IRS ANSWERS QUESTIONS ON PLAN QUARTERLY CONTRIBUTION AND 'LIQUIDITY' REQUIREMENTS.

Rev. Rul. 95-31

PURPOSE

This revenue ruling provides questions and answers relating to section 412(m) of the Internal Revenue Code as amended by the Retirement Protection Act of 1994 (RPA '94), which is part of the Uruguay Round Agreements Act, Public Law 103-465 (GATT).

Until further guidance is published, the guidance provided by this revenue ruling may be relied on to administer plans. If, and to the extent, future guidance is more restrictive than the guidance in this revenue ruling, the future guidance will be applied without retroactive effect. No inference should be drawn regarding issues not raised which may be suggested by a particular question and answer as to why certain questions, and not others, are included in this revenue ruling.

BACKGROUND

Section 412(m) provides a quarterly contribution requirement for defined benefit pension plans (other than multiemployer plans). In general, a defined benefit plan satisfies the quarterly contribution requirement if quarterly contributions are made not later than 15 days after the end of each quarter of the plan year. Generally, the amount of each quarterly contribution required is equal to 25 percent of the lesser of: (1) 90 percent of the amount required to be contributed to the plan for the plan year under section 412, or (2) 100 percent of the amount required to be contributed for the preceding plan year under section 412. Notice 89-52, 1989-1 C.B. 692, provided guidance with respect to the application and calculation of the quarterly contribution requirement.

RPA '94 amended section 412(m)(1) to provide that a defined benefit plan is not subject to the rules of section 412(m) for a plan year if the funded current liability percentage for the preceding plan year was 100 percent or greater. The amendment to section 412(m)(1) is effective for plan years beginning after December 8, 1994.

RPA '94 amended section 412(m)(5) to provide that defined benefit plans subject to section 412(m) that have more than 100 participants are also subject to a "liquidity requirement." Generally, such plans are required to maintain liquid plan assets at an amount approximately equal to three times the total disbursements from the trust during the 12-month period ending on the last day of each quarter for which the plan has a required quarterly installment. If contributions are not made in sufficient time to satisfy the liquidity requirement, under RPA '94 the employer contributing to the plan (and, for a plan other than a multiemployer plan, each member of the employer's controlled group, within the meaning of sections 414(b), (c), (m), or (o)) is subject to certain excise taxes under section 4971(f), and section 206(e) of the Employee Retirement Income Security Act of 1974 (ERISA) prohibits fiduciaries from making certain payments from the plan. The amendment to section 412(m)(5) is effective for plan years beginning after December 31, 1994.

QUESTIONS AND ANSWERS ON QUARTERLY CONTRIBUTION REQUIREMENTS

Q-1: Which plans are subject to the quarterly contribution requirement of section 412(m) as amended by RPA '94 for plan years beginning after December 8, 1994?

A-1: For plan years beginning after December 8, 1994, defined benefit plans (other than multiemployer plans) that have a funded current liability percentage for the preceding plan year of less than 100 percent are subject to the quarterly contribution requirement of section 412(m).

Q-2: Does a plan that is not subject to section 412(m) have quarterly required installments?

A-2: If a plan is not subject to section 412(m), the plan has no quarterly required installments within the meaning of section 412(m)(4) and section 302(e)(4) of ERISA. Thus, any employer responsible for contributing to such a plan has not failed to pay quarterly required installments for purposes of section 412(n)(1)(A) and section 302(f)(1)(A) of ERISA (relating to liens arising due to the failure to make required installments or contributions under section 412). The Department of Labor has advised the Service that no notice will be required under section 101(d) of ERISA (relating to the notice to participants and beneficiaries due to the failure to make required installments or contributions under section 302 of ERISA) as a result of a failure to make required installments in the case of a plan that is not subject to section 412(m).

Q-3: For purposes of section 412(m)(1), how is the funded current liability percentage for the preceding plan year determined?

A-3: For purposes of section 412(m)(1), the funded current liability percentage for the preceding plan year is equal to the plan's actuarial value of assets as of the valuation date in the preceding plan year (as described in Q&A-4), divided by the current liability as of that valuation date (as described in Q&A-5).

In general, for this purpose, the plan's actuarial value of assets and the current liability from Schedule B of Form 5500 as of the valuation date for the preceding plan year must be used.

