Rev. Proc. 81-29

Section 1. Purpose

This revenue procedure provides automatic approval for certain defined benefit plans to change the funding method with respect to plan years specified in section 7, restricts the time for which automatic approval is granted for a change in funding method under Rev. Proc. 80-50, 1980-2 C.B. 816, and prohibits a change in funding method under Rev. Proc. 80-50 for a plan year immediately succeeding a year in which a plan used the shortfall funding method described in section 1.412(c)-1 of the Income Tax Regulations.

Sec. 2. Background

Section 412(c)(5) of the Internal Revenue Code, as amended, and section 302(c)(5) of the Employee Retirement Income Security Act of 1974 (ERISA), Pub. L. 93-406, 1974-3 C.B. 1, 40, state that if the funding method of a plan is changed, the new funding method shall become effective only if the change is approved by the Secretary.

Sec. 3. Definitions

.01 "Current participant" means any participant who is currently employed in covered service by the employer(s) maintaining the plan.

.02 "All participants" means all participants who must be considered in a particular actuarial valuation. See section 1.412(c)(3)-1(c)(3) of the Income Tax Regulations for rules on employees who must be considered in an actuarial valuation.

.03 "Entry age" means the participant's age at the time he or she would have commenced participation if the plan had always been in existence.

.04 "Retirement age" means the age at which retirement benefits are expected to commence, based on the assumptions used to determine costs.

Sec. 4. Approval for Changes

Subject to the requirements of section 5 and except as restricted by section 6 of this revenue procedure, approval is granted to change a plan's funding method to any of the following funding methods.

.01 Approval 1--A change to one of the four entry age normal (EAN) funding methods described in paragraphs (1), (2), (3), or (4).

(1) Individual EAN (Level Dollar Amount)--Under this funding method the normal cost is the sum of the individual normal costs for all participants. For a current participant, the individual normal cost equals (A) the present value of future benefits determined as of the participant's entry age divided by (B) the present value of an annuity of $1 per year payable from entry age to retirement age. For other than a current participant, the normal cost equals $0. The accrued liability is the sum of the individual accrued liabilities for all participants. The individual accrued liability equals the present value of future benefits less the present value of the individual normal costs payable in the future. The present values referred to in the preceding sentence are calculated as of the participant's attained age. The unfunded liability equals the total accrued liability less the actuarial value of plan assets.

(2) Individual EAN (Level Percentage of Salary)--Under this funding method the normal cost is the sum of the individual normal costs for all participants. For a current participant, the individual normal cost is the participant's normal cost accrual rate multiplied by the participant's current compensation. The normal cost accrual rate equals (A) the present value of future benefits determined as of the participant's entry age divided by (B) the present value of future compensation determined as of the participant's entry age. In calculating the present value of future compensation as of entry age, the salary scale must be applied both retrospectively and prospectively to estimate compensation in years prior to and subsequent to the valuation year based on compensation for the valuation year. For other than a current participant the normal cost equals $0. The accrued liability is the sum of the individual accrued liabilities for all participants. The individual accrued liability is equal to the present value of future benefits less the normal cost accrual rate multiplied by the present value of the participant's future compensation. The present values referred to in the preceding sentence are calculated as of the participant's attained age. The unfunded liability equals the total accrued liability less the actuarial value of plan assets.

(3) Aggregate EAN (Level Dollar Amount)--Under this funding method the normal cost is computed in the aggregate as the normal cost per participant multiplied by the number of current participants. The normal cost per participant equals (A) the present value of future benefits determined as of entry age for all current participants divided by (B) the sum of the present value of an annuity of $1 per year payable from entry age to retirement age for all current participants. The accrued liability is calculated in the aggregate as the total present value of benefits for all participants less the normal cost per participant multiplied by the sum for all current participants of the present value of an annuity of $1 per year payable from attained age to retirement age. The present values referred to in the preceding sentence are calculated as of the participant's attained age. The unfunded liability equals the total accrued liability less the actuarial value of assets.

(4) Aggregate EAN (Level Percentage of Salary)--Under this funding method the normal cost is computed in the aggregate as the normal cost accrual rate multiplied by the total current compensation of all current participants. The normal cost accrual rate equals (A) the total present value of future benefits determined as of entry age for all current participants divided by (B) the sum of the present value of future compensation, determined as of entry age for current participants. In calculating the present value of future salary as of entry age the salary scale must be used retrospectively and prospectively to estimate compensation in years prior to and subsequent to the valuation year based on compensation for the valuation year. The accrued liability is calculated in the aggregate as the total present value of benefits for all participants less the normal cost accrual rate multiplied by the total present value of future compensation from attained age to retirement age for all current participants. The present values referred to in the preceding sentence are calculated as of the participant's attained age. The unfunded liability equals the total accrued liability less the actuarial value of plan assets.

