IRC 436: AFTAP Thresholds, Benefit Restrictions, and Accrual Freezes

IRC 436 imposes funding-based limits on benefits and accruals in single-employer defined benefit pension plans, and the trigger is a single number: the Adjusted Funding Target Attainment Percentage, or AFTAP. Once that percentage drops below 80%, the plan loses the ability to pay unrestricted lump sums and to adopt benefit-increasing amendments. Below 60%, the restrictions tighten sharply: no accelerated payments at all, no shutdown-type benefits, and a mandatory freeze on new accruals. A plan sponsor in bankruptcy faces the strictest version of these rules regardless of how well funded the plan actually is.

The AFTAP: The Number That Drives Everything

The AFTAP compares the value of a plan’s assets to its funding target, the present value of all benefits participants have already earned. Both sides of the ratio are adjusted for items like prefunding balances and funding standard carryover balances, which is what separates the AFTAP from the simpler funding target attainment percentage used in the minimum funding rules under IRC 430.¹ The percentage slots the plan into one of three zones: 80% or above (generally unrestricted), 60% up to just under 80% (partial restrictions), or below 60% (the harshest tier).

The plan’s enrolled actuary must formally certify the AFTAP each year. That certification is what sets the plan’s operational status for the year. When the actuary is late, the plan doesn’t get the benefit of the doubt.

Restrictions on Lump Sums and Other Accelerated Payments

IRC 436(d) restricts what the statute calls “prohibited payments,” which broadly means any payment in a form that exceeds what a participant would receive under a straight life annuity. That covers lump-sum cashouts, Social Security level income options, and other accelerated distributions.² How much of a lump sum a participant can take depends on where the AFTAP sits.

AFTAP at 80% or Above

No restrictions apply to lump sums or other accelerated forms. Participants can elect any payment form the plan offers. The one exception is a sponsor in bankruptcy, which is treated separately below.

AFTAP at 60% to Below 80%

A partial restriction applies. A participant can receive a lump sum, but it is capped at the lesser of two amounts: 50% of the benefit’s present value, or the present value of the maximum benefit the Pension Benefit Guaranty Corporation would guarantee for that participant.³ For a 65-year-old participant in 2026, the PBGC’s maximum monthly guarantee under a straight-life annuity is $7,789.77.⁴ Whatever is not paid in the lump sum must be paid as an annuity.

The 50% option can only be used once during any continuous period the AFTAP stays in this middle zone. If a participant takes a bifurcated distribution and the plan later climbs above 80%, that participant cannot come back for a second lump sum on the withheld portion. That piece has already been converted to annuity form.

AFTAP Below 60%

All prohibited payments are completely banned. No lump sums, no Social Security level income options, no other accelerated forms.¹ Participants can still start a straight life annuity or another non-accelerated form, but anything that front-loads value is off the table.

Restrictions on Benefit-Increasing Amendments

IRC 436(c) prevents a plan from making its underfunding worse by adding new promises. Any amendment that increases plan liabilities is blocked if the AFTAP is below 80%, or if the AFTAP would drop below 80% after factoring in the amendment’s cost.¹ That includes amendments raising existing benefits, creating new benefit formulas, or accelerating vesting.

A narrow exception exists for flat-dollar (non-compensation-based) increases whose rate of increase doesn’t exceed the contemporaneous rate of increase in average wages of the plan’s participants. That lets cost-of-living-type adjustments continue even in a modestly underfunded plan.

Restrictions on Shutdown and Contingent Event Benefits

Some plans provide subsidized early retirement benefits triggered by a plant shutdown or mass layoff. IRC 436(b) labels these “unpredictable contingent event benefits,” or UCEBs. A UCEB cannot be paid if the AFTAP is below 60%, or if it would drop below 60% after accounting for the additional liability the triggering event creates.¹ A plan sitting at 62% might look safe, but if a shutdown adds enough new liability to push the adjusted AFTAP below 60%, those benefits are blocked. The sponsor can unlock them with an additional contribution large enough to bring the AFTAP to at least 60% after the event.⁵

Mandatory Freeze on Benefit Accruals

The most disruptive restriction is the mandatory cessation of benefit accruals under IRC 436(e), which kicks in when the AFTAP falls below 60%. Participants stop earning any new retirement benefits as of the plan year’s valuation date. For workers still on the job and counting on their pension growing each year, this is the restriction that lands hardest.

Accruals can resume once the AFTAP is certified at 60% or higher. A plan may automatically restore the accruals missed during the freeze, but only if two conditions are met: the freeze lasted 12 months or less, and the enrolled actuary certifies that the current-year AFTAP would remain at or above 60% after accounting for the restored accruals.² If those conditions aren’t met, restoring missed accruals requires a plan amendment, which is itself subject to the 80% amendment restriction. A plan that barely clears 60% can restart accruals going forward but may not be well-funded enough to make participants whole for what they lost.

What Happens When AFTAP Certification Is Late

IRC 436(h) sets up three tiers of presumed underfunding when the actuary hasn’t yet certified the current year’s AFTAP. These presumptions keep a plan from paying out freely while its real funding status is unknown.

