AFTAP Drop, Lump Sums, and a Plant-Closing Benefit

At 72%, the plan is in the 60% to 80% AFTAP band, so IRC 436(d)(2) restricts prohibited payments. A lump sum is a prohibited payment, and the plan may pay only the lesser of 50% of the amount otherwise payable or the present value of the accrued benefit. Because the present value of the accrued benefit is the full lump sum, the 50% cap controls. Each retiring employee can receive only half of the requested lump sum unless the plan pays an annuity instead. The remaining half cannot be paid until the AFTAP reaches 80% or another exception applies. The plan is not at the below-60% level, so the full prohibition on lump sums in IRC 436(d)(1) does not apply.

The benefit-increase amendment is a separate issue. IRC 436(c) limits plan amendments that increase liability for benefits when the AFTAP is below 80%, unless an exception applies, such as a plan freeze or a legally required amendment. At 72%, the early retirement increase and the new shutdown benefit should not be assumed to take effect. The shutdown benefit is also an unpredictable contingent event benefit, and IRC 436(a) restricts such benefits if the AFTAP falls below 60%. The amendment must be reviewed before adoption, and the actuary should project whether the increase would push the AFTAP below 60%. Accruals may continue because IRC 436(e) freezes accruals only below 60%.

The prefunding balance cannot be used to satisfy the 2025 quarterly contribution requirement. Under IRC 430(j)(3), a plan may not use a credit balance to meet quarterly contributions if the AFTAP for the preceding plan year was less than 100%. The preceding plan year for 2025 is 2024, and the certified 2024 AFTAP is 72%, so the quarterly contribution must be paid in cash. Using the balance would also reduce plan assets for AFTAP purposes and push the percentage further below 80%, potentially below 60%, which would trigger additional restrictions: no lump sums, no benefit increases, and a freeze on accruals.

The prefunding balance can still be used to offset the minimum required contribution at year-end if the plan satisfies the applicable election and certification rules, but it cannot cure the quarterly contribution requirement. The actuary should model the 2025 contribution with and without the balance, confirm the quarterly amount, and check the IRC 436(f) rules that can require the credit balance to be reduced to avoid benefit restrictions. The practical advice is to pay the quarterly contribution in cash and preserve the prefunding balance until the AFTAP is restored.

First, the actuary should issue the AFTAP certification and determine whether the plan is operating under a presumed AFTAP because a certification was not made. Second, the plan administrator should issue the IRC 436 participant notice explaining the 50% lump-sum limitation and any other restrictions. Third, the administrator should process lump-sum requests individually, applying the 50% cap and documenting the calculation. Fourth, the sponsor should not adopt or implement the early retirement increase or shutdown benefit until the actuary confirms that IRC 436(c) and 436(a) permit it or an exception applies.

If the company wants to pay full lump sums or add the shutdown benefit, it should consider a cash contribution to raise the AFTAP above 80% before the effective date. The actuary should also check the PBGC variable-rate premium and the funding-based limits on accelerated distributions. Finally, because the plant closing may produce a partial termination or a shutdown, the sponsor should review IRC 411(d)(3) vesting and the plan document's shutdown-benefit triggers. These steps should be coordinated before announcing the closing so the company does not promise benefits the plan cannot legally pay.