.02 Approval 2--A change to the traditional unit credit funding method described in paragraph (2) of the plan is described in paragraph (1).

(1) Under the plan, the benefits are expressed in the form of a stated dollar amount per year of credited service, or the benefit accruing in any year equals a stated percentage(s) applied to the participant's compensation (or portion thereof) in that year.

(2) Under this funding method the normal cost is the sum of the individual normal costs for all participants. Except as provided below, the individual normal cost is the present value of the benefit accruing in the plan year. The accrued liability is the sum of the individual accrued liabilities for all participants. The individual's accrued liability is the present value of the benefit accrued in prior plan years. The unfunded liability equals the total accrued liability less the actuarial value of plan assets. The above present values are determined as of the valuation date. If the plan is amended to increase benefits (or if the plan provides for a scheduled increase in benefits) and a portion of such increase is attributable to prior years, then, although the entire benefit may accrue in the current year, the portion of the increase in benefits that is attributable to prior years is considered as accrued in prior plan years and thus is reflected in the accrued liability rather than the current year's normal cost.

.03 Approval 3--A change to the service pro-rate unit credit funding method described in paragraph (2) or (3) if the plan is described in paragraph (1).

(1) The plan provides that for a participant who has been credited with a full year of service for every year since he or she commenced participation, the accrued benefit after X years of credited service equals the product of (a) the anticipated normal retirement benefit for the participant and (B) the ratio of X divided by the participant's anticipated years of credited service at normal retirement age. Credited service for this purpose may be limited to a maximum number of years, specified in the plan. Thus, for example, the following plans satisfy the requirements of this paragraph.

(A) The accrued benefit after Y years equals an anticipated benefit specified in the plan times the ratio of Y divided by the anticipated service at retirement.

(B) The accrued benefit after Y years equals P percent times Y times final average compensation.

(C) The accrued benefit after Y years equals P percent times Y times final average compensation reduced by Q percent times Y times social security PIA, where Y cannot exceed 30.

(2) Service Pro-rate (Single Assumed Retirement Age)--Under this funding method the normal cost for this method is the sum of the individual normal costs for all current participants whose credited service is less than any maximum years of credited service specified in the plan. The individual normal cost is the present value at the current age of the benefit projected, based on the actuarial assumptions, at the assumed retirement age, divided by the participant's anticipated years of credited service (as limited by any maximum specified in the plan) at that age. The accrued liability is the sum of the individual accrued liabilities for all participants. The individual accrued liability for a current participant is the product of the normal cost for such participant and the total years of credited service at the current age (as limited by any maximum in the plan). For other participants, the individual accrued liability is the present value at the current age of the accrued benefit at that age. The unfunded accrued liability equals the total accrued liability less the actuarial value of plan assets.

(3) Service Pro-rate (Multiple Assumed Retirement Ages)--The normal cost for this funding method is the sum of all current participants whose credited service is less than any maximum years of credited service specified in the plan. The individual normal cost is the sum of component normal costs for the various benefits valued using the method. Separate component normal costs are computed for each future separation date, based on the probability under the actuarial assumptions used, of the participant separating from the plan on that separation date. Each separate component individual normal cost is the present value of the benefit projected to that separation date divided by the participant's anticipated years of credit service (as limited by any maximum specified in the plan) at that separation date. The accrued liability is the sum of the individual accrued liabilities for all participants. The individual accrued liability for a current participant is the product of the normal cost for that participant and the total years of credited service at the current age (as limited by any maximum in the plan). For other participants the individual accrued liability is the present value at the current age of the participant's accrued benefit. The unfunded accrued liability equals the total accrued liability less the actuarial value of plan assets.

.04 Approval 4--A change to one of the three frozen initial liability funding methods described in paragraph (1), (2), or (3).

(1) Level dollar amount weighted by entry age normal costs--Under this funding method the normal cost is computed in the aggregate as (A) the present value of future benefits for all participants less the actuarial value of plan assets less the unfunded liability divided by (B) a temporary annuity factor. The temporary annuity factor equals the present value of future entry age normal costs for attained age to retirement age for all current participants divided by the total entry age normal cost for all current participants. For purposes of this paragraph, the entry age normal cost must be determined under section 4.01(1).

(2) Level dollar amount weighted by individual level premium normal cost--Under this funding method the normal cost is computed in the aggregate as (A) the present value of future benefits for all participants less the actuarial value of plan assets less the unfunded liability divided by (B) a temporary annuity factor. The temporary annuity factor equals the present value of future individual level premium normal costs from attained age to retirement age for all current participants divided by the total current year's individual level premium normal cost for all current participants. For purposes of this paragraph, the individual level premium normal cost for each participant is the sum of the level amounts to fund each increment of projected benefit from the attained age at which the increment occurs to the retirement age.

