Federal law limits certain benefits under a defined benefit plan if the plan’s funding percentage falls below 60%. If the benefit limitations apply to a plan, the plan administrator of that plan is required to notify plan participants and beneficiaries of those limitations. The Internal Revenue Service recently issued guidance in Q&A format on the notice requirements.


Both the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and the Internal Revenue Code of 1986 (“Code”), as amended provide that if a defined benefit plan does not meet certain funding requirements, the plan must implement certain restrictions on the benefits payable from the plan and, possibly, benefit accruals. ERISA § 101(j) generally requires that plan participants and beneficiaries be notified within 30 days of the date these restrictions are imposed.

Benefit Limitations that Require Notification

Funding-based benefit limitations are generally based on the plan’s funding status which is measured by the plan’s “adjusted funding target attainment percentage” or “AFTAP”. The AFTAP is generally computed by determining the ratio of the plan’s assets to the plan’s benefit liabilities. Plan participants and beneficiaries must be provided notice if the plan is subject to one of the following restrictions:

  1. Unpredictable Contingent Event Benefit Payment Restriction. Unpredictable contingent event benefits (“UCEBs”) are benefits paid, or increased, due to an event other than the attainment of an age, performance of a service, receipt of compensation, or occurrence of death or disability. For example, benefits that may be enhanced due to a plant shutdown are UCEBs. If a plan’s AFTAP is less than 60% or if payment of UCEBs would result in an AFTAP of less than 60%, the plan is prohibited from paying UCEBs. [See ERISA 206(g)(1) and Code § 436(b)]
  1. Prohibition on Lump Sums and other Accelerated Payments. If a plan’s AFTAP is less than 80%, the plan is restricted in paying benefit forms that provide payments in excess of the payment that would be provided under a single life annuity option (“prohibited payments”). Such prohibited payments include lump sums, period certain annuities, and Social Security level income options. The limitation is partial for plans whose AFTAP is greater than 60% but less than 80%. Those plans may pay up to one-half of the benefit in a prohibited payment if the plan sponsor is not in bankruptcy. The partial payment is limited to the value of the PBGC maximum guarantee under a plan termination. Prohibited payments may not be made if the plan’s AFTAP is less than 60% or the plan sponsor is a debtor in federal bankruptcy or under similar state law and the plan’s AFTAP is less than 100%. [See ERISA 206(g)(3) and Code § 436(d)]
  1. Complete Cessation of Benefit Accruals. If a plan’s AFTAP is less than 60%, all future benefit accruals must cease. [See ERISA 206(g)(4) and Code § 436(e)]

Who must be notified?

Notice of the funding-based benefit limitations must be provided only to plan participants and beneficiaries to whom the relevant limitation applies or could apply on or after the applicable funding level becomes effective for the plan. For example, a notice must be provided to participants who could receive enhanced early retirement benefits due to a plant shut down.

Additionally, affected participants and beneficiaries must receive another notice if the plan ceases to be subject to the prohibited payment limitation and permits participants and beneficiaries who commenced benefits while the limitations were in effect to make a new benefit election.

A notice is not required to be provided to participants and beneficiaries to whom the relevant limitations do not or could not apply. For example, a notice is not required to be provided in the following situations:

  1. Notice of prohibited payment limitations need not be given to a participant currently receiving benefit payments if he or she cannot elect another benefit payment form.
  2. A participant who has terminated service (with a vested accrued benefit) would not be required to receive a notice of the cessation of benefit accruals.
  3. Notice of the benefit limitations is not required if the plan sponsor makes a contribution such that the benefit limitations will not apply.

When must the Notice be Provided?

Generally, plan administrators must provide the notice within 30 days of the date the plan becomes subject to the funding-based benefit limitation. In most cases, the date a restriction is effective is either (i) the date of the actuary’s certification of the AFTAP or (ii) the date a funding presumption first applies.

Special rules apply in the case of a notice related to UCEBs. In the case of a plan with an AFTAP of 60% or more, if a UCEB occurs that would make the AFTAP less than 60%, the notice must be provided 30 days after the occurrence of the UCEB. However, earlier notice could be required for plans with an AFTAP of 60% or more. In those plans, notice is required by the latest of:

  1. The date on which a WARN Act Notice is required, if the employer is covered by the WARN Act and the UCEB event requires a WARN Act;
  2. 60 days before the UCEB actually occurs; or
  3. 30 days after the date the employer makes a decision to cause the UCEB event to occur (for example, a decision to shut down a plant).

For prohibited payment limitations, an additional notice is required within 30 days after the date on which the prohibited payment limitation ceases to apply if the plan permits participants and beneficiaries who commenced benefits during the limitation period to elect to receive their remaining benefits in a previously prohibited form.

Contents of Notice

General Requirements of Notice - The notice must generally include the plan name, employer’s identification number, plan number, contact information for obtaining additional information, effective date and description of the limitations, a description of the participants affected, a description of the conditions under which the limitations will cease and a description of the plan provisions applicable after the limitations cease.

The notice must also include the plan’s AFTAP and a statement that the limitations apply because of the level of the plan’s AFTAP. The Notice must also state whether the benefit limitation is a result of a certification issued by the plan’s actuary or is the result of application of a funding presumption.

For a notice with respect to a UCEB, the notice must contain a description of the difference between the plan’s benefits payable if the benefit limitation had not applied and those that are payable after application of the benefit limitation.

A notice announcing benefit limitations on prohibited payments imposed for reasons of bankruptcy must include a statement that the limitation applies because of the legal process and because the plan’s AFTAP has not been certified to be at least 100%.

If participants or beneficiaries begin receiving benefits during a benefit limitation period and the plan permits them to make a new election for their remaining benefits when the limitations no longer apply, the second notice provided when the limitations no longer apply must include the plan name, employer’s identification number and plan number; description of the restrictions that no longer apply; an explanation that the participant or beneficiary may elect the previously prohibited form of payment; and contact information for obtaining additional information.

Style and format of Notice

The notice must be written so that the average plan participant and beneficiary will understand the significance of the benefit limitations described. The notice requirement applies separately to each funding-based benefit limitation. However, a single notice may cover multiple benefit limitations. The IRS guidance includes an example of a notice for a plan that has an AFTAP of 75% and becomes subject to limitations on the UCEBs.


Notices must be in writing and may be furnished in any paper or electronic form (in compliance with Department of Labor or IRS regulations). [See 29 C.F.R. 2520.104b-1(c) and Treas. Reg. 54.4980F-1, Q&A 13(c)]

Effective Date

The statutory notice requirements are currently effective and have been since 2008. The specific requirements of this recent IRS guidance are effective November 1, 2012. Plan administrators are subject to a reasonable interpretation of the statutory notice requirements prior to the November 1, 2012 effective date of the guidance and may rely on the IRS guidance before that effective date.

Penalty for Noncompliance

The Department of Labor (DOL) is responsible for collecting penalties for failure to provide the notice, of not more than $1,100 per day from plan administrators for violations of the Notice requirement.

Request for Comments

The IRS has asked for comments on whether a notice should be required on additional dates and whether the notice should be provided to individuals who become participants and beneficiaries after the first date the benefit limitations apply or at later dates, such as annually.