IRS APPROVES CHANGES IN FUNDING METHODS USED TO DETERMINE MINIMUM FUNDING STANDARDS FOR DEFINED BENEFIT PLANS.

Rev. Proc. 95-51

                          TABLE OF CONTENTS

.01 This revenue procedure provides approval to change the funding method used to determine the minimum funding standard for defined benefit plans as further described below. The approval under this revenue procedure is granted in accordance with section 412(c)(5) of the Internal Revenue Code and section 302(c)(5) of the Employee Retirement Income Security Act of 1974 (ERISA). Section 3 provides approval to change the funding method of the plan to one of fourteen methods, including a change in the asset valuation method to one of three asset valuation methods, a change in the valuation date to the first day of the plan year, and a change in the method for valuing ancillary benefits to the method used to value retirement benefits. Section 4 provides approvals for certain changes that become necessary or expedient under special circumstances.

.02 Any changes in funding method under this revenue procedure must satisfy the rules of Section 5 concerning the continued maintenance of certain amortization bases, the creation of an amortization base resulting from the change in method (method change base), and the amortization period for the method change base. Taxpayers, plan administrators, and enrolled actuaries are cautioned to consider the overall restrictions for use of this procedure (see section 6.01), the additional restrictions for approval of any of the changes listed in section 3 (see section 6.02), and specific restrictions described under each of the approvals. Approval for changes not provided by this revenue procedure may be requested from the Internal Revenue Service.

.03 The funding method changes approved in this revenue procedure also apply for purposes of section 404. However, calculations under the funding method for purposes of section 404 may require certain modifications to elements in the calculations. For example, for purposes of section 412, the value of assets used in the determination of the normal cost under an aggregate funding method is adjusted for any credit balance or funding deficiency in the funding standard account. The value of assets is not adjusted in that manner for purposes of section 404 but is, instead, adjusted for any undeducted contributions (see section 1.404(a)-14(d)(2) of the Income Tax Regulations).

.04 The application of a funding method must conform to all of the requirements of the regulations under section 412. Thus, for example, in a method which allocates liabilities among different elements of past and future service, the allocation of liabilities must be reasonable as required under section 1.412(c)(3)-1(c)(5).

SECTION 2. BACKGROUND

.01 Section 412(c)(5)(A), as amended, and section 302(c)(5)(A) of ERISA, Pub. L. 93-406, 1974-3 C.B. 1, 40, as amended, 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.

.02 Section 1.412(c)(1)-1 of the regulations provides that the term "funding method", when used in section 412, has the same meaning as the term "actuarial cost method" in section 3(31) of ERISA. Section 1.412(c)(1)-1 further provides that the funding method of a plan includes not only the overall funding method used by the plan but also each specific method of computation used in applying the overall method. Therefore, for example, the funding method of a plan includes the date on which assets and liabilities are valued (the valuation date). The funding method also includes the definition of compensation which is used to determine the normal cost or accrued liability. Furthermore, a change in a particular aspect of a funding method does not change any other aspects of that method. For example, a change in funding method from the unit credit to the level dollar individual entry age normal method does not change the current valuation date or asset valuation method used for the plan.

.03 Section 1.412(c)(2)-1 generally provides that a change in the actuarial valuation method used to value the assets of a plan is a change in funding method that requires approval under section 412(c)(5).

.04 Rev. Proc. 78-17, 1978-2 C.B. 490, Rev. Proc. 79-50, 1979-2 C.B. 532, Rev. Proc. 80-50, 1980-2 C.B. 816, and Rev. Proc. 81-29, 1981-2 C.B. 550 granted approval for certain changes of funding method. Rev. Proc. 85-29, 1985-1 C.B. 581, as extended by Notice 90- 63, 1990-2 C.B. 347, and by Rev. Proc. 92-48, 1992-1 C.B. 987, gave broad approval for changes to any acceptable funding method for plan years beginning on or after January 1, 1984 but not after December 31, 1993, and superseded Rev. Proc. 78-17, Rev. Proc. 79-50, Rev. Proc. 80-50, and Rev. Proc. 81-29. Rev. Proc. 78-37, 1978-2 C.B. 540, provides 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.

