AFTAP is less than 80%. Further restrictions apply if the AFTAP is less than 60%.

Benefit Restrictions Imposed by New Rules:

For AFTAP less than 80%:

No plan amendments which increase benefits or establish new benefits are allowed until the AFTAP is certified to exceed this limitation. The plan is prohibited from paying "accelerated benefit payments" (e.g. lump sum payments) to plan participants. This means no terminated plan participant may choose a distribution option other than the statutory lifetime annuity option under the plan. Lump sums may not be paid in full until an AFTAP certification establishes that the plan is sufficiently funded.

For AFTAP less than 60%:

The plan must freeze all future benefit accruals. No new benefits may be earned under the plan until an actuarial certification establishes that AFTAP exceeds 60%.

A plan with no AFTAP Certification is assumed to have an AFTAP of less than 60% and is subject to all benefit restrictions.

The plan actuary will prepare the necessary AFTAP certification as soon as all pertinent data is submitted for the plan. The data needed by the actuary is the same information required each year to determine your plan contributions every year.

Plan sponsors are required to provide written notice of the applicable benefit restrictions to plan participants and beneficiaries within 30 days of the effective date of benefit restrictions. All plans are deemed to be subject to these restrictions until an AFTAP Certification is performed and notice must be provided to all plan participants.

A sample Notice of Plan Benefit Restrictions is included with this bulletin and should be distributed to all employees participating in your defined benefit plan. The notice clearly indicates that benefit restrictions will be lifted as soon as the AFTAP Certification is complete which demonstrates that the plan meets the new funding requirements.