Q-4: For purposes of section 412(m)(1), how is the plan's actuarial value of assets for the preceding plan year determined?

A-4: For purposes of section 412(m)(1), the plan's actuarial value of assets for the preceding plan year is the plan's actuarial value of assets as of the plan's valuation date, unreduced by any credit balance in the plan's funding standard account. The actuarial value of assets for the preceding plan year must not include any contributions made for that plan year. However, contributions made within 8 1/2 months after the end of an earlier plan year are taken into account if they were made for that earlier plan year.

Q-5: For purposes of section 412(m)(1), how is the plan's current liability as of the valuation date for the preceding plan year determined?

A-5: For purposes of section 412(m)(1), the current liability as of the valuation date for the preceding plan year is the current liability as defined in section 412(l)(7) as of such date. Thus, the current liability is subject to the restrictions on actuarial assumptions mandated under section 412(l)(7)(C). The current liability determined for purposes of section 412(m)(1) for the preceding plan year must not include the expected increase in current liability attributable to benefits accruing during that year.

Q-6: For purposes of section 412(m)(1), if the preceding plan year began before January 1, 1995 and the valuation date for the preceding plan year was not the first day of the plan year, how is the current liability for the preceding plan year determined where line 13a (current liability as of the valuation date) was not required to be completed on Schedule B of Form 5500 for that year?

A-6: If the preceding plan year began before January 1, 1995 and the valuation date was not the first day of the plan year, and if line 13a was not required to be completed on Schedule B of Form 5500 for that year, the current liability as of the valuation date was not shown on the Schedule B. In such a case, for purposes of section 412(m)(1), the current liability for the preceding plan year may be determined by adjusting the current liability as of the beginning of the preceding plan year (line 6d(iv) of the Schedule B of Form 5500) to the valuation date. The adjustment must take into account actual benefit payments and interest from the beginning of the preceding plan year to the valuation date at the interest rate used to determine the current liability of the plan for that year.

QUESTIONS AND ANSWERS ON LIQUIDITY REQUIREMENTS

Q-7: Which plans are subject to the liquidity requirement of section 412(m)(5)?

A-7: Defined benefit plans that are subject to the quarterly contribution requirement for a plan year (in accordance with Q&A-1 above) and that have more than 100 participants on any day of the preceding plan year are subject to the liquidity requirement of section 412(m)(5). Thus, multiemployer plans, plans with funded current liability percentages of 100 percent or more for the preceding plan year, and plans that on every day of the preceding plan year had 100 or fewer participants are not subject to the liquidity requirement. For purposes of determining the number of participants in a plan on any day of the preceding plan year, the number of participants is determined according to the rules that apply for purposes of section 412(l)(6)(A), including the plan aggregation rules of section 412(l)(6)(C).

Q-8: What steps must be taken to satisfy the liquidity requirement if a plan is subject to section 412(m)(5)?

A-8: If a plan is subject to the liquidity requirement, the amount of the liquidity shortfall must be determined as of the end of each quarter for which there is a required quarterly installment. If a plan has a liquidity shortfall (as described in Q&A-10) equal to zero, the liquidity requirement is satisfied. If a plan has a liquidity shortfall greater than zero, the liquidity requirement of section 412(m)(5) will not be satisfied unless the employer makes a contribution to the plan in the form of liquid assets in an amount not less than the amount of the liquidity shortfall. The liquidity requirement for a quarter is satisfied only if the contribution is made to the plan on or before the due date of the required quarterly installment.

Q-9: What are some of the consequences if an employer fails to satisfy the liquidity requirement?

A-9: If the employer fails to satisfy the liquidity requirement, the employer is treated as failing to make a required installment under section 412(m) and section 302(e) of ERISA. Thus, there is an additional interest charge to the funding standard account under section 412(m)(1), and the employer is treated as failing to make a required installment for purposes of section 412(n)(1)(A). In addition, an excise tax under section 4971(f) is applicable, and fiduciaries are prohibited from making certain payments from the plan under section 206(e) of ERISA.

Q-10: How is the "liquidity shortfall" determined for a quarter?

