The Adjusted Funding Target Attainment Percentage, or AFTAP, is the single number that determines what a single-employer defined benefit pension plan can and cannot do in a given year. It measures plan assets against the value of benefits already earned, and once it drops below certain thresholds, federal law imposes automatic restrictions. Understanding AFTAP pension funding levels and the restrictions tied to them starts with two numbers to remember: 80% and 60%. Fall below the first, and lump-sum payouts get cut in half and benefit increases are locked out. Fall below the second, and future benefit accruals freeze entirely.
How the AFTAP Is Calculated
The AFTAP is a ratio. The numerator is the market value of the pension trust’s assets, reduced by the plan’s prefunding balance and funding standard carryover balance. The denominator is the funding target, meaning the present value of every benefit participants have earned so far.1Internal Revenue Service. Notice 2021-48 – Guidance on Single-Employer Defined Benefit Pension Plan Funding Changes Under the American Rescue Plan Act of 2021 Subtracting the credit balances keeps the ratio from giving credit for prior-year surpluses that have already been counted.
The “adjusted” part comes from a second step. Both the asset figure and the funding target are increased by the value of annuity purchases the plan made for non-highly-compensated employees during the two preceding plan years.2U.S. Department of Labor. Pension Protection Act of 2006 Technical Explanation Without that addback, a plan could inflate its percentage by moving liabilities off the books through annuity purchases while removing the matching assets from the trust.
The Certification Deadline and the Presumption Trap
An enrolled actuary must calculate and certify the AFTAP each year. Until that certification is signed, the plan operates under presumption rules that can force restrictions on a plan that is actually well funded.3eCFR. 26 CFR 1.436-1 – Limits on Benefits and Benefit Accruals Under Single Employer Defined Benefit Plans
Two deadlines matter. If no certification is issued by the first day of the fourth month of the plan year, and the plan was within 10 percentage points of a restriction threshold in the prior year, the plan is presumed to have an AFTAP 10 percentage points below last year’s number.4Office of the Law Revision Counsel. 26 USC 436 – Funding-Based Limits on Benefits and Benefit Accruals Under Single-Employer Plans A plan certified at 85% last year is now treated as if it were at 75%, and the 80% restrictions kick in.
The second deadline is harsher. If the actuary has not certified by the first day of the tenth month of the plan year, the plan is conclusively presumed to be below 60%.4Office of the Law Revision Counsel. 26 USC 436 – Funding-Based Limits on Benefits and Benefit Accruals Under Single-Employer Plans “Conclusively” leaves no room for rebuttal. Accruals freeze, lump sums stop, and the actual funded status of the plan is irrelevant until certification finally happens.
Restrictions When the AFTAP Falls Below 80%
Two things happen at once when the AFTAP drops below 80% but stays at 60% or above.
First, full lump-sum payouts and other accelerated distribution forms are cut off. The plan can still pay a partial lump sum, but it is capped at the lesser of 50% of what the participant would otherwise receive or the present value of the maximum benefit guaranteed by the Pension Benefit Guaranty Corporation.4Office of the Law Revision Counsel. 26 USC 436 – Funding-Based Limits on Benefits and Benefit Accruals Under Single-Employer Plans The rest is paid as a monthly annuity. A participant only gets one partial lump-sum distribution for the entire period the restriction is in effect.
Second, the plan cannot adopt any amendment that increases benefit liabilities. Raising the benefit formula, adding new benefit features, accelerating vesting, or adding a cost-of-living adjustment are all blocked.4Office of the Law Revision Counsel. 26 USC 436 – Funding-Based Limits on Benefits and Benefit Accruals Under Single-Employer Plans The sponsor can lift this specific restriction by making an additional contribution equal to the full cost of the proposed amendment, but that means real cash beyond the year’s required contribution.
Restrictions When the AFTAP Falls Below 60%
Below 60%, the rules stop trying to slow the bleeding and simply stop it. Every lump-sum payment and every other accelerated distribution form ceases. There is no partial-payment option at this level.4Office of the Law Revision Counsel. 26 USC 436 – Funding-Based Limits on Benefits and Benefit Accruals Under Single-Employer Plans
Future benefit accruals also freeze. Active employees stop earning additional pension credits for their ongoing service until the plan’s funding recovers.1Internal Revenue Service. Notice 2021-48 – Guidance on Single-Employer Defined Benefit Pension Plan Funding Changes Under the American Rescue Plan Act of 2021 On top of that, the plan cannot pay unpredictable contingent event benefits, meaning benefits that would otherwise be triggered by events like plant shutdowns or layoffs.
