A pension benefit increase adopted after the year has closed can count for that year, and the test that limits it comes down to one word: twice

Buried in a 31 page proposal filed on Wednesday morning is a rule change worth reading if you sponsor a defined benefit plan and have ever wanted to increase benefits after the fact.

The IRS has proposed amendments to the regulations under section 430 of the Code, which is the minimum funding requirement for single-employer defined benefit plans. The immediate purpose is unglamorous. The 2009 regulations never absorbed the statutory changes made by the Worker, Retiree, and Employer Recovery Act of 2008, by the SECURE Act in 2019, or by SECURE 2.0 in 2022, and this is the catch-up.

The practical change is in what may now be counted, and when.

Amendments adopted after the year ends

Under the proposal, an employer that adopts a plan after the close of a taxable year but before the due date of its return, and makes the election available under section 401(b)(2), has that plan treated as adopted on the last day of the taxable year for funding purposes. An employer that amends a plan to increase accrued benefits, effective as of a date in the immediately preceding plan year, and makes the section 401(b)(3) election, gets the same treatment for that amendment.

In each case the amendment feeds into the funding target and the target normal cost for the earlier year, which in turn raises the deductible limit for the sponsor. Two conditions attach: the amendment must take effect no later than the day it is adopted, and where the valuation date precedes the treated adoption date, a section 412(d)(2) election is required.

The document then flags a trap on itself. Minimum required contributions are due 8 1/2 months after the end of the plan year. The deadline for adopting one of these amendments can fall after that, depending on how the plan year and the taxable year line up.

The anti-abuse test is now a ratio

The existing rules already pull in certain amendments adopted after the valuation date. The proposal narrows that to amendments which increase target normal cost disproportionately, and defines the word.

An amendment is disproportionate if the percentage increase in target normal cost caused by it is more than twice the percentage increase in the funding target caused by it, counting only participants currently in the employer's service. The IRS asks for comment on other ways to measure the same thing, including a comparison of the present value of current year accruals against accruals in later years, which is an unusual admission that the test it has written is a first attempt.

$5,000, and which fees leave the calculation

Plan-related expenses sit inside target normal cost. Investment-related expenses do not, which makes the boundary between them worth money every year.

The proposal sets it at $5,000. Where a service provider is expected to be paid $5,000 or more from plan assets in a year, and the payments cover both investment work and something else such as recordkeeping, only the amounts the provider itemises as investment management or directly investment-related come out of target normal cost. Below $5,000, the whole payment is treated as investment-related and nobody has to itemise anything. The threshold is not arbitrary. It matches the point at which a service provider already has to be reported on Schedule C of the Form 5500.

Comments close 60 days after publication. The regulations would apply to plan years beginning on or after six months after the final rule appears, and the Office of Information and Regulatory Affairs has already determined that the proposal is not significant.