SERVICE DEFERS INTEREST CHARGES ON LATE PAYMENTS OF QUARTERLY INSTALLMENTS PAID INTO DEFINED BENEFIT PLANS.

Notice 89-52

This notice provides guidance, in the form of questions and answers, with respect to the requirement that contributions to pension plans be made in quarterly installments under section 412(m) of the Internal Revenue Code as added by section 9304(b) of the Omnibus Budget Reconciliation Act of 1987 (OBRA '87). In addition, this notice provides a transitional rule regarding the amortization period for experience gains and losses determined in the valuation for plan years beginning on January 1, 1988. BACKGROUND Section 9304(a) of OBRA '87 amended section 412(c)(10) for plan years beginning after December 31, 1987, to provide that the minimum funding requirements for pension plans that are not multiemployer plans ("nonmulti-employer plans") for a plan year is satisfied as of the last day of such plan year if the required payment is made within eight and one-half months after the last day of such plan year. Section 9304(b) of OBRA '87 added section 412(m) for plan years beginning after December 31, 1988 to require that a portion of the required minimum funding for a nonmultiemployer plan for a plan year be contributed by the employer in quarterly installments within 15 days after the end of each quarter of the plan year. Section 412(m)(2)(C) provides that contributions are credited against unpaid required installments in the order in which such installments are required to be paid. Section 9307(a)(1) of OBRA '87 also amended section 412(b) for plan years beginning after December 31, 1987 to provide that experience losses and gains for nonmultiemployer plans be amortized over a 5-year period instead of a 15-year period. QUESTIONS AND ANSWERS Q-1: When are quarterly installments due? A-1: Section 412(m)(3) requires that starting with the first plan year beginning in 1989, quarterly installments are due 15 days after the end of each quarter. For example, in the case of a calendar year plan, the first installment for the current plan year is due April 15th of such year. Subsequent installments are due July 15th and October 15th of the current year and January 15th of the following plan year. Q-2: What are the consequences of a late payment of a quarterly installment? A-2: Section 412(b)(5) requires that the funding standard account ("FSA") be charged with interest at the appropriate rate, consistent with the rate or rates of interest used under the plan to determine costs (the "applicable interest rate for the FSA"). However, if there is a late payment of a quarterly installment, a portion of the interest charged to the FSA is based on the rate required under section 412(m)(1). The amount of interest charged to the FSA attributable to the late amount is based on 175% of the Federal mid-term rate (as in effect under section 1274 for the first month of the plan year) or if greater, the otherwise applicable interest rate for the FSA. The interest is charged from the due date to the date the late amount is actually contributed (regardless of the date such contribution is deemed to have been contributed under section 412(c)(10)). However, with respect to the first quarterly installment for the 1989 plan year, the interest rate under section 412(m)(1)(A) (i.e., 175% of the Federal mid-term rate) will not apply until 30 days after the publication of this notice in the Internal Revenue Bulletin. Furthermore, for a nonmultiemployer defined benefit plan, if the aggregate amount of all underpayments of quarterly installments and other payments required under section 412 exceeds $1,000,000, a lien in favor of the plan may arise under section 412(n) on the property of the person who failed to make the payment to the plan. EXAMPLE 1 -- Assume for a calendar year plan year, a required installment of $6,250 is due April 15, 1989, but is not actually contributed until June 15, 1989. Further, assume that the interest rate under section 412(b)(5) is 8.00% and 175% of the Federal mid-term rate in effect on January 1, 1989 is 16.41%. (For purposes of this example, the extension of the date from which 412(m)(1)(A) applies is not considered.) The interest charge to the 1989 FSA, before reflecting the requirements of section 412(m), is based on 8.00%. However, for the two-month period of underpayment of the quarterly installment the rate used to determine the interest charge on the late installment is 16.41%. The amount of interest charged to the 1989 FSA, attributable to the two month period of underpayment of the $6,250 required installment, is $160 [($6,250 times 1.1641 (to the 2/12 power) minus $6,250]. Had the required installment been timely contributed, the charge would have been $81 [($6,250 times 1.08 (to the 2/12 power) minus $6,250]. (Of course, there would also have been an interest credit in the 1989 FSA of $81 on account of such contribution.) Therefore, an additional $79 [$160 - $81] is charged to the 1989 FSA as a result of the late payment. EXAMPLE 2 -- Assume the same facts as in Example 1, except that the April 15th required installment of $6,250 is not paid until September 15, 1990. (For purposes of this example, the extension of the date from which section 412(m)(1)(A) applies is not considered.) Under section 412(b) interest is charged to the FSA only to the end of the plan year. Under section 412(m)(1), however, interest is charged for the full period of underpayment, or in this case, seventeen months. By applying the higher interest rate for the entire period of underpayment, the interest charged to the 1989 FSA attributable to the late installment is $1,501 [($6,250 times 1.1641 (to the 17/12 power) minus $6,250]. Had the required installment been timely contributed, the charge would have been $350 [($6,250 times 1.08 (to the 8.5/12 power) minus $6,250]. (Of course, there would also have been an interest credit in the 1989 FSA of $350 on account of such contribution.) Therefore, an additional $1,151 [$1,501 - $350] is charged to the FSA as a result of the late payment. Q-3: Does the interest charge on late quarterly installments apply to money purchase pension plans? A-3: No interest is charged under section 412(m)(1) on late or unpaid quarterly installments required for money purchase pension plans (including target benefit defined contribution plans). Q-4: What is the amount of a quarterly installment? A-4: In general, each quarterly installment is equal to the applicable percentage of the Required Annual Payment ("RAP"). Additional adjustments may be required in the case of a plan with an unpredictable contingent event liability. The RAP for any plan year is the lesser of 90% of the amount required to be contributed to the plan under section 412 for the current plan year (adjusted to the beginning of the plan year) or 100% of the amount required to be contributed to the plan for the preceding plan year. If the preceding plan year was not a twelve-month plan year, the RAP for the plan year is 90% of the amount required to be contributed under section 412 for the current plan year (See Example 3, Q&A-10). The amount required