On June 25, 2010, the President signed into law H.R. 3962, the “Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010” (the Act). This so-called “doc-fix” Act cancels a scheduled reduction in Medicare payments to doctors and for June 1, 2010, through Nov. 30, 2010, puts in place a 2.2% increase in a factor used in the formula determining physician payment rates.

The Act pays for the “doc fix” in part by providing funding relief for some pension plans hard hit by the steep market slide in 2008. The theory for the revenue offset is that funding relief will increase employers' taxable income thereby boosting government revenue.

The Act also creates a CMS (Centers for Medicare and Medicaid Services)-IRS data match provision to help identify fraudulent Medicare providers.

Following are highlights of the tax provisions in the new law.

Extended Period for Single Employer Defined Benefit Plans To Amortize Certain Shortfall Amortization Bases

Defined benefit pension plans generally are subject to minimum funding rules that require the sponsoring employer to periodically make contributions to fund plan benefits. An elaborate set of rules applies if there's a funding shortfall. In general, under pre-Act law, a 7-year amortization period applies in the case of a defined benefit plan funding shortfall.

New law. For plan years beginning after Dec. 31, 2007, the Act permits single employer defined benefit plan sponsors to elect for certain years (see below): (1) an extended 9-year amortization period (“2 plus 7”), with interest only being paid in the first two years; or (2) a 15-year amortization period. ( Code Sec. 430(c)(2)(D) , as amended by Act Sec. 201) The Act generally allows plan sponsors to elect relief for up to two plan years during the four-plan-year period from 2008 to 2011. However, a plan sponsor may elect relief for a plan year only if the due date for the payment of the minimum required contribution for that plan year occurs on or after June 25, 2010 (enactment date). ( Code Sec. 430(c)(2)(D)(v) )

During a restriction period (see below), any plan year in which the shortfall amortization installment otherwise determined and payable for that year under an election to use an extended amortization period may be increased by an “installment acceleration amount.” ( Code Sec. 430(c)(7) ) The length of the restriction period following an election to use an extended amortization schedule depends on the extended amortization schedule elected by the plan sponsor for the eligible plan year. If the “2 plus 7” amortization schedule for an eligible plan year is elected, the restriction period is the three-year period beginning with the election year or, if later, the first plan year beginning after Dec. 31, 2009. If the 15-year amortization schedule for an eligible plan year is elected, the restriction period is the 5-year period beginning with the election year or, if later, the first plan year beginning after Dec. 31, 2009. ( Code Sec. 430(c)(7)(F) )

The “installment acceleration amount” for any plan year in a restriction period generally is the aggregate amount of “excess employee compensation” as specially defined with respect to all employees for the plan year and the aggregate amount of extraordinary dividends and redemptions for the plan year. ( Code Sec. 430(c)(7)(C) ) For limits on installment acceleration amounts, see Code Sec. 430(c)(7)(B) . In general, “excess employee compensation” is compensation as specially defined with respect to any employee (including a self-employed individual treated as an employee under Code Sec. 401(c) ) for any plan year in excess of $1,000,000. ( Code Sec. 430(c)(7)(D) ) Beginning in 2011, the $1,000,000 threshold will be adjusted for inflation.

The aggregate amount of extraordinary dividends and redemptions for a plan year is equal to the amount by which the sum of the dividends declared during the plan year by the plan sponsor and the aggregate amount paid for the redemption of stock of the plan sponsor redeemed during the plan year exceeds the greater of:

1.      the plan sponsor's adjusted net income (within the meaning of ERISA Sec. 4043) for the preceding plan year, determined without regard for any reduction by reason of interest, taxes, depreciation or amortization; or

2.      for a plan sponsor who determined and declared dividend in the same manner for at least 5 consecutive years immediately preceding the plan year, the aggregate amount of dividends determined and declared for the plan year in that manner. ( Code Sec. 430(c)(7)(E) )

Extended Amortization Period For Plans Subject to Prior Law Funding Rules

Defined benefit pension plans generally are subject to minimum funding requirements. The Pension Protection Act of 2006 (PPA) made significant changes to the minimum funding requirements for single-employer plans. Generally, those modifications became effective for plan years beginning after Dec. 31, 2007. However, there are delayed effective dates for certain plans including multiple employer plans of certain cooperatives, certain PBGC settlement plans, and plans of certain government contractors.

