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One free scan finds every outdated or missing driver and matches the right update for your exact hardware.Free scan · exact hardware matchFor a U.S. single-employer defined-benefit plan subject to Internal Revenue Code Section 430, the minimum required contribution depends on the funding target compared with plan assets after the applicable treatment of the plan’s prefunding balance and funding standard carryover balance. If adjusted assets are below the funding target, the minimum generally includes target normal cost plus applicable shortfall- and waiver-amortization charges. If adjusted assets meet or exceed the target, the excess can reduce target normal cost, but never below zero. A trust’s gross asset balance by itself is therefore not enough to determine the contribution.
Which pension plans use this calculation?
This explanation applies to single-employer defined-benefit plans covered by the general Section 430 funding rules. It does not automatically apply to every pension arrangement. Multiemployer plans and certain collectively bargained multiple-employer plans, including plans subject to separate CSEC rules, use different statutory frameworks.
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Before examining a funding balance, identify the plan’s legal category, plan year, valuation date and applicable funding rules. A calculation that is correct for a covered single-employer plan can be wrong for a multiemployer or specially classified plan.
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Funding target
The funding target is generally the present value, as of the first day of the plan year, of benefits participants have already accrued or earned. It is a liability measure, not a statement of the trust’s market value. The calculation uses statutory actuarial methods and assumptions, including the plan’s interest-rate and mortality assumptions and the form and timing of promised benefits.
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Target normal cost
Target normal cost is the current-year cost of benefits expected to accrue or be earned during the plan year. The 2026 proposed regulations describe it as the present value of those expected accruals plus expected plan-related expenses paid from plan assets, reduced by expected mandatory employee contributions. That description comes from a proposed rule, so it should not be treated as a final regulation.
Target normal cost is different from the funding target. The funding target looks back at benefits already earned; target normal cost looks at the cost assigned to the current year. A plan can have a large funding target and a comparatively smaller target normal cost, or the reverse, depending on its workforce, benefit formula and assumptions.
Plan asset value
Section 430 does not use an unqualified “what is in the trust today?” number. The valuation method and statutory rules determine the asset value used for funding. Depending on the plan and elections, the valuation may involve an averaging method, market-value rules or other permitted adjustments.
Funding balances
A plan can maintain a prefunding balance and a funding standard carryover balance. These balances represent prior funding amounts that may be available for statutory purposes, subject to election, timing and other restrictions. Their treatment changes the adjusted-asset comparison used in the minimum-funding formula. Consequently, the same trust balance can lead to a different funding result depending on which balances exist, how much remains and whether the sponsor elects to use or preserve them.
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The two-branch calculation
The most useful way to understand the rule is as a decision tree rather than a single percentage or subtraction.
- Classify the plan. Confirm that the plan is a Section 430 single-employer defined-benefit plan and identify any special statutory rules.
- Set the valuation inputs. Determine the funding target and target normal cost using the plan’s required valuation date, benefit data, actuarial assumptions and expense and employee-contribution information.
- Determine adjusted assets. Value plan assets under the applicable asset method and apply the statutory treatment of the prefunding balance and funding standard carryover balance, including any sponsor election to use a balance.
- Compare adjusted assets with the funding target. This comparison determines which side of the formula applies.
- Apply the appropriate branch. A below-target result can add amortization charges to target normal cost. An at-or-above-target result lets excess adjusted assets offset target normal cost, subject to a zero floor.
- Complete the plan-specific funding calculation. The enrolled actuary or another qualified professional must apply every applicable base, installment, limitation, election and deadline.
| Adjusted-asset position | What it means for the formula | Role of funding balances |
|---|---|---|
| Below the funding target | Target normal cost generally remains due, and applicable shortfall-amortization and waiver-amortization charges can increase the minimum. | Balances and their statutory treatment affect whether the plan is below target and can affect the amount that must be funded. |
| Equal to or above the funding target | Excess adjusted assets reduce target normal cost, but the statutory minimum cannot become negative. | Preserved or available balances can influence the adjusted-asset amount and therefore the size of the offset. |
What happens when adjusted assets are below the funding target?
Target normal cost is the starting point
The current-year cost of newly earned benefits is generally part of the minimum regardless of whether the plan is underfunded or overfunded. It reflects the benefits expected to accrue during the plan year and, under the proposed 2026 description, certain expected plan expenses and mandatory employee contributions.
Shortfall-amortization charges can be added
When a shortfall base applies, the base is generally paid through level annual installments over seven plan years. Each applicable installment is part of the minimum contribution while that amortization schedule remains outstanding. The seven-year period describes the general mechanism; the exact bases, effective dates and installment amounts depend on the plan’s history and the governing rules for the relevant years.
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Waiver-amortization charges may also apply
A plan that previously received a funding waiver can have a separate waiver-amortization obligation. If an installment is applicable for the year, it is included with the other components of the minimum. A waiver is therefore not a permanent cancellation of the underlying funding obligation.
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What happens when adjusted assets meet or exceed the target?
Once adjusted assets reach the funding target, the formula changes branch. The excess is available to reduce target normal cost. The reduction is capped at the amount of target normal cost, so the statutory minimum does not become a negative contribution. If excess assets fully offset target normal cost, the result can be zero for that component, but that does not mean every plan obligation disappears. Other applicable statutory requirements, benefit-protection rules, administrative costs or required payments may still matter.
This is why a plan surplus does not automatically mean that no contribution is required. The relevant surplus is the excess of adjusted assets over the funding target after the prescribed balance treatment, not simply the difference between a trust statement and a liability estimate.