.05 Section 412(c)(12), which was added by the Retirement Protection Act of 1994, requires that any increases in plan benefits that are scheduled to take effect during the term of a collective bargaining agreement currently applicable to a plan that is described in section 413(a) (other than a multiemployer plan), must be anticipated. If the funding method of a plan does not currently anticipate such benefit increases, the funding method must be changed to do so. Section 4.01 provides approval for this change.

SECTION 3. APPROVAL FOR SPECIFIED CHANGES

Subject to the applicability restrictions of section 6 and to the individual conditions under each method below, approval is granted for a change to one of the following funding methods. The development of the normal cost is described for each of the funding methods provided in subsections .01, through .09. For funding methods that directly calculate an accrued liability, within the meaning of Rev. Rul. 81-13, 1981-1 C.B. 229, the development of the accrued liability is also described.

.01 Approval 1. Approval is granted for a change in funding method to the unit credit funding method described below.

(1) This approval does not apply if the plan is a cash balance plan. For this purpose, a cash balance plan is a defined benefit plan that defines any portion of an employee's benefits by reference to the employee's hypothetical account, where such hypothetical account is determined by reference to hypothetical allocations and hypothetical earnings that are designed to mimic the actual allocations of contributions and earnings to an employee's account that would occur under a defined contribution plan.

(2) Under this method, the normal cost is the sum of the individual normal costs for all active participants. An individual normal cost is the sum of the normal costs for the various benefits valued using the method. The normal cost for each benefit is the present value of the portion of the projected benefit at each expected separation date that is allocated to the current plan year as set forth in paragraphs (5) and (6) below. For purposes of this approval, separation date includes any date of benefit commencement, if earlier.

(3) The accrued liability under the method is the sum of the individual accrued liabilities for each participant. An individual's accrued liability is the sum of the accrued liabilities for the various benefits valued using the method. The accrued liability for each benefit is the present value of the portion of the projected benefit at each expected separation date that is allocated to prior plan years as set forth in paragraphs (4), (5), and (6) below.

(4) For a participant other than an active participant, or for a beneficiary, the projected benefit is the accrued retirement benefit, or other plan benefit, under the terms of the plan and the projected benefit is allocated to prior plan years.

(5) For an active participant, when valuing all benefits other than ancillary benefits that are not directly related to the accrued retirement benefit, the projected benefit related to a particular separation date is the benefit determined for the participant under the plan's benefit formula(s) calculated using the projected compensation and the projection, under respective assumptions, of any other components that would be used in the calculation of the benefit on the expected separation date. The projected benefit at each expected separation date is allocated to the years of credited service as follows.

(a) The portion of the projected benefit allocated to the current plan year is determined as

(i) the benefit that would be determined for the participant under the plan's benefit formula(s) calculated using the projected compensation, if applicable, and the projection, under respective assumptions, of any other components that would be used in the calculation of the benefit on the expected separation date, except taking into account only credited service through the end of the current plan year, minus

(ii) the benefit that would be determined for the participant under the plan's benefit formula(s) calculated using the projected compensation, if applicable, and the projection, under respective assumptions, of any other components that would be used in the calculation of the benefit on the expected separation date, except taking into account only credited service through the beginning of the current plan year.

(b) The portion of the projected benefit allocated to prior plan years is the benefit determined for the participant under the plan's benefit formulas calculated using the projected compensation, if applicable, and the projection, under respective assumptions, of any other components that would be used in the calculation of the benefit on the expected separation date, except taking into account only credited service through the beginning of the current plan year (i.e., the amount in subparagraph (a)(ii) above).

(c) Notwithstanding that the allocations in subparagraphs (a) and (b) only take into account credited service as of the beginning and end of the plan year, if a participant is expected to satisfy an eligibility requirement for a particular benefit that is being valued (e.g., subsidized early retirement benefit) as of an expected separation date, the amounts in subparagraphs (a) and (b), and in paragraph (6) below, must be determined as if the employee has satisfied the eligibility requirement.

(d) The portion of the projected benefit allocated to prior plan years may not be less than the participant's actual accrued benefit as of the beginning of the current plan year. In addition, the benefit determined as of the end of the current plan year in subparagraph (a)(i) above may not be less than the participant's estimated accrued benefit as of the end of the current plan year.

