Jamie Johnson

Single-Employer Plans

General

The act provides the plan sponsor an option to use one of two modified amortization schedules to extend shortfall amortization bases for no more than two eligible plan years. Plan sponsors that use the modified amortization schedule in two eligible plan years must elect the same amortization schedule for both years. An eligible plan year is any plan year beginning in 2008, 2009, 2010 or 2011, provided the due date for the payment of the minimum required contribution for such plan year occurs on or after June 25, 2010 (the date of enactment).

The first amortization option is a two-plus-seven amortization schedule. During the first two plan years beginning with the election year, interest only is required based on the effective interest rate for the election year. The remaining balance is then amortized in seven level annual installments under the segment rates for the election year.

The second option is a 15-year amortization. Shortfall installments determined under this method are calculated as level annual installments over the 15-year period beginning with the election year under the election year segment rates.

The Treasury secretary is charged with providing the form and manner in which the election is made. The election only may be revoked with the consent of the Treasury secretary in consultation with the Pension Benefit Guaranty Corporation (PBGC). Certain reporting is prescribed for plan sponsors who use one of the described amortization schedules. The sponsor must give notice of the election to plan participants and beneficiaries and inform the PBGC.

Dollar-for-Dollar Increases

In certain cases, dollar-for-dollar increases in specified installments are required due to excess compensation, extraordinary dividends or stock redemptions. The increase is limited to the amount that would have been required had the modified amortization schedule not been elected. These restrictions are in place during the first three years of a two-plus-seven election and the first five years of a 15-year election.

Excess compensation is defined as the aggregate income of plan sponsor employees (including those defined as self-employed) over $1 million (indexed each calendar year after 2010) for services performed after February 28, 2010. Income includes amounts set aside by a plan sponsor for purposes of paying deferred compensation under a nonqualified deferred compensation plan. Income does not include stock (within the meaning of Section 409A of the Internal Revenue Code of 1986) granted after February 28, 2010, if such grant includes a substantial risk of forfeiture for at least five years from the date of the grant. It also does not include commissions paid based on performance and certain nonqualified deferred compensation, restricted stock, stock options or stock appreciation rights payable or granted under a written contract in effect March 1, 2010.

Extraordinary dividends and redemptions are defined as the excess of dividends declared during the plan year, plus the aggregate amount paid for the redemption of stock during the plan year (after February 28, 2010) over the plan sponsor’s EBITDA during the preceding plan year or the historical dividend amount. Redemptions pursuant to a plan maintained with respect to employees, or as a result of death, disability or termination of an employee or shareholders, are excluded from the calculation.

Plan sponsors considering such elections should carefully evaluate the potential impact of these restrictions on their operations.

Additional Considerations

Plans impacted by Section 104, 105 or 106 of the Pension Protection Act of 2006 also may qualify for relief; however, the terms differ from those described above. For plans described in Section 106 of the Pension Protection Act of 2006, the plan sponsor may only elect to have the amortization schedule apply to one plan year.

Multiemployer Plans

Solvent multiemployer plans may treat the portion of any loss or gain attributable to net investment losses incurred in either or both of the first two plan years ending after August 31, 2008, as an item separate from other experience losses, to be amortized in equal annual installments over 30 years.

A solvent multiemployer plan also may change its asset valuation method to spread the difference between expected and actual returns for either or both of the first two plan years ending after August 31, 2008, over a period of up to 10 years. In addition, the value of plan assets in this same period shall not be less than 80 percent or greater than 130 percent of the fair market value of such assets.

Similar reporting requirements as those noted for single-employer plans are required for multiemployer plans making this election. Contact your BKD advisor for more details about potential rule changes for defined benefit plans.