IRS Completes Pension Funding Regs - Regulatory,Legislative and ...

by abell@nuco.com (ALLISON BELL)

The Internal Revenue Services has posted a final rule that will affect how defined benefit pension plans measure assets and liabilities, including insurance contracts used to fund benefits.

In addition to measurement of assets and liabilities, the regulations cover benefit restrictions for underfunded pension plans.

The regulations, which have an effective date of Oct. 15, 2009, affect sponsors, administrators, participants, and beneficiaries of single-employer pension plans.

The IRS will start applying the regulations to plan years beginning on or after Jan. 1, 2010.

One section deals with treatment of use of insurance to fund pension benefits.

As under the proposed regulations, the final “regulations provide that a plan generally is required to reflect in the plan’s funding target and target normal cost the liability for benefits that are funded through insurance contracts held by the plan, and to include the corresponding insurance contracts in plan assets,” officials write in a preamble to the regulations, which appear today in the Federal Register.

A plan also can “exclude benefits provided under such contracts from the plan’s funding target and target normal cost and to exclude the corresponding insurance contracts from plan assets,” officials write.

That kind of treatment is only available for insurance bought from a state-licensed insurer, “and only to the extent that a participant’s or beneficiary’s right to receive those benefits is an irrevocable contractual right under the insurance contract, based on premiums paid to the insurance company prior to the valuation date under the insurance contracts,” officials write.

The alternative treatment is “not available if the plan trustee can surrender a contract to the insurer for its cash value because the participant’s or beneficiary’s rights to receive those benefits is not an irrevocable contractual right,” officials write.

Read more...