to be contributed to the plan for a plan year ("minimum funding requirement") is the amount necessary to avoid a funding deficiency as of the end of that plan year. This amount is generally determined by reference to the Schedule B filed for the applicable plan year. If the amount required to be contributed is restricted by the full funding limitation of section 412(c)(7), such limitation is the minimum funding requirement for such plan year. Contributions made for the preceding year are disregarded in determining 100% of the preceding year's minimum funding requirement and contributions made for the current year are disregarded in determining 90% of the current year's minimum funding requirement. An example of the calculation of the amount of a quarterly installment is provided in Q&A-10. Q-5: What is the applicable percentage of the RAP that must be paid in each quarterly installment? A-5: Section 412(m)(4)(C) defines the applicable percentage to be 6.25% for plan years beginning in 1989, 12.5% for plan years beginning in 1990, 18.75% for plan years beginning in 1991 and 25% for plan years beginning after 1991. Q-6: Is a credit balance taken into account in determining the RAP? A-6: The minimum funding requirement for a plan year is determined without regard to any credit balance as of the beginning of such plan year. For example, to calculate the RAP for a 1989 calendar plan year, a credit balance as of December 31, 1987 is disregarded in determining 100% of the preceding plan year's minimum funding requirement and a credit balance as of December 31, 1988 is disregarded in determining 90% of the current year's minimum funding requirement. Q&A-12 addresses the issue of treating a credit balance as payment of all or a portion of a quarterly installment. Q-7: Is an accumulated funding deficiency taken into account in determining the RAP? A-7: In determining 100% of the preceding year's minimum funding requirement, the employer must take into account any accumulated funding deficiency that existed as of the beginning of such preceding plan year. In determining 90% of the current year's minimum funding requirement, the employer must take into account any accumulated funding deficiency that existed at the beginning of the current plan year. However, because the first two quarterly installments are due before the end of the 8 1/2 month period during which contributions may be made for the preceding plan year, the quarterly installment may be determined without reflecting such deficiency. If at the end of the 8 1/2 month period, it is established that an accumulated funding deficiency did exist at the beginning of the current plan year, the employer must recalculate the quarterly installment amount taking into account such deficiency. To the extent that this recalculation indicates an underpayment of any installment previously made, the rules regarding interest charges and liens under section 412(m)(1) and (n) apply. For example, for a plan year beginning on January 1, 1989, an employer may disregard an accumulated funding deficiency existing on such date in calculating the amount of the 1989 quarterly installments as long as the employer contributes an amount necessary to cure the deficiency on or before September 15, 1989. If the accumulated funding deficiency has not been cured on or before September 15, 1989, the amount of the quarterly installments for 1989 must be recalculated so that the 1989 minimum funding requirement will reflect any accumulated funding deficiency existing on January 1, 1989. Q-8: Is a minimum funding requirement that was waived in accordance with section 412(d) taken into account in determining the RAP? A-8: If the minimum funding requirement for the preceding plan year has been waived, the determination of 100% of the preceding year's minimum funding requirement is made as if no amount was waived. In addition, any amortization charges resulting from a funding waiver for an earlier plan year are included in the determination of the minimum funding requirement for both the current plan year and the preceding plan year. For example, to calculate the RAP for a 1989 calendar plan year assuming a waiver was granted for a portion of the minimum funding requirement for 1988, such waiver is disregarded in determining 100% of the preceding year's minimum funding requirement. The amortization of the waived amount is included in determining 90% of the current year's minimum funding requirement. The determination of 90% of the current year's minimum funding requirement should generally be made assuming that no waiver will be granted for the current plan year. If any amount is disregarded in anticipation of a waiver of such amount for the current plan year, and such waiver is subsequently denied, the rules regarding interest charges and liens under section 412(m)(1) and (n) apply. Q-9: How is the current year's RAP determined if a plan used the alternative minimum funding standard described in section 412(g) in either the preceding plan year or the current plan year? A-9: The RAP for any plan year is based on the funding standards used for the preceding plan year and current plan year. For example, assume that a plan uses the alternative minimum funding standard in 1988 and uses the regular funding standard in 1989. The 1989 RAP is the lesser of 100% of the minimum funding requirement for 1988, based on the alternative funding standard or 90% of the minimum funding requirement for 1989, based on the regular minimum funding standard. Q-10: How is the amount of the first quarterly installment, as well as subsequent required installments, determined? A-10: In general, the amount of each quarterly installment for a plan year is determined by multiplying the RAP by the applicable percentage for the plan year. Each installment made during the plan year is credited with the appropriate amount of interest to the FSA from the contribution date to the end of the plan year. To the extent that a quarterly installment is made before the due date, interest credited for the period before such installment was due may be used to reduce the amount necessary to meet a future installment for the same plan year. Similarly, if an amount in excess of the quarterly installment is contributed, such excess (and interest credited with respect to such excess) may be used to reduce the amount needed to meet a future installment. Q&A-14 illustrates how this is done. EXAMPLE 3 -- In determining the amount of the quarterly installments for the 1989 plan year for a calendar year plan, assume the 1988 minimum funding requirement as of December 31, 1988 is $100,000, and the 1989 minimum requirement as of December 31, 1989 is $125,000. First, adjust the $125,000 amount for 1989 by discounting at the appropriate interest rate(s) to determine the minimum funding requirement at the beginning of the plan year (8% for purposes of this example). Next determine the lesser of 90% of the discounted $125,000 amount for 1989 or 100% of the $100,000 amount for 1988. The final step is to multiply the lesser amount, the 1989 RAP, by the applicable percentage. A summary follows:

