Rev. Proc. 78-37

Section 1. Purpose.

The purpose of this Revenue Procedure is to set forth the procedure by which a plan administrator or plan sponsor may obtain approval of the Secretary of the Treasury for a change in funding method as provided by section 412(c)(5) of the Internal Revenue Code 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].

Sec. 2. Background.

.01 Section 3(31) of the Employee Retirement Income Security Act of 1974 lists some acceptable funding methods.

.02 Section 412(c)(5) of the Internal Revenue Code of 1954, as amended, and section 302(c)(5) of ERISA 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. Scope and Definition.

.01 This Revenue Procedure applies to any defined benefit plan that is subject to section 412 of the Code or section 302 of ERISA.

.02 Any change in a plan's current method of computing the minimum contribution under section 412 of the Code or section 302 of ERISA is a change in the funding method. See section 11.412(c)(1)-1(b) of the Temporary Income Tax Regulations under the Employee Retirement Security Act of 1974. The following are some examples of a change in funding method:

Example 1 -- The minimum contribution is computed using the entry age normal method. Changing the method of computing the contribution to the unit credit method is a change in funding method.

Example 2 -- The minimum contribution is computed using the aggregate method in which the normal cost percentage is determined by dividing the present value of future benefits less assets by the present value of future compensation. Changing the method of computing the contribution to the aggregate method using the present value of $1 paid from attained to retirement age for all active participants, instead of future compensation, is a change in funding method.

Example 3 -- The method of valuing liabilities is unchanged, but the method of valuing assets is changed from one method to another acceptable method.

Example 4 -- The day of the plan year as of which the plan liabilities or the plan assets are valued is changed.

.03 This Revenue Procedure applies to any change in funding method for any plan year after the first plan year in which a plan is subject to section 412 of the Code or section 302 of ERISA. If a change in funding method was made prior to or coincident with the first year the plan is subject to section 412 or section 302, no approval is required, and therefore such approval should not be requested.

.04 Approval will be given to a change in the funding method only if the proposed method is an acceptable method.

Sec. 4. Application.

.01 A plan administrator, plan sponsor, or the authorized representative of either who desires to obtain approval for a change in the funding method should make a written request (no form is prescribed for requesting approval) to the Commissioner of Internal Revenue; Attention: E:A:P; 1111 Constitution Avenue, N.W.; Washington, DC 20224. The request should normally be made no later than the close of the plan year for which the change is to be effective or, if later, 180 days after the publication of this procedure unless the Service in its discretion grants an extension of time for the submission of the request.

.02 The following information shall accompany the request:

(1) The location of the office of the District Director of Internal Revenue having jurisdiction over the plan, the employer identification number, the plan name and number, and the name and address of the plan administrator or plan sponsor.

(2) A copy of each of the last two actuarial valuation reports for the plan.

(3) A copy of each of the last two Schedule B's of Form 5500, including attachments thereto, that have been filed with the Internal Revenue Service.

(4) A statement of the plan year first affected by the proposed change, the current funding method, and the proposed funding method with a complete description of each method. Such description should include, for example, the method for valuing ancillary benefits if it differs from the method used for retirement benefits. Also, such description should clearly indicate the particular variation being used of any funding method.

(5) A brief statement of the reason for the proposed change.

(6) A statement whether a change is funding method was previously requested. A statement of whether the plan year is also being changed.

(7) A worksheet, prepared by the enrolled actuary servicing the plan, showing how each entry in the funding standard account will be produced using the proposed method. Numerical results should be shown.

(8) A statement of whether a waiver of the minimum funding standard is currently in effect and whether a request for a waiver is currently pending or is expected to be submitted in the near future.

In certain cases some of the material described above may be inappropriate or burdensome to furnish. In such cases, the request for approval should include a statement indicating why such material is not being furnished.

.03 The Service may request additional information as needed.

Sec. 5. Class Rulings.

.01 In the case where approval is desired for a change in funding method that is identical for a group of plans in excess of twenty receiving actuarial services from the same insurance company or consulting firm, a "class ruling" may be requested approving the change for all consenting taxpayers in the class.

.02 The class ruling may be requested by an enrolled actuary on behalf of an insurance company or consulting firm that provides actuarial services to the plan.

.03 The request for a class ruling shall contain the following information:

(1) The name and enrollment number of the actuary making the request.

(2) The insurance company or consulting firm described in subsection 5.02.

(3) A statement indicating that the applicant believes that the class ruling will be applied to at least 20 plans, and an estimate of the number of plans that are expected to change the funding method in accordance with the class ruling.

(4) The information described in subsections 4.02(4), 4.02(5), and 4.02(7), except that the numerical results requested in 4.02(7) should be a numerical illustrative example rather than actual numerical results.

.04 If the change in the funding method is approved, a "class ruling letter" will be issued to the insurance company or consulting firm requesting the ruling. However, it is not incumbent upon the plan administrator or plan sponsor of any plan to agree to the change in the funding method. If the change in the funding method covered by the class ruling letter is desired, the plan administrator or plan sponsor shall sign and attach a statement to Form 5500, for the plan year in which the change is made, to the effect that the taxpayer so agrees to change the funding method as allowed by the class ruling letter. A copy of the class ruling letter should be attached to Schedule B.

.05 If a request for a class ruling is approved, at least ten of the plans covered by the ruling must make the change in the funding method in order for the ruling to become effective. The class ruling letter may provide a time period within which the minimum number of changes must be made.

.06 The Service may provide that a class ruling will not be effective for changes made after a time specified in the ruling. Also, the Service may, at its discretion, decline to issue a class ruling and treat each taxpayer as a separate request, or publish a revenue procedure or revenue ruling with a wider applicability.

Sec. 6. Conferences in the National Office.

If a conference has been requested, a conference will be granted only when the Service deems it will be helpful in deciding the case or an adverse decision is proposed.

Sec. 7. Declaration Required.

.01 Except in the case of a class ruling, the plan administrator or plan sponsor shall sign a declaration as required by section 601.201(e)(1) of the Statement of Procedural Rules. In the case of a class ruling, the enrolled actuary shall sign the declaration. The declaration will read as follows:

"Under penalties of perjury, I declare that I have examined this request, including accompanying documents, and to the best of my knowledge and belief, the facts presented in support of the requested ruling are true, correct and complete."

.02 The plan administrator, plan sponsor or enrolled actuary is not required to furnish a statement of proposed deletions pursuant to section 6110(c) of the Code.

Sec. 8. Approval Letter Filed With Form 5500.

.01 If the request for the change in funding method is approved, the letter approving the change should be attached to Schedule B of the Form 5500 that is filed for the first plan year for which the change is effective.

.02 In case of a ruling described in Section 4 of this review procedure, the National Office will send a copy of the ruling letter to the District Director having jurisdiction over the plan.

Sec. 9. Effect on Other Documents.

Rev. Proc. 72-3, 1972-1 C.B. 698, is modified to the extent that this Revenue Procedure provides special procedures for issuing rulings with respect to requests for approval of changes in funding methods other than those described in Rev. Proc. 78-17, page 490, this Bulletin, (relating to ancillary benefits).