Executive Summary: Key Updates in IRS Bulletin No. 2026-28

The Internal Revenue Bulletin No. 2026-28, issued July 6, 2026, delivers three pivotal updates reshaping pension funding calculations, federal rate applications, and Qualified Opportunity Zone (QOZ) compliance. Key developments include: Notice 2026-38 (pension funding segment rates under § 430(h)(2)), Notice 2026-40 (QOZ transitional guidance under OBBBA amendments), and Revenue Ruling 2026-12 (federal rates for July 2026, impacting § 382, § 1274, § 1288, and § 7872).

Notice 2026-38 finalizes the May 2026 corporate bond yield curve, spot segment rates, 24-month average segment rates (4.75% short-term, 5.26% mid-term, 5.90% long-term), and 30-year Treasury rate (4.53%). These rates, derived under § 430(h)(2)(C)(iv), directly impact minimum funding requirements and lump-sum distributions for defined benefit plans. The 25-year average smoothing mechanism reduces volatility, with segment rates reflecting a sustained upward trend in corporate bond yields since 2022.

Notice 2026-40 provides transitional guidance for QOZs under OBBBA amendments to §§ 1400Z-1 and 1400Z-2, extending incentives and modifying qualification thresholds. The IRS intends to issue proposed regulations aligning with this guidance, particularly for pre-OBBBA investments. Key provisions address the 25% QOZ designation limitation and qualifying investment start dates, ensuring continuity for existing investments amid legislative uncertainty.

Revenue Ruling 2026-12 publishes federal rates for July 2026, including adjusted long-term rates and tax-exempt rates. These rates impact § 382 (NOL limitations), § 1274 (below-market loans), § 1288 (original issue discount), and § 7872 (gift loans). The blended annual rate under § 7872(e)(2) is 3.82%, reflecting Federal Reserve monetary tightening to combat inflation.

Collectively, these updates underscore the IRS’s ongoing efforts to align tax administration with evolving economic conditions and legislative changes. For tax practitioners, the Bulletin demands immediate attention to pension funding strategies, QOZ investment compliance, and federal rate-dependent transactions—each of which will be explored in greater depth in the subsequent sections.

Revenue Ruling 2026-12: Federal Rates for July 2026

The IRS’s Revenue Ruling 2026-12 provides prescribed federal rates for July 2026, derived from Treasury yields and corporate bond data. These rates underpin tax planning and compliance strategies across multiple IRC sections, including debt instruments, pension funding, low-income housing credits, and below-market loans. The ruling’s tables include Applicable Federal Rates (AFRs) and the § 7520 valuation rate.

Updated Federal Rates

Revenue Ruling 2026-12 prescribes six federal rate sets for July 2026, tailored to specific IRC applications:

Table 1: Applicable Federal Rates (AFR) AFRs for July 2026 by maturity and compounding period (annual, semiannual, quarterly, monthly):

• Long-term AFR: 4.98% (annual compounding)
• Mid-term AFR: 4.35%
• Short-term AFR: 4.00% Tiered rates (110%, 120%, 130%) accommodate risk premiums. Rates reflect Federal Reserve monetary tightening to combat inflation.

Table 2: Adjusted AFRs (Tax-Exempt Obligations, § 1288)

• Long-term adjusted AFR: 3.77%
• Mid-term adjusted AFR: 3.29%
• Short-term adjusted AFR: 3.03% These rates determine original issue discount (OID) for tax-exempt bonds.

Table 3: Rates Under § 382

• Adjusted federal long-term rate: 3.77%
• Long-term tax-exempt rate: 3.77% Used to calculate NOL carryforward limitations after ownership changes.

Table 4: Appropriate Percentages Under § 42(b)(1) (LIHC)

• 70% present value credit: 8.09%
• 30% present value credit: 3.47% § 42(b)(2) mandates a 9% floor for non-federally subsidized buildings placed in service after July 30, 2008.

Table 5: Rate Under § 7520 § 7520 rate: 5.20% (120% of mid-term AFR). Used to value annuities, life estates, and remainder interests in trusts (e.g., GRATs, CRTs).

Table 6: Blended Annual Rate for 2026 Under § 7872 Blended annual rate: 3.82%. Used to calculate imputed interest on below-market loans, including gift loans.