      (1) 1988 amount due 12/31/88                           $100,000

Q-11: Are contributions made during the 8 1/2 month period following the end of a plan year considered contributions for the prior plan year or the current plan year?

A-11: Contributions for a plan year may be contributed at any time during that plan year. In addition, section 412(c)(10) allows contributions made within the 8 1/2 month period following the end of a plan year to be deemed to have been made on the last day of such plan year.

An employer may designate whether contributions made during the 8 1/2 month period following the end of a plan year are made for the current plan year (the year in which the contributions were made) or the prior plan year, but not for a future plan year. Contributions may be designated for only one plan year. This designation is reported on Schedule B of Form 5500. If no designation is made, a contribution is treated as designated for the plan year in which it is made. The FSA for a plan year is credited with all contributions designated to be made for such plan year.

EXAMPLE 4 -- Assume the same facts as in Example 3. In addition, assume that the employer did not make any contribution for the 1988 plan year by the end of 1988. The employer contributed $6,250 on April 10, 1989, $6,250 on July 10, 1989, and $100,000 on September 10, 1989. The employer designated the first two of these contributions as being made for the 1989 plan year (amounts necessary to meet the requirements of section 412(m) for the 1989 plan year) and the third contribution as being made for the 1988 plan year.

Only the third contribution (the September 10, 1989 contribution) is credited to the 1988 FSA. The first two contributions are reported on the 1989 Schedule B and are credited to the 1989 FSA with the applicable interest adjustments.

This notice does not consider and has no effect on the designation of the year with respect to employer contributions for purposes of section 404(a)(1) or (6).

Q-12: May an employer treat all or a portion of a credit balance in a plan's FSA as a payment of a quarterly installment?

A-12: An employer may treat all or a portion of a credit balance in a plan's FSA as a payment of a quarterly installment.

