Determination of Target Normal Cost and Funding Target for Single-Employer Defined Benefit Plans, REG-107855-25, RIN 1545-BR50, 91 Fed. Reg. _____ (proposed Aug. 20, 2026) (to be codified at 26 C.F.R. § 1.430(d)-1)

The Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) have released a Notice of Proposed Rulemaking under REG-107855-25, which proposes to “modify rules in the existing regulations relating to the minimum funding requirement applicable to single-employer defined benefit pension plans”. These proposed regulations aim to “implement certain statutory amendments that have not yet been reflected in the regulations”.

Historically, the minimum funding rules under Internal Revenue Code (I.R.C.) § 430 were established by the Pension Protection Act of 2006 (PPA ’06), Pub. L. No. 109-280, 120 Stat. 780. The existing final regulations, published on October 15, 2009 (T.D. 9467), have applied to plan years beginning on or after January 1, 2010. Since the issuance of T.D. 9467, several key statutory changes have altered the landscape of single-employer defined benefit plans. The proposed regulations primarily reflect amendments made by the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA ’08), Pub. L. No. 110-458, 122 Stat. 5092; the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), Pub. L. No. 116-94, 133 Stat. 2534; and the SECURE 2.0 Act of 2022 (SECURE 2.0 Act), Pub. L. No. 117-328, 136 Stat. 4459.

Justification and Authority for the Regulations

The Treasury Department and the IRS issued these regulations under the specific delegations of authority provided by the Internal Revenue Code. Specifically, I.R.C. § 430(g)(3)(B) grants authority to permit plan asset valuation on the basis of averaging fair market values under regulations prescribed by the Secretary of the Treasury. Furthermore, I.R.C. § 430(h)(3) directs the Secretary to prescribe mortality tables for any present value or other computation under I.R.C. § 430. In addition, the proposed regulations are issued under the general delegation of authority in I.R.C. § 7805(a), which directs the Secretary of the Treasury to “prescribe all needful rules and regulations for the enforcement of [the Code], including such rules and regulations as may be necessary by reason of any alteration of law relating to internal revenue.”

Reasons for Release: Facilitating Benefit Increases and Aligning Actuarial Rules

The primary catalyst for these proposed regulations is the statutory misalignment between tax filing deadlines and the minimum funding rules. Specifically, the IRS explains that “these proposed regulations would facilitate the adoption of amendments that increase benefits.” Under the current framework, plan sponsors who adopt benefit-increasing amendments after the close of a plan year but before their tax filing due date face hurdles in taking those amendments into account for that preceding year. The proposed rules resolve this, as “under these proposed regulations, such amendments adopted after the end of the plan year can be taken into account in determining the actuarial results for a plan year which, in turn, will result in an increased deductible limit for the taxable year for the plan sponsor.”

Additionally, the proposed regulations address administrative and analytical discrepancies by:

Clarifying which plan-related expenses are includable in “target normal cost” under I.R.C. § 430(b)(1).
Providing explicit rules for plans adopted after the close of a plan year under the SECURE Act and SECURE 2.0 Act.
Specifying when plan amendments must be reflected in actuarial results.
Extending deadlines for changes in actuarial assumptions or funding methods under I.R.C. § 412(d)(1).
Eliminating obsolete statutory references, such as the segment rate phase-in from 2008 and 2009 under I.R.C. § 430(h)(2)(G), and conforming hybrid plan terminology to existing regulations under I.R.C. § 411(a)(13).

Plan-Related versus Investment-Related Expenses

Under I.R.C. § 430(b)(1), target normal cost includes “the amount of plan-related expenses expected to be paid from plan assets during the plan year”. However, the current regulations did not fully define “plan-related expenses” and left § 1.430(d)-1(b)(1)(iii)(B) reserved. Proposed § 1.430(d)-1(b)(1)(iii)(B) fills this gap, stating that plan-related expenses “consist of all amounts that are expected to be paid from plan assets that are neither benefits paid to participants or beneficiaries (treating the purchase of an annuity contract as the payment of benefits) nor investment-related expenses described in paragraph (b)(1)(iii)(C) of this section.” These plan-related expenses explicitly include “fees paid for professional services (such as legal, actuarial, and audit services), plan administration, and premiums paid to the Pension Benefit Guaranty Corporation, among other items.”

Conversely, proposed § 1.430(d)-1(b)(1)(iii)(C) provides that “investment-related expenses” are excluded from target normal cost. These expenses “consist of investment management fees and other expenses directly related to the investment of the plan’s assets.”

To ease the administrative burden of itemization, the proposed regulations introduce a $5,000 reporting threshold, consistent with Form 5500, Schedule C. If total payments from plan assets to a service provider are expected to be $5,000 or more for a plan year and consist of both types of expenses:

“only those amounts that the service provider itemizes as investment management fees or other expenses directly related to the investment of the plan’s assets are treated as investment-related expenses. Amounts itemized as expenses for other services are not treated as investment-related expenses.”

If total payments to a provider are expected to be less than $5,000, all payments are treated as investment-related expenses, meaning they are excluded from target normal cost without requiring itemization. Other services include instances where “the assets of the pension fund are held by a bank or trust company affiliated with the fund’s investment manager and the plan assets are used to pay custodial or trustee fees for the safekeeping of the investment assets, such as holding securities, settling trades, or collecting income.”

Plan Provisions Taken into Account: Remedial and Retroactive Elections

The general rule under proposed § 1.430(d)-1(d)(1)(i) is that a plan’s funding target and target normal cost are determined based on plan provisions “adopted no later than the valuation date for the plan year and that take effect on or before the last day of the plan year.”