If any Section 436 restriction applied last year, the current year’s AFTAP is presumed equal to last year’s until the actuary certifies the actual number. A plan at 55% last year starts this year presumed at 55%, with the same restrictions.¹
If no restriction applied last year but the prior AFTAP was within 10 percentage points of a threshold that would have triggered one, and the actuary hasn’t certified by the first day of the fourth month, the AFTAP is presumed to be 10 points lower than last year’s certified figure. A plan certified at 87% would drop to a presumed 77% at that point, pushing it below the 80% threshold.¹
If no certification has been made before the first day of the tenth month, the AFTAP is conclusively presumed to be less than 60%. The plan drops into the most restrictive tier for the remainder of the year: no lump sums, no benefit-increasing amendments, and a mandatory accrual freeze. This presumption cannot be overridden retroactively.¹

The tenth-month rule is the one that catches sponsors off guard. A missed deadline doesn’t just delay operations; it forces the plan into the harshest restrictions for the rest of the year, regardless of actual funding.

Bankruptcy Overrides the AFTAP

When a plan sponsor enters bankruptcy, IRC 436 imposes its strictest restrictions regardless of the plan’s actual AFTAP. During any period the sponsor is a debtor in a case under Title 11 of the U.S. Code (or similar federal or state law), the plan may not pay any prohibited payment at all.¹ A plan that was 95% funded the day before the filing is locked down as completely as one at 50%.

Benefit accruals face a separate bankruptcy freeze. The plan must stop new accruals as of the date the employer enters bankruptcy, and unlike the standard 60% freeze, a corrective contribution won’t lift it. The freeze persists throughout the proceeding.

The Five-Year Exception for New Plans

IRC 436(g) provides a limited carveout during a plan’s first five years. The restrictions on accruals, amendments, and contingent event benefits do not apply. A new plan hasn’t had time to build up assets, so applying full funding thresholds would effectively prevent sponsors from offering defined benefit plans at all.

Two limits on the exception matter. The lump-sum and accelerated payment restrictions under IRC 436(d) still apply from day one. And the five-year clock is not always as generous as it sounds: years during which a predecessor employer maintained the plan count, as do years of any other defined benefit plan maintained by the current or predecessor employer within the preceding five years if any participants overlapped.

How to Lift the Restrictions

A sponsor doesn’t have to wait for markets or time to lift Section 436 restrictions. The statute’s relief mechanisms revolve around putting more money into the plan.

The direct route is an additional cash contribution large enough to push the AFTAP above the relevant threshold. For the prohibited payment ban and the accrual freeze, the target is 60%. For the amendment restriction, the target is 80%.⁵ These contributions are on top of the plan’s minimum required contribution under IRC 430.¹ Once the contribution is made, the enrolled actuary must promptly issue a revised AFTAP certification reflecting the new assets. Without recertification, the contribution alone doesn’t change operational status.

For the 80% amendment restriction, the statute also allows the sponsor to post security instead of an immediate cash contribution. The security must be in a form acceptable to the Secretary of the Treasury, equal to the increase in the funding target caused by the amendment. It sits in escrow and is released only after the plan reaches 80% AFTAP without counting the security.¹ That option lets a sponsor adopt a benefit improvement now and fund it over time.

Fixing a Section 436 Violation

Mistakes happen. A plan might pay a lump sum it shouldn’t have, or process a benefit-increasing amendment when the AFTAP didn’t support it. The IRS handles these failures through the Employee Plans Compliance Resolution System (EPCRS), currently governed by Revenue Procedure 2021-30, which provides structured correction methods rather than requiring disqualification for every error.⁶

For overpayments made in violation of Section 436, the correction options include a funding exception method (available when the plan is at least 100% funded at the time of correction, allowing the plan to absorb the loss without recovery), a contribution credit method (the sponsor applies contribution credits to offset the overpayment, with any remaining net amount reimbursed to the plan), and recoupment from the recipient (requiring written notice and a choice among installments, reduced future payments, or a single-sum repayment). Overpayments are taxable income to the recipient and are not eligible for rollover, and the plan must correct ongoing payments to the right amount going forward.⁶

1
Office of the Law Revision Counsel. 26 U.S. Code 436 – Funding-Based Limits on Benefits and Benefit Accruals Under Single-Employer Plans
2
Internal Revenue Service. Publication 5139 Explanation No. 14 Section 436 Limitations Defined Benefit Plans
3
Pension Benefit Guaranty Corporation. Present Value of the Maximum PBGC Guaranteed Benefit
4
Pension Benefit Guaranty Corporation. Maximum Monthly Guarantee Tables
5
Bloomberg Tax. 26 U.S.C. 436 – Funding-Based Limits on Benefits and Benefit Accruals Under Single-Employer Plans
6
Internal Revenue Service. Updated IRS Correction Principles and Changes to VCP Outlined in EPCRS Revenue Procedure 2021-30