(6) For active participants, when valuing ancillary benefits that are not directly related to the accrued retirement benefit, the projected benefit related to a particular separation date is the benefit determined for the participant under the plan's benefit formula(s) calculated using the projected compensation and the projection, under respective assumptions, of any other components that would be used in the calculation of the benefit on the expected separation date. The portion of the projected benefit allocated to the current plan year is the projected benefit at the expected separation date divided by the number of years of service the participant will have at such date. The portion of such projected benefit allocated to prior years of service is the projected benefit multiplied by a fraction, the numerator of which is the number of years of service at the beginning of the plan year, and the denominator of which is the number of years of service the participant will have at the expected separation date.

(7) The unfunded liability equals the total accrued liability less the actuarial value of plan assets. All present values are determined as of the valuation date.

(8) The following examples illustrate the application of the method.

(a) Example 1. The retirement benefit under the terms of a plan is equal to 1.3% of high 1-year compensation per year of service, but not less than the top-heavy minimum of 2% of high 5-year average compensation for each year the plan is top-heavy (not exceeding 20%), as required under section 416(c). Compensation under the plan is limited to $100,000. The plan has been top-heavy only for the last 7 years. Employee E has 10 years of service at the beginning of the current plan year. E's compensation for that year is $30,000. The compensation is assumed to increase at the rate of 5% compounded yearly. The particular benefit being valued is the early retirement benefit anticipated to commence at the expected separation date 7 years in the future (i.e., after completion of 17 years of service). At this separation date, the employee will be eligible for early retirement, and will have projected compensation of $40,202, and projected high 5-year average compensation of $36,552. The allocated benefits determined for Employee E at the beginning and end of the plan year, and on the separation date, are shown in the table below.

 _____________________________________________________________________

² $5,117 = $36,552 x 2.0% x 7; $5,848 = $36,552 x 2.0% x 8

³ $8,885 = $40,202 x 1.3% x 17; $7,310 = $36,552 x 2.0% x 10

The benefit allocated to the current year is $622 ($5,848- $5,226), and the benefit allocated to prior years is $5,226. In this case, the projected benefit at the separation date is based on the 1.3% benefit formula, and the current year's benefit allocation of the projected benefit results in an amount which is based on the 1.3% benefit formula at the beginning of the year and on the top-heavy formula at the end of the year.

(b) Example 2: Plan B is an accumulation plan within the meaning of section 1.401(a)(4)-12 of the regulations. The benefit formula under Plan B for each plan year is 1% of compensation for such year. The sum of the amounts for each of the years constitutes an employee's benefit. The accrued benefit at any date under Plan B is the benefit payable at normal retirement age for the years of service to date. Employee F has 3 years of service at the beginning of the year. The benefit being valued is the normal retirement benefit payable at the normal retirement date (the date Employee F reaches normal retirement age). At normal retirement age, Employee F will have 20 years of service. Compensation is assumed to increase at a rate of 5% per year. Employee F's compensation was $28,665, $27,170, and $26,000 for the prior year, the second prior year, and the third prior year, respectively. For valuation purposes, Employee F's compensation for the current year is assumed to be $30,098. During the preceding plan year, Plan B was amended effective on the first day of the current plan year to provide that with respect to all prior plan years, the normal retirement benefit is updated to the greater of the benefit actually accumulated as of the beginning of the current plan year or 1% of the preceding year's compensation multiplied by the number of years of service prior to the beginning of the current plan year.

The benefit determined for Employee F, taking into account only credited service through the beginning of the current plan year under the plan's benefit formula is $860 (the greater of (a) $818 ((1% x $26,000) + (1% x $27,170) + (1% x $28,665)), or (b) $860 (1% x $28,665 x 3)). Taking the amendment into account, the projected benefit payable at normal retirement age is $8,637 ($860 + (1% x $30,098 x 25.84), where 25.84 is the accumulation of $1 payable at the end of the year for 17 years determined at 5% interest). For purposes of allocating the projected benefit, changes in compensation assumed for later plan years are not taken into account in accordance with the plan's benefit formula. The benefit allocated to the current plan year is $301 ((860 + (1% x $30,098)) - 860).