Context: Federal Reserve Policy and Industry Impact

The prescribed federal rates in Revenue Ruling 2026-12 reflect the Federal Reserve’s monetary policy, which has maintained a federal funds rate of 5.25–5.50% since 2022 to combat inflation. This prolonged period of high rates has elevated Treasury yields and corporate bond yields, directly influencing the prescribed federal rates.

The political landscape, shaped by the Inflation Reduction Act (2022) and American Rescue Plan Act (2021), has contributed to inflationary pressures. The TCJA’s temporary provisions, such as 100% bonus depreciation, have been repeatedly extended, complicating tax planning.

Industry adaptation includes recalibrated models for debt financing and pension funding. The corporate bond yield curve has steepened, creating challenges for pension plans as higher discount rates reduce liabilities but increase funding costs. The IRS’s updates provide clarity for plan sponsors navigating evolving segment rate methodologies.

The pension industry has adopted conservative funding strategies, including cash balance plans and hybrid designs, to mitigate risks. Multiemployer plans face pressure due to declining union membership and labor market shifts.

The Federal Reserve’s monetary policy remains a subject of debate, with progressive lawmakers arguing that rate hikes harm low-income households and small businesses, while conservative economists emphasize their necessity to curb inflation. The IRS’s ruling balances stable financial markets with economic growth support.

Implications for Tax Practitioners

Revenue Ruling 2026-12’s prescribed federal rates impact debt instruments, pension funding, LIHC, estate/gift tax planning, and below-market loans. Practitioners must apply the correct rates from the ruling’s tables to ensure compliance and optimize tax outcomes.

Key Applications:

• Debt Instruments/Installment Sales (§ 1274): Use tiered AFRs (Table 1) to structure transactions. Higher AFRs reduce attractiveness; explore alternatives.
• Pension Funding (§ 430, § 417(e)(3)(D)): Monitor segment rates from Notice 2026-38. Higher rates may increase funding requirements.
• LIHC (§ 42): Advise clients on optimal timing for building placement. The 9% floor ensures viability despite higher rates.
• Estate/Gift Tax Planning (§ 7520): Reassess GRATs/CRTs. The 5.20% § 7520 rate reduces effectiveness; consider shorter-term GRATs or IDGTs.
• Below-Market Loans (§ 7872): Document loan terms and use the 3.82% blended rate (Table 6) to avoid gift tax implications.

Rate Changes from July 2025:

• Long-term AFR: +148 bps (3.50% → 4.98%)
• Mid-term AFR: +135 bps (3.00% → 4.35%)
• Short-term AFR: +150 bps (2.50% → 4.00%)
• § 7520 rate: +100 bps (4.20% → 5.20%)
• Blended § 7872 rate: +97 bps (2.85% → 3.82%)

Practitioners must consider compounding periods (annual, semiannual, quarterly, monthly) for accurate present value calculations.

Notice 2026-38: Pension Funding and Segment Rates Update

The IRS’s Notice 2026-38 updates the corporate bond monthly yield curve, spot segment rates, and 24-month average segment rates (June 2026) for pension funding under § 417(e)(3) and § 430(h)(2). Adjustments reflect current market realities amid Federal Reserve rate hikes and elevated corporate borrowing costs.

Legislative shifts, including ARPA (temporary 5% segment rate freeze) and SECURE 2.0 (5.5% floor for plan years beginning in 2026), underscore Congress’s intent to balance fiscal prudence with employer funding burdens. Notice 2026-38 provides the latest corporate bond yield curve and segment rates, directly influencing minimum funding requirements for single-employer and multiemployer plans.

Updated Pension Funding Components

Notice 2026-38 updates three critical components for pension funding calculations:

1. Corporate Bond Monthly Yield Curve (Table 2026-5): Derived from high-quality corporate bond data for May 2026, spanning 0.5 to 30 years with yields from 3.99% to 6.56%. Used to determine spot segment rates under § 430(h)(2). Constructed using spline interpolation for a continuous rate structure.

2. Spot Segment Rates for May 2026:

   • First segment (1–5 years): 4.42%
   • Second segment (6–20 years): 5.47%
   • Third segment (21+ years): 6.31% Used to calculate target normal cost and funding target for single-employer plans under § 430.

3. 24-Month Average Segment Rates for June 2026: Unadjusted rates: 4.39% (first), 5.26% (second), 5.90% (third). Adjusted rates (95–105% of 25-year averages): 4.75% (first), 5.26% (second), 5.90% (third) for plan years beginning in 2025–2026. The "25-year average corridor" smooths volatility.