New law. Generally effective as if included in PPA, the Act extends two types of funding relief to underfunded plans with delayed PPA effective dates. (Act Sec. 202, amending PPA by redesignating Sec. 107 as Sec. 108 and inserting a new Sec. 107) A plan sponsor may elect either: (1) a two year look-back rule for purposes of calculating the plan's deficit reduction contribution (i.e., use a plan's funded current liability percentage from the second plan year preceding the plan's first election year); or (2) a 15-year amortization period for purposes of determining the plan's unfunded new liability. Plan sponsors of eligible plans may elect relief for not more than two applicable years (one year for plans of certain government contractors). (PPA Sec. 107(d)(1)) Plan sponsors electing two years of relief must elect the same type of relief for each year. (PPA Sec. 107(d)(2)) Generally, relief may be elected for any two plan years beginning in 2008, 2009, 2010, or 2011. A plan year beginning in 2008 may be an applicable year, however, only if the due date for payment of the plan's minimum required contribution occurs on or after June 25, 2010 (enactment date). (PPA Sec. 107(e)(1))

Act Sec. 202(b) also amends PPA Sec. 104 by making that section applicable to eligible charity plans. As a result, the delayed PPA effective date and special interest rates rules that apply to eligible cooperative plans apply to eligible charity plans. (Committee Reports) A plan is an eligible charity plan for a plan year if it is maintained by more than one employer, 100% of whom are tax exempt organizations under Code Sec. 501(c)(3) . For purposes of the provision, the determination of whether a plan is maintained by more than one employer is determined without regard to the controlled group rules of Code Sec. 414(c) . (Act Sec. 202(b), adding PPA Sec. 104(d)) The change for eligible charity plans is effective for plan years beginning after Dec. 31, 2007, except that a plan sponsor may elect to apply the provision to plan years beginning after Dec. 31, 2008, under elections made at the time and in the manner prescribed by IRS. The elections may be revoked only with IRS's consent. (Act Sec. 202(c)(2))

Lookback For Underfunded Plan's Benefit Restrictions

Underfunded single-employer defined benefit plans are subject to a variety of restrictions on the payment and accrual of benefits. Certain accelerated benefits may not be paid during plan years in which the plan hasn't met a specified “adjusted funding target attainment percentage” (AFTAP). Different rules apply for plans that have an AFTAP of less than 60%, and those with an AFTAP of from 60% to less than 80%. The accelerated benefits targeted under these provisions, known as prohibited payments, are, in essence, any payments other than a single life annuity.

Under these rules a Social Security supplement is not a prohibited payment. A Social Security supplement is a benefit for plan participants that begins before the age and terminates before the age when participants are entitled to full, unreduced on account of age, Social Security benefits. The supplement must not exceed the Social Security benefits. In contrast, a Social Security leveling option—a payment option which accelerates payments under the plan before, and reduces payments after, a participant starts receiving social security payments in order to provide substantially similar payments before and after such benefits are received—is a prohibited payment.

Under another underfunded plan restriction, plans with severe funding shortfalls are subject to a limit on benefit accruals, under which future benefit accruals are frozen until the shortfall is resolved. The Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) Sec. 203 ( P.L. 110-458, Sec. 203 ) provided that for the first plan year beginning during the period beginning on Oct. 1, 2008, and ending on Sept. 30, 2009, plans subject to this limit must substitute the plan's AFTAP for the preceding plan year for the percentage for the plan year, but only if the AFTAP for the preceding year is greater. In other words, the plan may use whichever AFTAP would result in a higher funding percentage.

New law. Under the Act, the Code Sec. 436(e) future benefit accrual limitation is avoided if the plan's AFTAP for the plan year beginning after Oct. 1, 2007 and before Oct. 1, 2008, is 60% or greater (or, in the case of a plan for which the valuation date is not the first day of the plan year, if the AFTAP for the plan year beginning before Nov. 1, 2007 is 60% or greater). The same substitution of the plan's AFTAP also applies in determining whether a plan can pay a Code Sec. 436(d) prohibited payment in the form of a social security leveling option. (Committee Report)

For plans with valuation dates on the first day of the plan year, the Act provides that for any plan year beginning on or after Oct. 1, 2008 and before Oct. 1, 2010—for purposes of an applicable provision only (see below)—a plan's AFTAP is the greater of: (1) the AFTAP, as determined without regard to this rule; or (2) the AFTAP for the plan year beginning after Oct. 1, 2007 and before Oct. 1, 2008 (as determined under rules prescribed by IRS). ( Code Sec. 436(j)(3)(A) , as amended by Act Sec. 203(a)(2))

