Pension plan amendments may gain narrower funding treatment

Here's a scenario that should make every practitioner with defined benefit plan clients sit up straight: An employer adopts a benefit increase late in the year, thinking it only affects future accruals. Under current rules, certain late-adopted amendments can be pulled into the current year's funding calculation. The IRS is now proposing an additional condition that could keep some amendments out. That makes the calendar, and the math, worth watching.

The Treasury and the IRS just proposed the first major overhaul of the target normal cost and funding target regulations since 2009. If you advise employers who sponsor single-employer defined benefit plans, this is an update that could decide whether a late-adopted amendment enters the current year's funding calculation or stays out.

Two numbers at the center of the bill

A plan's minimum required contribution depends in part on two numbers: target normal cost and funding target. Target normal cost covers benefits expected to accrue or be earned during the current year, plus plan-related expenses expected to be paid from plan assets, less mandatory employee contributions expected during the year. Funding target covers benefits accrued or earned as of the beginning of the current plan year. That distinction sounds technical, but it drives real consequences. Section 436(c) generally restricts benefit-increasing amendments when a plan's AFTAP is below 80%, or would fall below 80% after taking the amendment into account. Get the classification wrong, and an amendment that should have triggered an extra contribution slides through unnoticed, or one that should have been allowed gets blocked.

The new test you cannot skip

Under current rules, certain late-adopted amendments already have to be folded into the current year's funding calculation if they take effect by the last day of the plan year, increase liabilities and would not pass a modified §436(c) test. The proposed regulations add a third condition: The amendment must also increase target normal cost disproportionately.

Here's the plain-English version. If an amendment raises target normal cost by more than double the percentage it raises the funding target, taking into account only benefits of participants currently employed by the employer, it meets the new disproportionate-increase condition. But it gets swept into current-year funding only if it also meets the existing conditions. That is a meaningful shift, and it means practitioners need to run the math on amendments that may already be subject to the existing special rule.

To put this into a simplified example: Say a plan is underfunded enough that it's in the zone where §436(c) restrictions could apply (this matters because the test only bites when the plan's funded status is shaky). Assume the funding-target figures below reflect only benefits of participants currently employed by the employer and that the stated changes result from the amendment.

• Before the amendment: Funding target (FT) = $10,000,000; target normal cost (TNC) = $500,000 (this is the cost of benefits being earned by current employees this year).
• The amendment: Adopted midyear, effective by year-end. Say it changes the benefit accrual rate, e.g., instead of accruing 1.5% of pay per year of service, employees now accrue 2.0% per year going forward, with a small increase attributable to prior service.
• Effect of the amendment: Because it mostly affects benefits being earned right now (not a big retroactive credit for past service), it barely moves the funding target, from $10,000,000 to $10,100,000 (a 1% increase). But it substantially raises the cost of this year's accrual TNC, from $500,000 to $600,000 (a 20% increase).

Applying the test:

• % increase in TNC = 20%
• % increase in FT = 1%
• Is 20% > 2 × 1% (i.e., > 2%)? Yes, by a lot.

Result: This amendment meets the disproportionate-increase test. But the new test does not catch the amendment on its own. The amendment must also take effect by the last day of the plan year, increase liabilities in one of the ways specified by the rule and be an amendment that would not be permitted under §436(c) as applied under the proposed rule. If any of those conditions is absent, satisfying the new ratio by itself does not pull the amendment into current-year funding.

The intuition: The existing rule prevents a plan from using a late-adopted amendment to load value into the current year's accrual and avoid an underfunding-based restriction. The proposed test focuses that rule on amendments for which the increase in target normal cost is disproportionate to the increase in funding target.

What counts as a plan expense finally gets clarified

The proposal also spells out what belongs in target normal cost. Legal, actuarial, audit and administrative fees and PBGC premiums count as plan-related expenses. Investment management fees do not. If aggregate expected payments from plan assets to a service provider total $5,000 or more for a mix of investment and non-investment work, only amounts the provider itemizes as investment management fees or other expenses directly related to investing plan assets are treated as investment-related expenses. If aggregate expected payments to the provider are below $5,000, all payments are treated as investment-related expenses without itemization.

Start the clock now

Written or electronic comments and requests for a public hearing must be received by Oct. 19, 2026, and the rules would not apply to plan years beginning until at least six months after final regulations are published. That gives you time, but not an excuse to wait. Start now. Inventory amendments your DB clients have adopted after the valuation date that may be subject to the existing special rule, run the disproportionate-increase math, check the 80% AFTAP threshold and document every §401(b)(3) and §412(d)(2) election carefully.

This is exactly the kind of regulatory shift that separates tax professionals who react from those who anticipate. Staying ahead of changes like this one, before they cost a client real money, is what keeps a practice trusted and growing.

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