A-10: The liquidity shortfall for a quarter is the amount equal to the excess (if any) of (1) the "base amount" (as described in Q&A- 11) with respect to such quarter, over (2) the value of the plan's "liquid assets" (as described in Q&A-14, Q&A-15, and Q&A-16) with respect to such quarter. However, the liquidity shortfall for a quarter is limited to the amount that, when added to prior installments for the plan year, is necessary to increase the funded current liability percentage for the current plan year (taking into account the expected increase in current liability due to benefits accruing during the plan year) to 100 percent.

Q-11: How is the "base amount" determined with respect to any quarter?

A-11: The base amount with respect to any quarter is the amount equal to three times the sum of the "adjusted disbursements" from the plan for the 12 months ending on the last day of that quarter. Adjusted disbursements are all disbursements from the trust, including benefit distributions under the plan (whether paid in the form of annuities, single sum distributions, or other forms of benefit), purchases of annuities under which insurers provide irrevocable commitments for the payment of benefits, and payments of administrative expenses, adjusted as described in Q&A-12.

Q-12: How are the disbursements described in Q&A-11 adjusted for purposes of calculating the base amount?

A-12: The disbursements described in Q&A-11 are adjusted by reducing those disbursements by the product of (1) the plan's funded current liability percentage defined under section 412(l)(8) as of the valuation date for the plan year, and (2) the sum of the purchases of annuity contracts and the payments of single sum distributions that were included in the disbursements. For this purpose, the funded current liability percentage is computed without subtracting any credit balance in the plan's funding standard account from the plan's actuarial value of assets.

Q-13: Is there a special rule for determining the base amount if disbursements described in Q&A-11 and Q&A-12 are attributable to nonrecurring circumstances?

A-13: A special rule under section 412(m)(5)(E)(ii)(II) permits the adjusted disbursements to be determined without regard to nonrecurring circumstances. Section 412(m)(5)(E)(ii)(II) provides that this rule is available for the quarter only if the base amount (determined without regard to this special rule) exceeds an amount equal to two times the sum of the adjusted disbursements from the plan for the 36-month period ending on the last day of that quarter, and the enrolled actuary for the plan certifies to the satisfaction of the Secretary that the excess amount is the result of nonrecurring circumstances.

Q-14: For purposes of section 412(m)(5)(E)(v), what are the liquid assets of a plan?

A-14: For purposes of section 412(m)(5)(E)(v), the liquid assets of a plan are cash, marketable securities, and other assets described in Q&A-15. For this purpose, marketable securities include financial instruments such as stocks and other equity interests, evidences of indebtedness (including certificates of deposit), options, futures contracts, and other derivatives, for which there is a liquid financial market, and other interests in entities (such as partnerships, trusts, or regulated investment companies) for which there is a liquid financial market. For the purposes of the preceding sentence, a liquid financial market is an established financial market described in section 1.1092(d)-1(b) of the Income Tax Regulations (other than an interbank market or an interdealer market described in section 1.1092(d)-1(b)(v) and (vi), respectively). Any security that is issued or guaranteed by the government of the United States or an agency or instrumentality thereof for which there is an established financial market described in section 1.1092(d)-1(b) of the Income Tax Regulations is a marketable security. Finally, any financial instrument or other interest in an entity that, under its terms, contains a right by which the instrument or other interest may immediately be redeemed, exchanged, or converted into cash or a marketable security, is a marketable security, provided there are no restrictions on the exercise of that right.

Q-15: For purposes of section 412(m)(5)(E)(v), what other assets besides cash and marketable securities are treated as liquid assets of a plan?

A-15: Until such time as regulations are issued, for purposes of section 412(m)(5)(E)(v), other assets that are treated as liquid assets of a plan are insurance, annuity, or other contracts issued by an insurance company that is licensed to do business under the laws of any State, but only if any such insurance, annuity, or other contract: (1) would be treated as a marketable security under Q&A-14 (if it were a financial instrument), (2) provides for substantially equal monthly disbursements, or (3) is benefit responsive. Thus, for example, an insurance contract is a liquid asset if the contract contains a right by which it may be immediately redeemed for cash. If the contract provides for substantially equal monthly disbursements (e.g., an annuity contract in pay status), the only portion of the contract that may be treated as liquid assets is the amount equal to 36 times the monthly disbursement (in the month containing the last day of the quarter) which is available under the terms of the contract, provided there are no restrictions on the disbursements. A contract is considered benefit responsive if, under applicable law and contractual provisions, the plan has the right to receive, without restrictions, disbursements from the contract in order to pay plan benefits for any participant in the plan. For the purposes of Q&A-14 and Q&A-15, a restriction on a redemption, exchange or conversion right, or a restriction on a disbursement, may result not only from applicable law or contractual provisions, but also from rehabilitation, conservatorship, receivership, insolvency, bankruptcy or similar proceedings.