4. 30-Year Treasury Weighted Average Rate: June 2026 rate: 4.53% (permissible range: 4.08% to 4.76%). Used to determine current liability for multiemployer plans under § 431(c)(6)(E)(ii)(I).

Legislative and Economic Context

SECURE 2.0 (2022) introduced a 5.5% floor for segment rates in plan years beginning in 2026, replacing ARPA’s temporary freeze. This floor applies to second and third segment rates, preventing excessive volatility in funding requirements.

The Federal Reserve’s 2022–2023 rate hikes steepened the corporate bond yield curve, creating a challenging environment for pension plans. Higher discount rates reduce liabilities but increase funding costs. The IRS’s updates provide clarity for plan sponsors navigating evolving segment rate methodologies.

The pension industry has adopted conservative funding strategies, including cash balance plans and hybrid designs, to mitigate risks. Multiemployer plans face pressure due to declining union membership and labor market shifts.

ESG considerations have narrowed spreads between corporate and Treasury bonds, potentially reducing segment rates. The IRS’s notice balances fiscal prudence with plan sponsor flexibility, addressing challenges for multiemployer plans.

From a political perspective, the updates in Notice 2026–38 reflect the IRS’s ongoing efforts to balance fiscal prudence with plan sponsor flexibility. The 5.5% floor under SECURE 2.0 is a compromise between the need to stabilize funding requirements and the desire to avoid excessive burdens on employers. However, the higher segment rates may create challenges for multiemployer plans, which have historically struggled with funding gaps and declining union membership. The IRS’s notice highlights the need for multiemployer plans to use the correct Treasury rate for their funding calculations, as errors can trigger PBGC premium increases or audit scrutiny.

The pension industry has responded to these changes by adopting more conservative funding strategies. Plan sponsors are increasingly utilizing cash balance plans and hybrid pension designs to mitigate funding risks, while multiemployer plans have faced significant pressure due to declining union membership and shifting labor market dynamics. The IRS’s updates in Notice 2026-38 are intended to provide clarity and stability in this evolving landscape, ensuring that plan sponsors can navigate the complexities of the new segment rate methodology.

Implications for Tax Practitioners

Notice 2026-38’s updated segment rates impact single-employer plans, multiemployer plans, lump-sum distributions, and compliance reporting.

Key Applications:

• Single-Employer Plans: Recalculate target normal cost and funding target using updated rates. Higher discount rates may lower required contributions, but the 5.5% SECURE 2.0 floor may limit reductions.
• Multiemployer Plans: The 4.53% 30-year Treasury rate (permissible range: 4.08% to 4.76%) influences current liability calculations. Plans with unfunded liabilities may face increased funding pressures.
• Lump-Sum Distributions (§ 417(e)(3)(D)): Updated spot segment rates (4.42%, 5.47%, 6.31%) reduce lump-sum payouts for participants.
• Compliance: Reflect updated rates in Form 5500 filings and actuarial assumptions. Errors may trigger penalties or audit scrutiny.
• Strategic Planning: Higher segment rates present opportunities for de-risking through lump-sum distributions or annuity purchases.

Calculation Mechanics: Segment rates are derived from corporate bond data using spline interpolation, weighted averages, and 24-month smoothing. The 25-year average corridor (95–105%) ensures stability. The 30-year Treasury rate uses a weighted average with a 90–105% permissible range.

The Broader Implications: Industry and Political Dynamics

The IRS’s updates in Notice 2026–38 occur against the backdrop of broader political and industry trends. The pension funding crisis has been a persistent issue, with many defined benefit plans facing underfunding risks due to low interest rates and market volatility. The SECURE 2.0 Act represents Congress’s attempt to address these challenges by introducing permanent changes to the segment rate methodology and providing additional tools for plan sponsors to manage funding risks.

The corporate bond market has also been influenced by ESG (Environmental, Social, and Governance) considerations, as investors increasingly demand bonds issued by companies with strong sustainability credentials. This trend has led to a narrowing of spreads between corporate and Treasury bonds, which could affect the yield curve used for pension funding calculations. The narrowing of spreads reflects the growing demand for ESG-compliant bonds, which has driven down yields for these instruments. This dynamic could reduce the segment rates used for pension funding, as the IRS’s yield curve is based on corporate bond yields.