In the case of a plan for which the valuation date is not the first day of the plan year, for any plan years beginning after Dec. 31, 2007, and before Jan. 1, 2010, the Code Sec. 436 future benefit accrual limitation rules are applied by substituting the plan's AFTAP for the plan year with the plan's AFTAP for the last plan year beginning before Nov. 1, 2007 (as determined under rules prescribed by IRS). ( Code Sec. 436(j)(3)(B) )

For purposes of these rules, applicable provision means either: (i) Code Sec. 436(d) (relating to the limits on the payment of accelerated benefits), but only for purposes of applying the limits to a payment which, as determined under rules to be prescribed by IRS, is a payment under a social security leveling option that accelerates payments under the plan before, and reduces payments after, a participant starts receiving Social Security benefits, in order to provide substantially similar aggregate payments both before and after the Social Security benefits are received; and (ii) Code Sec. 436(e) (relating to the limit on benefit accruals for plans with severe funding shortfalls). ( Code Sec. 436(j)(3)(C) )

The Act provides that Sec. 203 of WRERA applies to a plan for any plan year instead of this provision to the extent that it produces a higher AFTAP for the plan year. (Act Sec. 203(b))

Special Lookback Credit Balance Rule for Plans Maintained by Charities

Under the 2006 Pension Protection Act (PPA) funding rules, credit balances that accumulated under pre-PPA law (“funding standard carryover balances”) are preserved and, for plan years beginning after 2007, new credit balances (“prefunding balances”) result if a plan sponsor makes contributions greater than those required under the PPA funding rules.

Plan sponsors may elect to credit all, or a portion, of the prefunding balance or the funding standard carryover balance for the current plan year against the minimum required contribution for the current plan year. The amount of the minimum required contribution must be reduced (but not in excess of the minimum required contribution) by the amount credited by the plan sponsor in its election. However, under pre-Act law, the election to offset the minimum required contribution with a funding balance wasn't available to underfunded plans. Specifically, under pre-Act law, a plan wasn't entitled to elect to offset its minimum required contribution by a prefunding balance, or a funding standard carryover balance, if the funding target attainment percentage (funding ratio), is less than 80% of: (1) the value of plan assets for the preceding plan year (as reduced by the prefunding balance), over; (2) the plan's funding target for the preceding plan year (determined without regard to the rules for plans in at-risk status).

New law. For plans with valuation dates on the first day of the plan year, the Act provides that for any plan year beginning after Aug. 31, 2009 and before Sept. 1, 2011, in determining whether a plan maintained exclusively by one or more tax-exempt Code Sec. 501(c)(3) charitable organizations (Committee Report, see below) is sufficiently funded so as to be allowed to credit all or a portion of its funding standard carryover balance or prefunding balance against the minimum required contribution for the plan year, the plan may use the greater of: (1) its funding target attainment percentage (determined without regard to this provision) for the prior plan year; or (2) the funding target attainment percentage for the plan year beginning after Aug. 31, 2007 and before Sept. 1, 2008 (as determined under rules prescribed by IRS). Thus, plans whose funded status for the lookback year was at least equal to 80% are allowed to temporarily offset their minimum required contributions by a credit balance, even if they wouldn't otherwise be allowed to do so. ( Code Sec. 430(f)(3)(D)(i) , as amended by Act Sec. 204(b))

For plans with valuation dates other than the first day of the plan year, the provisions apply for any plan year beginning after Dec. 31, 2007, and before Jan. 1, 2010, and the plan may use the funding target attainment percentage for the last plan year beginning before Sept. 1, 2007 (as determined under rules prescribed by IRS). ( Code Sec. 430(f)(3)(D)(ii) )

Observation: Although Code Sec. 430(f)(3)(D(ii)(I) provides that it applies for plan years beginning after Dec. 31, 2007, the effective date provision in Act Sec 204(c)(2) indicates that in the case of a plan for which the valuation date is not the first day of the plan year, the amendments apply to plan years beginning after Dec. 31, 2008.