.02 Approval 2. Approval is granted for a change in funding method to the level percent of compensation aggregate funding method described below.

(1) This approval applies only to plans which provide for compensation-related benefits.

(2) Under this method, the normal cost is calculated in the aggregate as the normal cost accrual rate multiplied by the total compensation of all active participants.

(a) The normal cost accrual rate is

(i) the total present value of future benefits of all participants and beneficiaries less adjusted assets, divided by

(ii) the total, for all active participants, of the present value of the compensation expected to be paid to each participant for each year of the participant's anticipated future service, determined as of the participant's attained age.

(b) For this purpose, the adjusted assets are equal to

(i) the actuarial value of the assets, plus

(ii) the sum of the outstanding balances of the amortization bases established on account of the current liability full funding limitation, if any, funding waivers under section 412(b)(2)(C), switchback to the regular funding standard under section 412(b)(2)(D), use of the shortfall method under section 1.412(c)(1)-2 of the regulations, and the transition under section 1.412(c)(3)- 2(d), minus

(iii) the credit balance (or plus the funding deficiency), if any, in the funding standard account.

.03 Approval 3. Approval is granted for a change in funding method to the level dollar aggregate funding method described below.

(1) Under this method, the normal cost is calculated in the aggregate as the normal cost per active participant multiplied by the number of active participants.

(a) The normal cost per active participant is

(i) the total present value of future benefits of all participants and beneficiaries, less adjusted assets, divided by

(ii) the total, for all active participants, of the present value of an annuity of $1 per year for every year of a participant's anticipated future service, determined as of the participant's attained age.

(b) For this purpose, the adjusted assets are equal to

(i) the actuarial value of the assets, plus

(ii) the sum of the outstanding balances of the amortization bases established on account of the current liability full funding limitation, if any, funding waivers under section 412(b)(2)(C), switchback to the regular funding standard under section 412(b)(2)(D), use of the shortfall method under section 1.412(c)(1)-2 of the regulations, and the transition under section 1.412(c)(3)- 2(d), minus

(iii) the credit balance (or plus the funding deficiency), if any, in the funding standard account.

.04 Approval 4. Approval is granted for a change in funding method to the level percent of compensation individual aggregate funding method described below.

(1) This approval applies only for plans which provide for compensation-related benefits.

(2) This approval does not apply if the actuarial value of assets is less than the present value of benefits for inactive participants and beneficiaries, or if the amount in paragraph (3)(b)(i) is less than zero.

(3) Under this method, the normal cost is the sum of the individual normal costs for each active participant.

(a) The normal cost for an active participant is

(i) the present value of future benefits for the participant, less allocated adjusted assets, divided by

(ii) the ratio of (A) the present value of the compensation expected to be paid to the participant for each year of the participant's anticipated future service, determined as of the participant's attained age, to (B) the participant's current compensation.

(b) For this purpose, allocated adjusted assets are calculated as follows:

(i) First, the adjusted value of the assets is equal to:

(A) the actuarial value of the assets, plus

(B) the sum of the outstanding balances of the amortization bases established on account of the current liability full funding limitation, if any, funding waivers under section 412(b)(2)(C), switchback to the regular funding standard under section 412(b)(2)(D), use of the shortfall method under section 1.412(c)(1)-2 of the regulations, and the transition under section 1.412(c)(3)- 2(d), minus

(C) the credit balance (or plus the funding deficiency), if any, in the funding standard account, minus

(D) any liabilities retained by the plan for any inactive participant or beneficiary.

(ii) In the first year the method is used, the allocated adjusted value of the assets for an active participant is calculated by allocating the adjusted value of the assets in proportion to the present value of accrued benefits, or in proportion to the accrued liability determined under one of the immediate gain funding methods described in subsection .01 or .08.

(iii) For years subsequent to the first year in which the method is used, the adjusted value of the assets is allocated to an active participant in the proportion that

(A) the sum of the allocated adjusted assets and calculated normal cost as of the valuation date for the prior year for that active participant bears to

(B) the total of the amounts in (A) for all active participants.

.05 Approval 5. Approval is granted for a change in funding method to the level dollar individual aggregate funding method described below.