From a political perspective, the updates in Notice 2026–38 reflect the IRS’s ongoing efforts to balance fiscal prudence with plan sponsor flexibility. The 5.5% floor under SECURE 2.0 is a compromise between the need to stabilize funding requirements and the desire to avoid excessive burdens on employers. However, the higher segment rates may create challenges for multiemployer plans, which have historically struggled with funding gaps and declining union membership. The IRS’s notice highlights the need for multiemployer plans to use the correct Treasury rate for their funding calculations, as errors can trigger IRS audits or PBGC premium increases.

The pension industry has responded to these changes by adopting more conservative funding strategies. Plan sponsors are increasingly utilizing cash balance plans and hybrid pension designs to mitigate funding risks, while multiemployer plans have faced significant pressure due to declining union membership and shifting labor market dynamics. The IRS’s updates in Notice 2026-38 are intended to provide clarity and stability in this evolving landscape, ensuring that plan sponsors can navigate the complexities of the new segment rate methodology.

Practical Takeaways for Tax Practitioners

1. Review Funding Strategies: Plan sponsors should reassess their funding strategies in light of the updated segment rates. Higher discount rates may reduce required contributions, but the 5.5% floor under SECURE 2.0 limits the extent of these reductions. Practitioners should advise clients to use the updated segment rates for their funding calculations, as errors can result in underfunding penalties or misstated financial disclosures.

2. Update Actuarial Assumptions: Actuaries and plan sponsors must update their actuarial assumptions to reflect the new segment rates. This includes recalculating the target normal cost, funding target, and current liability for multiemployer plans. The IRS’s notice emphasizes the importance of using the correct segment rates for each plan year, as misapplying the rates can trigger IRS audits or PBGC premium adjustments.

3. Communicate with Participants: Plan sponsors should inform participants about the impact of the updated rates on lump-sum distributions. Lower lump-sum payouts may require additional disclosures to ensure transparency. The IRS’s notice underscores the importance of using the updated segment rates for lump-sum distributions, as errors can result in overpayments or underpayments that may trigger disputes with participants or regulatory penalties.

4. Monitor Legislative Developments: The One, Big, Beautiful Bill Act (OBBBA) and other legislative proposals may introduce further changes to pension funding rules. Practitioners should stay informed about potential updates and adjust their strategies accordingly. The IRS’s notice highlights the need for plan sponsors to monitor legislative developments, as changes to the segment rate methodology could affect their funding requirements.

5. Ensure Compliance: Failure to comply with the updated segment rates could result in penalties or audit scrutiny. Practitioners should review their clients’ Form 5500 filings and other regulatory disclosures to ensure accuracy. The IRS’s notice emphasizes the importance of documenting the use of the correct segment rates, as errors can trigger IRS audits or PBGC premium increases.

Notice 2026-40: Transitional Guidance on Qualified Opportunity Zones

The IRS’s Notice 2026-40 introduces transitional guidance under §§ 1400Z-1 and 1400Z-2, amended by the One, Big, Beautiful Bill Act (OBBBA). The notice bridges the pre-OBBBA regime and forthcoming regulations, addressing ambiguities in the 25% QOZ designation limitation and qualifying investment start dates.

The QOZ program, established by TCJA (2017), incentivizes long-term capital investments in distressed communities through tax benefits: (1) deferral of capital gains tax on QOF investments, (2) partial exclusion for investments held ≥5 years, and (3) permanent exclusion for investments held ≥10 years. The program’s effectiveness depends on QOZ designation, QOF formation, and QOZB compliance with asset/use requirements. OBBBA amendments necessitated transitional guidance for continuity.

Updated QOZ Transitional Guidance

Notice 2026-40 introduces transitional guidance for QOFs and QOZBs under OBBBA amendments to §§ 1400Z-1 and 1400Z-2, focusing on tangible property acquired after December 31, 2026.

Applicable Start Date Requirement (§ 1400Z-2(d)(2)(D)(i)(I))

For tangible property to qualify as QOZBP, it must be acquired after the "applicable start date" of a designated QOZ. Under OBBBA, the applicable start date is January 1 following certification and designation of a QOZ. This change applies only to QOZs designated after July 4, 2025. Previously designated QOZs do not have an applicable start date under the new rules. Property acquired after December 31, 2026, cannot qualify as QOZBP unless it meets exceptions (e.g., written working capital plan or ordinary course of business replacement).