EXAMPLE 5 -- Assume the same facts as Example 3, except that an amount in excess of the 1988 minimum funding requirement was contributed during 1988 and that such contribution resulted in a credit balance of $10,000 on December 31, 1988. It was determined in Example 3 that the amount of the first quarterly installment due on April 15, 1989 is $6,250. At that time, the credit balance, with three and a half months' interest, equals $10,227. Even if no contribution is made by April 15, 1989, the first installment requirement is satisfied because the credit balance with interest exceeds the amount of the quarterly installment due. The amount of excess, $3,977, with three months' interest to the due date of the second installment, is $4,054 and may be used to reduce the amount required to be contributed for the second installment. Therefore, as long as $2,196 [$6,250 - $4,054] is contributed by July 15, 1989, the second installment requirement will be satisfied. The full $6,250 must be contributed for the third and fourth installments unless additional contributions are made for the 1988 plan year on or before September 15, 1989.

Contributions for the prior plan year will not be reflected in the determination of any credit balance until they are actually contributed to the plan. The intent to contribute the required amount within 8 1/2 months after the end of the prior plan year is not sufficient. For example, in the previous example, if no contribution for the 1988 plan year had been made by April 15, 1989, no credit balance could have been taken into account in determining the amount needed to satisfy the first installment requirement, unless the amount of credit balance as of December 31, 1987 was greater than the 1988 minimum required contribution.

Q-13: Are quarterly installments required for the first plan year to which section 412 applies?

A-13: Quarterly installments are not required for the first plan year to which section 412 applies.

Q-14: If the amount contributed is in excess of the required quarterly installment (either due to an overpayment or a contribution made prior to the due date with no interest adjustment), may such overpayment be used to reduce the payment of a subsequent quarterly installment?

A-14: The overpayment of a quarterly installment may be used to reduce the payment necessary to satisfy a subsequent quarterly installment for the same plan year.

EXAMPLE 6 -- Assume the same facts as in Example 3, except that the amount of a quarterly installment was initially determined based only on the prior year's minimum funding requirement, because the current year's requirement was not yet determined by April 15, 1989. In addition, assume that the first two quarterly installments of $6,250 were contributed on April 15, 1989 and July 15, 1989. It is subsequently determined (upon completion of the current year's valuation) that the 1989 minimum funding requirement as of December 31, 1989 is $75,000 (instead of $125,000 as in Example 3). The correct quarterly installment amount is $3,906 [90% of ($75,000 divided by 1.08) times .0625]. The first installment of $6,250 exceeded the required $3,906 by $2,344 as did the second. Reflecting the interest to be credited in the FSA to October 15, 1989 (the due date of the third installment, a total of $4,825 [$2,344 x 1.08 (to the 6/12 power) plus $2,344 x 1.08 (to the 3/12 power)] has been overpaid. The third installment of $3,906 is entirely satisfied by such overpayment; the amount of overpayment is reduced to $919. After reflecting interest to December 31, 1989 (no interest is credited in the FSA after the end of the plan year), the overpayment is $934. The amount required to satisfy the final installment on January 15, 1989 is $2,972 [$3,906 - $934].

Q-15: If the 1989 valuation for a plan indicates that the quarterly installments made for the 1989 plan year exceed the deductible amount for the 1989 plan year, may the excess of the amount contributed over the deductible limit be designated as a contribution for the 1988 or 1990 plan year?

A-15: To the extent that the payments were made within the period allowed by section 412(c)(10) for the 1988 plan year, such contributions may be designated for the 1988 plan year. Contributions so designated are included in the determination of the maximum deductible amount for the 1988 plan year. Further, contributions of quarterly installments made in the 1990 plan year may be designated as contributions for the 1990 plan year.

Q-16: May all or part of the payment of a quarterly installment be returned to the employer as a mistake of fact merely because such payment is in excess of the deductible limits?

A-16: Rev. Rul. 77-200, 1977-1 C.B. 98, allows for the reversion of certain nondeductible contributions only if the amount to be returned was contributed as a result of a good faith mistake of fact. Nondeductibility is not a mistake of fact.

Future guidance will provide limited relief permitting reversions to employers of certain contributions.

Q-17: Because the first quarterly installment for any plan year is due 3 1/2 months after the end of the preceding plan year and the amount of such installment is based on the minimum funding requirement for the preceding plan year, must the valuation for the preceding plan year be finalized within such 3 1/2 month period, even though contributions for such plan year are not required to be made until 8 1/2 months after the end of such plan year?