Funding Standard Account Rules Eased for Multieemployer Plans

Each multiemployer plan subject to the minimum funding requirements must establish and maintain a funding standard account. For each plan year, the funding standard account is charged with the sum of the (1) normal cost, and (2) the amortization of supplemental costs, determined based on the use of an acceptable actuarial cost method. A plan's normal cost for a plan year generally represents the cost of future benefits allocated to the plan year under the funding method used by the plan for current employees. The supplemental cost for a plan year is the cost of future benefits that would not be met by future normal costs, or plan assets, such as net experience loss. Supplemental costs are amortized (i.e., recognized for funding purposes) over a specified number of years. The amortization period for a multiemployer plan for most credits and charges is 15 years. Experience gains and losses also are amortized over 15 years.

As of the close of a plan year, if charges to the funding standard account exceed credits to the account, the plan has an accumulated funding deficiency equal to the amount of the excess. A multiemployer plan with an accumulated funding deficiency for a plan year won't meet the Code Sec. 412 minimum funding requirements, and generally is subject to an excise tax on the underfunding. If credits to the funding standard account exceed charges, a credit balance results, and the credit balance, increased with interest, can be used to reduce future required contributions.

An automatic extension of amortization periods under the multiemployer plan funding rules is available if the sponsor of a multiemployer plan: (i) submits an application to IRS for an extension of the period of years required to amortize any unfunded liability; and (ii) includes a certification by the plan's actuary with the application. IRS must extend the amortization period for the period of time (up to five years) specified in the application.

The value of a plan's assets (under the minimum funding rules for multiemployer plans) may be determined on the basis of any reasonable actuarial method of valuation that (i) takes into account fair market value, and (ii) is permitted under IRS regs. Thus, the actuarial value of a plan's assets under a reasonable actuarial method generally can include a “smoothing” (averaging) methodology that takes into account reasonable expected investment returns and average values of the plan assets, as long as (1) the smoothing period does not exceed the five most recent plan years, and (2) the actuarial valuation method used by the plan results in a value of the assets that is not less than 80%, and not more than 120% of the current fair market value of the assets.

IRS must approve a change in a plan's asset valuation methods, which is considered to be part of the plan's funding method.

New law. The Act allows multiemployer plans that satisfy a solvency test to elect to make changes in the funding standard account for either or both of the first two plan years ending after Aug. 31, 2008, by (i) amortizing “net investment losses” over 30 years instead of 15 years, and/or (ii) changing the plan's asset valuation method so as to spread the difference between expected and actual returns over a period of up to 10 years, and/or providing an expanded ceiling for the asset valuation, as described below.

Extension of net investment loss amortization period. A multiemployer plan that meets the solvency test (see below) may treat as an item separate from other experience losses, to be amortized in equal annual installments (until fully amortized) over a period of 30 years, the portion of its experience losses (if any) attributable to any “net investment losses” (see below) incurred in either or both of the first two plan years ending after Aug. 31, 2008. ( Code Sec. 431(b)(8)(A)(i) , as amended by Act Sec. 211(a)(2))

No extension of amortization periods under Code Sec. 431(d) is allowed for the 30-year amortization period for net investment losses described above. If an extension of the amortization period under Code Sec. 431(d) was granted for any plan year before the election described above (to have a 30-year amortization period for net investment losses) applies to the plan year, then the extension must not result in the amortization period exceeding 30 years. ( Code Sec. 431(b)(8)(A)(ii) )

“Net investment losses” must be determined in the manner that IRS prescribes, on the basis of the difference between actual and expected returns (including any difference attributable to any criminally fraudulent investment arrangement, as determined under rules substantially similar to those prescribed by IRS for Code Sec. 165 loss purposes). ( Code Sec. 431(b)(8)(A)(iii) )

Asset “smoothing” relief rules. A multiemployer plan that meets the solvency test (see below) may change its asset valuation method in a manner that—

1.      spreads the difference between expected and actual returns for either, or both, of the first two plan years ending after Aug. 31, 2008, over a period of not more than 10 years.