Why the prefunding and carryover balances matter
They can change the branch of the formula
Funding balances can affect whether the plan is treated as below target or at or above target for minimum-funding purposes. A sponsor that uses an available balance may reduce the amount of cash needed for the year, but it also reduces the balance retained for a future year. A sponsor that preserves the balance may face a larger current cash requirement while retaining a potential future offset.
Use is not the same as ownership of trust assets
The balances are statutory accounting items, not a second bank account. Their existence does not mean that the plan holds additional securities or cash beyond the trust assets. Their impact comes from how the law instructs the actuary to adjust the asset comparison and apply elections.
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Election timing and limits are decisive
Whether a balance can be used, the amount that may be used and the deadline for an election depend on the plan year and applicable rules. A sponsor should not assume that an informal decision to contribute less automatically spends a balance. The election and certification must be handled through the plan’s required funding process.
Funding target versus target normal cost
| Measure | Question it answers | Typical timing focus |
|---|---|---|
| Funding target | What is the present value of benefits earned to date under the statutory assumptions? | As of the first day of the plan year |
| Target normal cost | What is the present value of benefits expected to accrue during this plan year, with applicable expenses and employee contributions considered? | Service and expected accruals during the current plan year |
Confusing these measures produces misleading explanations. A change in the funding target does not automatically equal a change in target normal cost, and neither number can be inferred from the trust’s gross balance without the plan’s actuarial data.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Assumptions can move the result from year to year
Interest-rate, mortality, retirement, turnover, salary and other assumptions affect the funding target and target normal cost. Asset performance and the permitted asset-valuation method affect adjusted assets. A contribution can therefore change even when the benefit formula and participant count appear stable.
For valuation dates during calendar year 2026, IRS Notice 2025-40 specifies updated static mortality tables for defined-benefit plan calculations. That update is an input to the valuation, not a universal percentage increase or decrease in required contributions. Only the plan’s actuary can determine the effect after applying the table to the plan’s demographics and benefit provisions.
Important 2026 regulatory developments
Proposed rules on target normal cost and funding target
The IRS published proposed regulations identified as REG-107855-25 addressing the determination of target normal cost and funding target for single-employer defined-benefit plans. The proposal states that comments and requests for a hearing must be received by October 19, 2026. As of October 17, 2026, it is still proposed, not final or automatically effective. Check the IRS for later action before relying on a provision for a filing or valuation.
The $50 million assumption-approval threshold
The proposed-rule discussion describes a separate rule for a single-employer plan and its related controlled-group plans. If aggregate unfunded vested benefits exceeded $50 million at the close of the prior plan year, certain changes to actuarial assumptions require approval by the Secretary. This is a threshold governing approval of assumption changes. It is not an average funding deficit, a penalty amount or a prediction of how much contributions will rise.
Why a general dollar example would be misleading
A valid contribution example must specify the valuation date, plan year, accrued benefits, participant data, interest and mortality assumptions, asset-valuation method, funding-balance elections, existing shortfall and waiver bases, and any applicable statutory limits. Changing any of those inputs can move the plan to the other formula branch or change an amortization installment. Without them, a dollar illustration would suggest a precision the available facts cannot support.
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For planning discussions, use a worksheet that labels each input and identifies whether it is measured, assumed, elected or carried forward. Do not substitute a trust statement’s ending balance for the adjusted-asset value used in the actuarial certification.
Common mistakes and how to correct them
- Comparing gross assets directly with liabilities: Recalculate assets using the required valuation method and funding-balance treatment.
- Calling the funding target the annual contribution: Separate the liability for benefits already earned from the current-year target normal cost and amortization charges.
- Assuming a surplus guarantees a zero contribution: Apply the target-normal-cost offset and its zero floor; then check for other applicable obligations.
- Ignoring old waiver or shortfall bases: Review every outstanding amortization schedule before estimating the current minimum.
- Treating a proposed rule as law: Confirm whether the 2026 proposal has been finalized and what effective dates apply.
- Applying Section 430 to the wrong plan type: Confirm whether the plan is single-employer, multiemployer or subject to a special CSEC framework.
- Using a prior-year mortality table automatically: Verify the table required for the valuation date, including the 2026 tables specified by Notice 2025-40.
What the sponsor should gather before asking for a calculation
- The plan document, latest actuarial valuation and current plan-year valuation date.
- Participant census data, accrued-benefit records and expected current-year accruals.
- Trust asset values and the asset-valuation method used for funding.
- Balances for the prefunding account and funding standard carryover account, including prior elections and expiration or reduction history.
- Outstanding shortfall-amortization and waiver-amortization bases and their remaining installments.
- The plan’s current actuarial assumptions and any proposed changes that may require regulatory approval.
- Controlled-group information relevant to any statutory threshold or assumption-approval rule.
Who should calculate the minimum?
The final amount is plan-specific and should be prepared by the enrolled actuary or another qualified professional who can apply the Section 430 rules, plan documents, elections, assumptions and filing deadlines together. IRS Publication 560 (2025) warns: “Determining the amount needed to satisfy the minimum funding standard for a defined benefit plan is complicated, and you should seek professional help in order to meet these contribution requirements.” That guidance is especially relevant when a funding balance, a prior waiver, a controlled-group threshold or a proposed regulatory change is involved.
Quick Recap
Practical decision checklist
- Verify the plan category and governing funding section.
- Confirm the valuation date and plan year.
- Obtain the funding target and target normal cost from the valuation.
- Confirm the required asset-valuation method.
- Inventory prefunding and carryover balances and document any election to use them.
- List all open shortfall and waiver amortization installments.
- Compare adjusted assets with the funding target and identify the applicable branch.
- Apply the zero floor to any target-normal-cost reduction.
- Check current mortality tables, proposed-rule status, assumption-approval requirements and contribution deadlines.
- Have the actuary or qualified professional certify the plan-specific minimum before payment.
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