A-17: Valuations need not be finalized within the 3 1/2 month period. However, if the final valuation indicates that a previously made installment was not sufficient to meet the requirements of section 412(m), the rules regarding interest charges and liens under section 412(m)(1) and (n) apply.

Q-18: What is the amortization period for experience gains or losses determined in valuations for plan years beginning after December 31, 1987?

A-18: Prior to OBRA '87, experience gains and losses were amortized (in equal annual installments) over 15 plan years until fully amortized for purposes of the minimum funding standards for pension plans under section 412. OBRA '87 amended sections 412(b)(2)(B)(iv) and 412(b)(3)(B)(ii) to provide that experience gains an losses are amortized (in equal annual installments) over 5 plan years until fully amortized (15 plan years in the case of a multiemployer plan). This change is effective for plan years beginning after December 31, 1987, and applies to experience gains and losses determined in valuations of a plan's liabilities for such years. Previously determined experience gains and losses continue to be amortized over 15 plan years.

For example, for a plan with a calendar plan year, the gain or loss determined in the valuation for the 1988 plan year is amortized over 5 plan years beginning with the 1988 plan year.

There has been some uncertainty regarding the effective date of the change to a 5-year amortization period for experience gains and loses for calendar year plans. Accordingly, an employer may apply an optional transitional rule with respect to to the amortization in the funding standard account of the experience gain or loss determined in the valuation for the plan year beginning in 1988 ("the transition loss (gain)"). This transitional rule may be used only if the plan had a calendar year plan year for 1988 and the valuation date for the 1988 plan year was January 1, 1988.

Under the transition rule, the amount charged (or credited in the case of an experience gain) to the 1988 funding standard account to amortize the transition loss (gain) may be based on a 15-year amortization period instead of a 5-year period. For plan years beginning in 1989, or later, the amount charged (or credited) to the funding standard account for the amortization of the transition loss (gain) shall be determined by amortizing the outstanding balance of the transition loss (gain) as of January 1, 1989, over 4 years (in equal annual installments) until fully amortized.

EXAMPLE 7 -- Assume a calendar year plan has a January 1, 1988 valuation date for the 1988 plan year. An experience loss of $100,000 was determined in the valuation as of such date. Under the transitional rule, the amount charged to the funding standard account for 1988 is a 15-year amortization of $100,000. Assuming an interest rate of 8%, this amount is $10,818 as of the beginning of 1988. The outstanding balance of the transition loss as of January 1, 1989 is $96,317 [($100,000 - $10,818) x 1.08]. The amount charged to the funding standard account for each of the years 1989-92 is a 4-year amortization of $96,317, or $26,926 (as of the beginning of the year).

If the transition rule is not used, the amount charged to the funding standard account for each of the years 1988-92 is a 5-year amortization of $100,000, or $23,190 as of the beginning of the year.

Q-19: What effect does the use of the transitional rule described above have on the determination of the required quarterly installment amount?

A-19: If the transitional rule is used, the required quarterly installments for the 1989 plan year are determined in the following manner. In determining 100% of the minimum funding requirement for the preceding plan year, the 15-year amortization of the transition loss(gain) is used. In determining 90% of the minimum funding requirement for the current plan year, the 4-year reamortized amount is used. However, as an element of the transitional rule, the first quarterly installment for the 1989 plan year may be determined as if 90% of the current year's minimum funding requirement included a 15- year amortization of the transition loss(gain) rather than the 4-year reamortized amount, provided the difference between the two is contributed to the plan (in addition to the second quarterly installment).

RELIANCE

Until further guidance is published by the Service, plan sponsors and participants may rely on this notice. If further guidance is more restrictive than the guidance provided by this notice, such further guidance will not have retroactive effect.

This document serves as an "administrative pronouncement" as that term is described in section 1.6661-3(b)(2) of the Income Tax Regulations and may be relied upon to the same extent as a revenue ruling or revenue procedure.

DRAFTING INFORMATION The principal authors of this notice are Kenneth R. Conn and Amy Viener of the Employee Plans Technical and Actuarial Division. For further information regarding this notice please contact the Employee Plans Technical and Actuarial Division's taxpayer assistance telephone service between the hours of 1:30 p.m. and 4 p.m. Eastern time, Monday through Friday on (202) 566-6783/6784 (not a toll-free call). Mr. Conn's telephone number is (202) 566-3733 and Ms. Viener's telephone number is (202) 566-4266 (neither are toll-free calls).