2.      provides that for either, or both, of these two plan years, the value of plan assets at any time will not be (i) less than 80%, or (ii) greater than 130%, of the fair market value of the assets at that time; or

3.      makes both changes described in items (1) and (2), to its asset valuation method. ( Code Sec. 431(b)(8)(B)(i) )

Use of the asset “smoothing” relief rules won't violate the asset valuation rules. That is, for any plan year that the asset smoothing relief rules apply:

(a) IRS must not treat the plan's asset valuation method as unreasonable solely because of the valuation method changes described in items (1), (2), and (3), immediately above; and

(b) the valuation method changes will be considered approved by IRS (as required under Code Sec. 412(d)(1) ). ( Code Sec. 431(b)(8)(B)(ii) )

If (i) the extended amortization period for net investment losses, and (ii) asset “smoothing” relief, both apply for any plan year, then the plan must treat any reduction in unfunded accrued liability resulting from the asset “smoothing” relief rules as a separate experience amortization base, to be amortized in equal annual installments (until fully amortized) over a period of 30 years, rather than the period that liability otherwise would have been amortized over. ( Code Sec. 431(b)(8)(B)(iii) )

Solvency test. The solvency test is met only if the plan actuary certifies that the plan is projected to have sufficient assets to timely pay expected benefits and anticipated expenditures over the amortization period, taking into account the changes in the funding standard account described above (i.e., under Code Sec. 431(b)(8) ). ( Code Sec. 431(b)(8)(C) )

Restriction on benefit increases. If the extended amortization period for net investment losses, or asset “smoothing” relief rules, apply to a multiemployer plan for any plan year, then, in addition to any other applicable restrictions on benefit increases, a plan amendment increasing benefits may not go into effect during either of the immediately following two plan years, unless —

(1) the plan actuary certifies that: (a) any benefit increase during this period is paid for out of additional contributions not allocated immediately before the application to the plan of these relief provisions, and (b) the plan's funded percentage and projected credit balances for these two plan years are reasonably expected to be at least as high as this percentage and these balances would have been if the benefit increase had not been adopted; or

(2) the amendment is required as a condition of qualification under the Code Sec. 401 qualification rules, or to comply with other applicable law. ( Code Sec. 431(b)(8)(D) )

Reporting. A sponsor of a plan to which the extended amortization period for net investment losses, or asset smoothing relief rules apply must give notice of the application of these relief provisions to plan participants and beneficiaries, and inform the Pension Benefit Guaranty Corporation (PBGC) of application of these provisions, in the form and manner that PBGC may prescribe. ( Code Sec. 431(b)(8)(E) )

Effective date. These changes generally are effective the first day of the first plan year ending after Aug. 31, 2008. However, any plan election under the funding relief rules discussed above that affects the plan's funding standard account for the first plan year ending after Aug. 31, 2008, must be disregarded for purposes of applying the provisions of the Code Sec. 432 additional funding rules for multiemployer plans in endangered status or critical status. The restrictions on plan amendments increasing benefits take effect on June 25, 2010. (Act Sec. 211(b))

New CMS-IRS Data Match to Identify Fraudulent Medicare Providers

The Centers for Medicare and Medicaid Services (CMS) and IRS are not authorized to exchange information for the purposes of fighting Medicare fraud and screening potential new providers.

New law. The Act directs IRS, upon written request from the Secretary of Health and Human Services (HHS), to disclose to HHS officers and employees return information of a taxpayer who has applied to enroll, or reenroll, as a Medicare provider of services or supplier consisting of taxpayer identity information; the amount of delinquent tax debt owed; and the tax year to which it pertains. ( Code Sec. 6103(l)(22)(A) , as amended by Act Sec. 103(a)(2)

Disclosed return information may be used by HHS officers and employees for the purposes of, and to the extent necessary in, establishing the taxpayer's eligibility for enrollment or re-enrollment in the Medicare program, or in any administrative or judicial proceeding relating to, or arising from, a denial of such enrollment or re-enrollment, or in determining the level of enhanced oversight to be applied with respect to such taxpayer pursuant to Social Security Act Sec. 1866(j)(3). ( Code Sec. 6103(l)(22)(B) )

For purposes of the new provision, “delinquent tax debt” means an outstanding debt under the Code for which a notice of lien has been filed under Code Sec. 6323 . However, it does not include debt that is being paid in a timely manner pursuant to an agreement under Code Sec. 6159 (installment agreement) or Code Sec. 7122 (compromise). Nor does it include a debt with respect to which a collection due process hearing under Code Sec. 6330 is requested, pending, or completed and no payment is required. ( Code Sec. 6103(l)(22)(B) )

Observation: Act Sec. 103 doesn't carry an effective date for the data-match changes above. Thus, they are effective on June 25, 2010, the Act's enactment date.