The Pension Protection Act of 2006 added Section 436 to the federal tax code. This new tax rule generally limits an underfunded pension plan’s ability to pay certain types of plan benefits until the plan’s funding status improves.
Although the rule has applied to plans since 2008, the IRS has delayed the deadline by which plan sponsors must amend their plan documents to include the requirements of Section 436. The deadline for amending a pension plan for Section 436 currently is the latest of (1) the last day of the first plan year that begins on or after January 1, 2012 (i.e., December 31, 2012, for calendar year plans); (2) the last day of the plan year for which Section 436 is first effective with respect to the plan; or (3) the due date (including extensions) of the plan sponsor’s tax return for the tax year that contains the first day of the plan year for which Section 436 is first effective for the plan.
As part of issuing the amendment deadline extension late last year, the IRS also issued a model amendment on which plan sponsors may rely. The model amendment is designed to incorporate all of the Section 436 provisions the IRS believes are necessary to include in a plan document. Employers that already have amended their plans for Section 436 should consider reviewing the adopted amendment against the IRS model amendment to ensure that the previous amendment made the requisite modifications to the plan.