(3) Level dollar amount weighted by a combination of individual level premium and entry age normal costs--Under this funding method the normal cost is computed in the aggregate as (A) the present value of future benefits for all participants less the actuarial value of plan assets less the unfunded liability divided by (B) a temporary annuity factor. The temporary annuity is equal to the total present value from attained age to retirement age of future tabular normal costs for all current participants divided by the total tabular normal costs for all current participants. The tabular normal cost for a participant is the sum of the level annual amount required to fund the projected benefit to which the participant was entitled as of the date of change in funding method from entry age to retirement age plus any level annual amount(s) required to fund any increase or decrease in projected benefit from the date the participant became entitled to the increase or decrease to retirement age.

Sec. 5. Applicable Requirements

.01 If the funding method is being changed to one of the methods described in section 4.04, then the unfunded liability as of the date of change under the new method shall be determined in accordance with either paragraph (1) or (2).

(1) The unfunded liability as of the date of the change is the unfunded liability determined under any acceptable funding method of the immediate gain type.

(2) If the funding method is being changed from a method described in section 4.04 or in section 3.03 of Rev. Proc. 80-50 to another such method then the unfunded liability under the prior method need not be recalculated as of the year of the change.

.02 If the funding method is being changed to one of the methods described in 4.04 then for years subsequent to the plan year of the change in method, the unfunded liability for any year must equal: (A) The unfunded liability for the prior plan year plus the normal cost for the prior plan year, minus

(B) The actual contributions for the prior plan year, where the amounts in (A) and (B) are adjusted with interest to the date as of when the unfunded liability is determined.

.03 (1) If the funding method is changed in accordance with section 4, the new amortization base resulting from the change in funding method is the difference between

(A) the unfunded liability under the new method as determined under section 4, and

(B) the net sum of the outstanding balance of all amortization bases (including the gain or loss base for the immediately preceding period), treating credit bases as negative bases, less the credit balance (or plus the funding deficiency) in the funding standard account.

(2) Even though the funding method is being changed, all amortization bases in the funding standard account must continue to be maintained.

.04 The amortization period for the new amortization base for purposes of sections 302 of ERISA and 412 of the Code must be as follows:

(1) If the plan was in existence on January 1, 1974, any negative amortization base (credit base) will be amortized over 40 years reduced by the number of prior plan years to which section 302 has applied and any positive base (charge base) will be amortized over 30 years.

(2) If the plan was not in existence on January 1, 1974, any charge base will be amortized over 30 years reduced by the number of prior plan years to which section 302 has applied, and any credit base will be amortized over 30 years.

Sec. 6 Restrictions

.01 This revenue procedure does not apply unless an actuarial valuation is made for the plan year for which a change in method is effective, and such valuation is used for purposes of section 302 of ERISA for such plan year.

.02 This revenue procedure does not apply unless the plan administrator or plan sponsor signs and attaches a statement to Schedule B of Form 5500 for the plan year for which a change is effective stating that the plan administrator or plan sponsor agrees to the change in funding method which is being made as approved by this revenue procedure.

.03 This revenue procedure does not apply if: (1) The funding method (including the asset valuation method) is being changed in any manner other than that described above.

(2) A waiver of the minimum funding standard has been granted for the plan or the amortization charge described in section 412(b)(2)(C) of the Code is applicable in the plan year of the change.

(3) The change is made for a plan year in which the plan is terminated.

.04 The approvals under section 4.01(2) and 4.01(4) do not apply if the plan benefits are not based on compensation.

.05 This revenue procedure does not apply for any plan year if Schedule B of Form 5500 has been filed or if the date (without extension) by which it must be filed has passed.

.06 The approvals under this revenue procedure do not apply to a plan for a plan year if the funding method (without regard to the asset valuation method) was changed in any of the three preceding plan years. Furthermore, the plan years beginning after December 31, 1981, section 3 of Rev. Proc. 80-50 does not apply to a plan for a plan year if the funding method (without regard to the asset valuation method) was changed in any of the three preceding plan years. This subsection does not apply for a year in which there has been both a change in the enrolled actuary for the plan and a change in the business organization providing actuarial services to the plan.

.07 The approvals under section 4.01 do not apply to any plan which in the current or the next four succeeding plan years uses the alternative funding standard account as described in section 412(g) of the Code.

.08 The approvals under the revenue procedure do not apply to any plan for a plan year if the plan funding method in the prior year was the shortfall funding method. Furthermore, for plan years beginning after December 31, 1981, Rev. Proc. 80-50 does not apply to a plan year if the funding method used in the prior year was the shortfall funding method.

Sec. 7. Effective Date

This revenue procedure is effective for changes in funding method made with respect to plan years commencing on or after January 1, 1980 and before January 1, 1986.

Sec. 8. Effect on Other Documents

Rev. Proc. 80-50 is modified.