However, to implement recent legislation, the proposed regulations offer vital relief for retroactive adoptions and benefit increases:

Section 412(d)(2) Elections: If an administrator makes an election under I.R.C. § 412(d)(2) for an amendment adopted no later than 2½ months after the end of a plan year, “then the amendment will be taken into account in determining the plan’s funding target and target normal cost for that plan year, provided that the amendment takes effect no later than the date the amendment is adopted.” This applies even if the amendment is adopted during the plan year.
Section 401(b)(2) Retroactive Plan Adoptions: Under section 201 of the SECURE Act and section 317 of SECURE 2.0, an employer may elect to treat a plan adopted after the close of a taxable year (but before the tax filing due date, including extensions) as adopted on the last day of that taxable year. Proposed § 1.430(d)-1(d)(1)(ii)(B) implements this, determining the target normal cost and funding target for the plan’s first year based on those provisions, provided that “(1) The plan takes effect no later than the date the plan is adopted; and (2) If the plan’s valuation date is before the date the plan is treated as being adopted, a section 412(d)(2) election is made.”
Section 401(b)(3) Retroactive Benefit Increases: Section 316 of the SECURE 2.0 Act allows employers to increase accrued benefits retroactively for the preceding plan year if the amendment is adopted before the tax filing due date (including extensions). Proposed § 1.430(d)-1(d)(1)(ii)(C) coordinates this with funding rules, treating the amendment as adopted as of the last day of the preceding plan year if elected, provided “(1) The amendment takes effect no later than the date it is adopted; and (2) If the plan’s valuation date is before the date the amendment is treated as being adopted, a section 412(d)(2) election is made.”

Tax professionals must navigate a critical timing trap here: the deadline for minimum required funding contributions under I.R.C. § 430(j)(1) is 8½ months after the end of the plan year, whereas the deadline for adopting § 401(b)(2) or § 401(b)(3) retroactive amendments can extend beyond that date, depending on the employer’s taxable year and extension status.

Special Rules for Operational Changes in Remedial Amendment Periods

The proposed regulations also introduce mechanisms for future remedial amendments during a remedial amendment period under Treas. Reg. § 1.401(b)-1(d). Under proposed § 1.430(d)-1(d)(1)(iii)(A), if plan operations are changed to make a future remedial amendment effective, “then the provisions of the future remedial amendment are treated as adopted on the date that the plan operations are changed.” This covers situations where plan operations must be modified in anticipation of a required amendment to address a disqualifying provision designated by the Commissioner before the remedial amendment period ends. If the final adopted language differs from operations, the amendment is treated as adopted only when operations are changed to reflect the actual adopted language.

Modification of the Mid-Year Amendment Anti-Abuse Rule

Under the current regulations, certain mid-year plan amendments that increase liabilities and are adopted after the valuation date must still be taken into account in the current year if they would not be permitted to take effect under the funding limits of I.R.C. § 436(c). The proposed regulations modify this anti-abuse rule in proposed § 1.430(d)-1(d)(2)(i) by narrowing its scope to amendments that “disproportionately increases target normal cost”.

Under proposed § 1.430(d)-1(d)(2)(iii), a plan amendment disproportionately increases target normal cost if:

“the percentage increase in target normal cost as the result of the amendment is more than twice the percentage increase in the funding target as a result of the amendment (taking into account only the benefits of participants currently employed in the service of the employer).”

The IRS has requested feedback on other potential metrics for this test, such as comparing the present value of current-year accruals with those in subsequent years.

Actuarial Assumptions and Funding Methods

Under I.R.C. § 412(d)(1) and existing § 1.430(d)-1(f)(1)(ii), established assumptions and funding methods generally cannot be changed retroactively for a plan year unless the IRS determines they were unreasonable or impermissible. Proposed § 1.430(d)-1(f)(1)(ii) modifies this restriction to handle a common administrative bottleneck: when a plan sponsor has submitted an application for a change in assumptions or funding method to the Secretary, but the application is still pending when the Schedule SB (Form 5500) is established for the plan year. The proposed revision allows the actuarial assumptions or funding method to be changed for that plan year “in accordance with the Secretary’s approval of that application” once it is issued.

Additionally, the proposed regulations delete references in existing § 1.430(d)-1(f)(4)(iii)(C) to the “phase-in of the section 430(h)(2) segment rates that applied under section 430(h)(2)(G) for plan years beginning in 2008 or 2009,” as these transitional rules are now obsolete. Conforming changes are also made to coordinate statutory hybrid plan terminology with the final regulations under I.R.C. § 411(a)(13).

Proposed Effective Date and Taxpayer Reliance

Proposed § 1.430(d)-1(g) provides that these regulations will apply to “plan years beginning on or after [DATE SIX MONTHS AFTER DATE OF PUBLICATION OF FINAL RULE].”

Crucially for current tax planning, the regulations provide immediate taxpayer reliance. Specifically, the IRS states:

“For earlier plan years, taxpayers may apply either the rules of this section or the rules described in 26 C.F.R. § 1.430(d)-1 (as it appeared in the April 1,, edition of 26 CFR part 1).”

This transition rule permits practitioners and plan sponsors to rely on these proposed regulations and implement their retroactive plan adoption and benefit increase elections immediately for current and prior open plan years, providing substantial tax planning and deduction acceleration opportunities.

Prepared with assistance from Gemini Notebook.