(1) This approval does not apply if the actuarial value of assets is less than the present value of benefits of inactive participants and beneficiaries, or if the amount in paragraph (2)(b)(i) is less than zero.

(2) Under this method, the normal cost is the sum of the individual normal costs for each active participant.

(a) The normal cost for an active participant is

(i) the present value of future benefits for the participant less allocated adjusted assets, divided by

(ii) the present value of an annuity of $1 per year for every year of the participant's anticipated future service, determined as of the participant's attained age.

(b) For this purpose, allocated adjusted assets are calculated as follows:

(i) First, the adjusted value of the assets is equal to:

(A) the actuarial value of the assets, plus

(B) the sum of the outstanding balances of the amortization bases established on account of the current liability full funding limitation, if any, funding waivers under section 412(b)(2)(C), switchback to the regular funding standard under section 412(b)(2)(D), use of the shortfall method under section 1.412(c)(1)-2 of the regulations, and the transition under section 1.412(c)(3)- 2(d), minus

(C) the credit balance (or plus the funding deficiency), if any, in the funding standard account, minus

(D) any liabilities retained by the plan for any inactive participant or beneficiary.

(ii) In the first year the method is used, allocated adjusted assets for an active participant is calculated by allocating the adjusted value of the assets in proportion to the present value of accrued benefits, or in proportion to the accrued liability determined under one of the immediate gain funding methods described in subsection .01 or .09.

(iii) For years subsequent to the first year in which the method is used, the adjusted value of the assets is allocated to an active participant in the proportion that

(A) the sum of the allocated adjusted assets and calculated normal cost as of the valuation date for the prior year for that active participant bears to

(B) the total of the amounts in (A) for all active participants.

.06 Approval 6. Approval is granted for a change in funding method to the level percent of compensation frozen initial liability funding method described below.

(1) This approval applies only for plans which provide for compensation-related benefits.

(2) Under this method, the normal cost is calculated in the aggregate, for every year the method is used including the first, as the normal cost accrual rate multiplied by the total compensation of all active participants.

(a) The normal cost accrual rate is

(i) the total present value of future benefits of all participants and beneficiaries less the sum of the actuarial value of assets and the unfunded liability, divided by

(ii) the total, for all active participants, of the present value of the compensation expected to be paid to each participant for each year of the participant's anticipated future service, determined as of the participant's attained age.

(b) As of the date of change, the unfunded liability is set equal to the unfunded accrued liability determined under the level percentage of compensation individual entry age normal funding method described in subsection .08.

(c) For years subsequent to the plan year of the change in method, the unfunded liability equals

(i) the unfunded liability for the prior plan year, plus the normal cost for the prior plan year (the result adjusted with appropriate interest to the valuation date), minus the actual contribution(s) for the prior plan year (adjusted with appropriate interest to the valuation date), and

(ii) the unfunded liability is further increased (or decreased) by the amount of any base established on the valuation date which results from a plan amendment or a change in assumptions. Such bases are amortized over the period(s) described in section 412(b)(2)(B) or section 412(b)(3)(B), as applicable.

.07 Approval 7. Approval is granted for a change in funding method to the level dollar frozen initial liability funding method described below.

(1) Under this method, the normal cost is calculated in the aggregate, for every year the method is used including the first, as the normal cost per active participant multiplied by the number of active participants.

(a) The normal cost per active participant is

(i) the total present value of future benefits of all participants and beneficiaries less the sum of the actuarial value of assets and the unfunded liability, divided by

(ii) the total, for all active participants, of the present value of an annuity of $1 per year for every year of a participant's anticipated future service, determined as of the participant's attained age.

(b) As of the date of change, the unfunded liability is set equal to the unfunded accrued liability determined under the level dollar individual entry age normal funding method described in subsection .09.

(c) For years subsequent to the plan year of the change in method, the unfunded liability equals

(i) the unfunded liability for the prior plan year, plus the normal cost for the prior plan year (the result adjusted with appropriate interest to the valuation date), minus the actual contribution(s) for the prior plan year (adjusted with appropriate interest to the valuation date), and

(ii) the unfunded liability is further increased (or decreased) by the amount of any base established on the valuation date which results from a plan amendment or a change in assumptions. Such bases are amortized over the period(s) described in section 412(b)(2)(B) or section 412(b)(3)(B), as applicable.