Working Capital Safe Harbor (§ 1397C(b)(8), § 1.1400Z2(d)-1(d)(3)(v))

QOZBs may hold cash for up to 31 months without violating the 90% asset test. For property acquired after December 31, 2026, transitional relief applies if:

• Working capital plan adopted on or before December 31, 2026.
• Property acquisitions align with the plan.
• At least 10% of estimated assets received by December 31, 2026.
• At least 5% of estimated assets expended by December 31, 2026.

Ordinary Course of Business Exception (§ 1400Z-2(d)(2)(D))

Property acquired to replace existing tangible business property may qualify as QOZBP if it meets § 1400Z-2(d)(2)(D) requirements. Examples include window replacements, appliance upgrades, or equipment modernization. The exception does not apply to expansions or transitions into new trades or businesses.

Examples:

1. Expansion of a Trade or Business: A warehouse purchased in 2028 for expansion does not qualify as QOZBP if not in a QOZ designated after January 1, 2027.
2. Replacement of Existing Property: Window replacements, appliance upgrades, and renovations qualify as QOZBP if in the ordinary course of business.
3. Modernization of Property: Equipment modernization to continue operations qualifies as QOZBP.

Implications for Fund Managers and Businesses

The transitional rules in Notice 2026-40 provide a clear roadmap for QOFs and QOZBs navigating the transition to the OBBBA framework. Fund managers must ensure that their investment strategies align with the new acquisition requirements, particularly the "applicable start date" rule, which could disqualify property acquired after December 31, 2026, in previously designated QOZs unless an exception applies. The working capital safe harbor offers critical flexibility for QOZBs with pre-existing plans, but strict compliance with the written plan and expenditure schedule is essential to avoid penalties.

For businesses operating in QOZs, the ordinary course of business exception provides relief for routine maintenance and upgrades, but expansions or transitions into new trades or businesses must be carefully structured to avoid disqualification. Practitioners should advise clients to document all acquisitions and expenditures meticulously, ensuring that they meet the IRS’s transitional requirements while maximizing the benefits of the QOZ program.

The IRS’s guidance in Notice 2026-40 reflects a balancing act between preserving the integrity of the QOZ program and adapting to legislative changes. Fund managers and businesses that proactively address these transitional rules will be best positioned to leverage the program’s incentives while avoiding costly compliance pitfalls.

Legislative and Economic Impact of OBBBA

The OBBBA (enacted July 4, 2025) represents the first major legislative overhaul of the QOZ program since TCJA (2017). The amendments address critiques of rent-seeking behavior, insufficient long-term investment, and inadequate transparency.

Key OBBBA Amendments:

1. Deferral Period Extension: Capital gains deferral extended from 2026 to 2028, providing additional time for capital deployment. Aligns with Treasury’s 2024 QOZ Impact Report, which noted 60% of QOFs had not met 30-month investment deadlines.
2. Substantial Improvement Relaxation: Environmental remediation costs now count toward the improvement threshold, targeting brownfield sites. Reflects Bipartisan Infrastructure Law (2021) priorities but raises gentrification concerns.
3. Working Capital Safe Harbor Expansion: Extended from 31 to 62 months for projects meeting job creation/community benefit thresholds. Addresses permitting delays and supply chain disruptions but raises potential abuse concerns.

Political Context: The OBBBA emerged from budget reconciliation, with progressive Democrats pushing for stricter accountability (e.g., job creation reporting). The final version includes § 1400Z-2(g), requiring QOFs to disclose aggregate investment amounts, asset types, and projected job creation to the IRS annually. This shift toward transparency aligns with SEC Form D filings but imposes compliance costs.

Economic Impact: Proponents (e.g., U.S. Conference of Mayors) argue the amendments will unlock billions in dormant capital, particularly in rural/Rust Belt communities. A 2025 Brookings study found $100B in QOZ capital since 2018, but only $12B flowed into high-poverty tracts. Critics (e.g., Urban Institute) caution that relaxed rules may exacerbate inequalities by prioritizing high-return projects in gentrifying areas.

The IRS’s transitional guidance in Notice 2026-40 bridges the old and new QOZ regimes, emphasizing meticulous documentation for compliance with both TCJA and OBBBA rules.