SERVICE ANNOUNCES RANGE OF INTEREST RATES USED TO DETERMINE MAXIMUM AMOUNT DEDUCTIBLE IN COMPLYING WITH FULL FUNDING LIMITATION RULES.

Notice 88-73

This notice provides guidance as to the determination of the weighted average interest rate and the resulting permissible range of interest rates used to calculate current liability for the purpose of the full funding limitation of section 412(c)(7) of the Internal Revenue Code as amended by section 9301 of Part I of subtitle D of title IX of the Omnibus Budget Reconciliation Act of 1987 (OBRA 1987).

BACKGROUND

Section 9301 of OBRA 1987 amended section 412(c)(7)(A) of the Code for plan years beginning after December 31, 1987, to provide that the full funding limitation for a plan year is the excess (if any) of (i) the lesser of (I) 150 percent of current liability, or (II) the accrued liability (including normal cost) under the plan (determined under the entry age normal funding method if such accrued liability cannot be directly calculated under the funding method used for the plan) over (ii) the lesser of (I) the fair market value of the plan's assets, or (II) the value of such assets determined under paragraph (2) of section 412(c). Thus, section 9301 of OBRA 1987 provides that the full funding limitation is the amount needed, if any, to increase the plan's assets to the lesser of 150 percent of current liability or the full funding limitation as determined prior to the amendment by OBRA 1987.

Section 404(a)(1)(A) of the Code provides that the amount deductible with respect to a defined benefit pension plan may not exceed the full funding limitation of section 412 of the Code. Therefore, the changes made by section 9301 of OBRA 1987, limit the maximum deductible amount with respect to plan years beginning after December 31, 1987, to the amount needed, if any, to increase the plan's assets to the lesser of 150 percent of current liability or the accrued liability under the plan. These changes also are taken into account in applying the excise tax on nondeductible contributions under section 4972.

Section 412(c)(7)(B) of the Code as added by section 9301 of OBRA 1987 provides that the term "current liability" for purposes of the calculation of the full funding limitation has the meaning given such term by section 412(1)(7) of the Code which was added by the Pension Protection Act (PPA) (Part II of subtitle D of title IX of OBRA 1987). Section 412(1)(7)(C) of the Code provides that the interest rate used to determine current liability is the rate used under section 412(b)(5).

Section 412(b)(5)(B) of the Code, as added by section 9307 of the PPA, provides that for purposes of determining "current liability," the interest rate must be within a "permissible range" which is not more than 10 percent above and not more than 10 percent below the weighted average of the rates of interest on 30-year Treasury securities during the 4-year period ending on the last day before the beginning of the plan year. Section 412(b)(5)(B)(ii)(II) of the Code as added by section 9307 provides that if the Secretary finds that the lowest rate of interest in the permissible range is unreasonably high, the Secretary may expand the permissible range and allow a lower rate of interest, but not lower than 80 percent of the weighted average rate as described in section 412(b)(5)(B)(ii)(II). No interest rate outside the permissible range is allowed. In addition, setting a rate within the range is not determinative as to the reasonableness of such rate. Section 412(b)(5)(B)(iii) provides that, for purposes of determining the reasonableness of a particular interest rate (within the permissible range) used by the plan in calculating current liability, the interest rate must be consistent with the interest rate that would be used by insurance companies in satisfying liabilities under the plan, and shall be determined without taking into account the experience of the plan and reasonable expectations as to future plan experience.

In order to determine the maximum deductible amount with respect to a defined benefit pension plan with respect to plan years beginning after December 31, 1987, the weighted average rate of interest on 30-year Treasury securities must be determined to establish the permissible range that is to be used in calculating 150 percent of current liability. In addition, pending further guidance the weighting method set forth in this notice is the exclusive method for determining the permissible range for a plan.

DESCRIPTION OF WEIGHTED AVERAGE

For the purpose of determining current liability, the rates of interest on 30-year Treasury securities are the average yields for 30-year Treasury Constant Maturities as published by the Federal Reserve (see Federal Reserve releases G.13 and H.15). The weighted average rate of interest is the weighted average of the average yield of such securities for the 48 months preceding the first day of the plan year with each month weighted as follows:

                     Month                              Weight

For plan years beginning after December 31, 1987, and prior to February 1, 1988, (i.e. plan years beginning in January 1988) this rate is 9.17 determined as follows:

                  (2)

The permissible range for plan years beginning in January 1988 is, therefore, from 8.25 to 10.08 percent (taking 90 and 110 percent of 9.1685 respectively and rounding). For plan years beginning in February 1988, a similar calculation (using January 1988 and leaving out January 1984) produces a permissible range from 8.22 to 10.04 percent.

No inference should be drawn from this notice as to any issue not specifically addressed herein. The Service is developing guidance on other issues relating to the full funding limitation, including the determination of a plan's current liability and, for such purposes, a reasonable interest rate (within the permissible range). In developing such guidance, the Service also will consider other methods of weighting interest rates for purposes of determining the permissible range and the circumstances in which the lowest rate in the permissible range may be reduced to a rate no lower than 80 percent of the weighted average rate.

The Internal Revenue Service will publish an announcement monthly in the Internal Revenue Bulletin updating the weighted average rate and the resulting range.

ADMINISTRATIVE PRONOUNCEMENT

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.

FOR FURTHER INFORMATION

The principal author of this notice is James E. Holland, Jr. of the Employee Plans Technical and Actuarial Division. For further information regarding this notice, call 202-556-6783 between 2:00 and 4:00 p.m. Eastern time (not a toll free number). Mr. Holland's number is 202-535-6768 (also not a toll free number).