Q-16: How are assets valued for purposes of determining the value of a plan's liquid assets?

A-16: The value of a plan's liquid assets with respect to a quarter is the fair market value of the plan's liquid assets as of the last day of the quarter. If an asset of a plan is considered liquid solely as a result of a redemption, exchange, or conversion right provided under the terms of the financial instrument, other interest, or contract, the fair market value of the asset must be determined assuming that right has been exercised. The value of a plan's liquid assets must be reduced by the amount of any liability or other obligation of the plan (other than liabilities of the plan for benefits payable under the plan). The value of the plan's liquid assets as of the last day of any quarter must also be reduced by subtracting certain contributions (adjusted with interest to the last day of the quarter at the plan's valuation interest rate). For any quarter, the contributions that are subtracted are those contributions (if any) that were made in the form of liquid assets during the quarter, provided they were not taken into account as a contribution toward a required quarterly installment for a prior quarter and were not made for a prior plan year.

The following example is provided to demonstrate the required adjustment to the plan's liquid assets.

EXAMPLE: A plan with a calendar year plan year has a required quarterly installment of $300,000 that is due April 15, 1995. The plan's valuation interest rate is 8 percent. The base amount and liquid assets (prior to adjustment) as of March 31, 1995, are $1,000,000 and $900,000, respectively. A contribution of $250,000 in the form of liquid assets is made on February 1, 1995, as a payment made for the first quarter of the 1995 plan year. A contribution of $75,000 in the form of liquid assets is made on February 20, 1995, as a payment made for the plan year ended December 31, 1994. For purposes of determining the liquidity shortfall, the liquid assets as of March 31, 1995, are adjusted by subtracting the contribution (adjusted with interest) made February 1, 1995 ($900,000 - $253,227 = $646,773).

The liquidity shortfall as of March 31, 1995, is the base amount minus the adjusted liquid assets ($1,000,000 - $646,773 = $353,227).

Because a contribution of $250,000 in liquid assets has already been made on February 1, 1995, as a payment made for the first quarter of the 1995 plan year, the additional payment that is necessary to satisfy the liquidity requirement is $100,000, where $100,000 is equal to the excess of the liquidity shortfall for the quarter ($353,227), over the amount of such shortfall that has been paid for the quarter in the form of liquid assets (adjusted for interest to the last day of the quarter) ($253,227). The additional payment of $100,000 (in the form of liquid assets) must be paid on or before April 15, 1995, in order to satisfy the liquidity requirement for the first quarter of the plan year.

Q-17: Is a credit balance in the plan's funding standard account treated as a contribution that may be used for purposes of satisfying the liquidity requirement?

A-17: No. A credit balance in the plan's funding standard account may not be treated as a contribution that may be used to satisfy the liquidity requirement. Actual contributions in the form of liquid assets must be made to the plan in order to satisfy the liquidity requirement.

COMMENTS REQUESTED

The Service requests written comments concerning the quarterly contribution requirement of section 412(m), including the liquidity requirement of section 412(m)(5). In particular, comments are requested on the types of assets that are liquid assets. Comments and information should be sent to Commissioner of Internal Revenue Service, Attention CP:E:EP, Washington, D.C. 20224.

EFFECT ON OTHER DOCUMENTS

Notice 89-52 is obsolete to the extent that section 412(m)(1) (concerning plans that are subject to the quarterly contribution requirement) was amended by RPA' 94.

DRAFTING INFORMATION

The principal author of this revenue ruling is Martin L. Pippins of the Employee Plans Division. For further information regarding this revenue ruling, please contact the Employee Plans Division's taxpayer assistance telephone service between the hours of 2:30 p.m. and 4:00 p.m. Eastern Time, Monday through Thursday on (202) 622-6076 (Actuarial Hotline) (not a toll-free telephone number). Mr. Pippins' telephone number is (202) 622-6261 (also not a toll-free number).