When any of these restrictions take effect, the plan administrator has 30 days to send written notice to participants and beneficiaries explaining which benefits have been limited.5Internal Revenue Service. Notice 2012-46 – Notice Requirements Under Section 101(j) of ERISA for Funding-Related Benefit Limitations in Single-Employer Defined Benefit Pension Plans Missing that requirement exposes the administrator to a Department of Labor civil penalty of up to $1,632 per day per violation, adjusted for inflation.6eCFR. 29 CFR Part 2575 – Adjustment of Civil Penalties Under ERISA Title I
The Small-Balance Carve-Out
One exception applies at every funding level. Benefits with a present value of $5,000 or less can still be paid as a lump sum regardless of the plan’s AFTAP, because those amounts fall under the involuntary cashout rules.4Office of the Law Revision Counsel. 26 USC 436 – Funding-Based Limits on Benefits and Benefit Accruals Under Single-Employer Plans Participants with small pension balances are not blocked from a full payout even in a plan sitting below 60%.
How Sponsors Raise the AFTAP
Three tools are available to push the number back up.
The direct route is a cash contribution. Contributions designated for a particular plan year must generally be made within 8½ months after the plan year ends to count toward that year’s funding calculation.7eCFR. 26 CFR 1.430(j)-1 – Payment of Minimum Required Contributions A contribution that arrives even a week after that window applies to the following year instead, and a full year of AFTAP improvement is lost.
A cheaper option, at least in the short run, is waiving credit balances. Because the prefunding balance and funding standard carryover balance are subtracted from assets in the AFTAP formula, voluntarily giving them up immediately raises the net asset figure without requiring new cash.3eCFR. 26 CFR 1.436-1 – Limits on Benefits and Benefit Accruals Under Single Employer Defined Benefit Plans The trade-off is that those balances could have offset future minimum required contributions, and once waived they are gone for good. For a plan sitting just under 80% or 60%, this is often the fastest way to cross back over.
Sponsors who cannot contribute cash right away can post security that the plan treats as an asset for AFTAP purposes. Acceptable forms are limited to a corporate surety bond, or cash and short-term U.S. Treasury obligations held in escrow at a bank or insurance company.3eCFR. 26 CFR 1.436-1 – Limits on Benefits and Benefit Accruals Under Single Employer Defined Benefit Plans The security is paid to the plan if the sponsor misses a future required contribution or if the plan terminates. It can only be released back to the employer once the actuary certifies the plan has reached at least 90% funded without counting the security, and if the plan stays below 60% for seven consecutive years while ignoring the security, the security is forfeited to the plan.
Other Costs of Underfunding
Restrictions on payouts and accruals are not the only price of a low AFTAP. Every single-employer plan pays a flat-rate premium to the Pension Benefit Guaranty Corporation of $111 per participant for 2026, and underfunded plans owe a variable-rate premium of $52 for every $1,000 of unfunded vested benefits, capped at $751 per participant.8Pension Benefit Guaranty Corporation (PBGC). Comprehensive Premium Filing Instructions for 2026 Plan Years For a plan with meaningful unfunded liabilities, those variable-rate premiums are a recurring annual cost of staying underfunded.
Chronic underfunding brings a second penalty called at-risk status. A plan is at-risk if, for the preceding plan year, its funding target attainment percentage was below 80% under standard assumptions and below 70% under more conservative assumptions. Plans with 500 or fewer participants are exempt. When a plan is at-risk, its funding target gets recalculated using more pessimistic assumptions, producing a larger liability and a bigger minimum required contribution. The increase phases in at 20% per consecutive year of at-risk status, reaching 100% in year five.9Office of the Law Revision Counsel. 26 USC 430 – Minimum Funding Standards for Single-Employer Defined Benefit Pension Plans A plan that stays underfunded year after year faces compounding contribution demands on top of the benefit restrictions already in place.