.08 Approval 8. Approval is granted for a change in funding method to the level percent of compensation individual entry age normal funding method described below.

(1) This approval does not apply if the alternative minimum funding standard account is used at any time within the 5-year period commencing with the first day of the plan year for which the change is made.

(2) This approval applies only for plans which provide for compensation-related benefits.

(3) Under this method, the normal cost is the sum of the individual normal costs for all active participants. For an active participant, the normal cost is the participant's normal cost accrual rate, multiplied by the participant's current compensation.

(a) The normal cost accrual rate equals

(i) the present value of future benefits for the participant, determined as of the participant's entry age, divided by

(ii) the present value of the compensation expected to be paid to the participant for each year of the participant's anticipated future service, determined as of the participant's entry age.

(b) In calculating the present value of future compensation, 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 the compensation used for the valuation.

(c) The accrued liability is the sum of the individual accrued liabilities for all participants and beneficiaries. A participant's accrued liability equals the present value, at the participant's attained age, of future benefits less, the present value at the participant's attained age of the individual normal costs payable in the future. A beneficiary's accrued liability equals the present value, at the beneficiary's attained age, of future benefits. The unfunded accrued liability equals the total accrued liability less the actuarial value of assets.

(d) Under this method, the entry age used for each active participant is the participant's age at the time he or she would have commenced participation if the plan had always been in existence under current terms, or the age as of which he or she began to earn service credits for purposes of benefit accrual under the current terms of the plan.

.09 Approval 9. Approval is granted for a change in funding method to the level dollar individual entry age normal funding method described below.

(1) This approval does not apply if the alternative minimum funding standard account is used at any time within the 5-year period commencing with the first day of the plan year for which the change is made.

(2) Under this method, the normal cost is the sum of the individual normal costs for all active participants.

(a) For an active participant, the individual normal cost equals

(i) the present value of future benefits for the participant, determined as of the participant's entry age, divided by

(ii) the present value of an annuity of $1 per year for every year of the participant's anticipated future service, determined as of the participant's entry age.

(b) The accrued liability is the sum of the individual accrued liabilities for all participants and beneficiaries. A participant's accrued liability equals the present value, at the participant's attained age, of future benefits, less the present value at the participant's attained age of the individual normal costs payable in the future. A beneficiary's accrued liability equals the present value, at the beneficiary's attained age, of future benefits. The unfunded accrued liability equals the total accrued liability less the actuarial value of the plan assets.

(c) Under this method, entry age used for each active participant is the participant's age at the time he or she would have commenced participation if the plan had always been in existence under current terms, or the age as of which he or she began to earn service credits for purposes of benefit accrual under the current terms of the plan.

.10 Approval 10. Approval is granted for a change in asset valuation method to fair market value as defined in section 1.412(c)(2)-1(c) of the regulations.

.11 Approval 11. Approval is granted for a change in asset valuation method to the average fair market value (without phase-in) as defined in section 1.412(c)(2)-1(b)(7) of the regulations, or to any alternative formulation that is algebraically equivalent to this average fair market value. The asset value determined under the method will be adjusted to be no greater than 120% and no less than 80% of the fair market value defined in section 1.412(c)(2)-1(c). The stated averaging period may not exceed five (5) plan years.

For example, under section 1.412(c)(2)-1(b)(7), if the averaging period is five years, in the first year the average value is based on the fair market value of assets in the current year and the adjusted values of assets for the prior four years as provided in section 1.412(c)(2)-1(b)(8). An alternative formulation which is algebraically equivalent to this method is one in which the average value of assets is equal to the fair market value on the valuation date, minus decreasing fractions (4/5, 3/5, 2/5, and 1/5, in this example) of the appreciation and depreciation in each of the four preceding years.

.12 Approval 12. Approval is granted for a change in asset valuation method to the average fair market value (with phase-in) as defined in section 1.412(c)(2)-1(b)(7) of the regulations, or to any alternative formulation that is algebraically equivalent to this average fair market value. The asset value determined under the method will be adjusted to be no greater than 120% and no less than 80% of the fair market value defined in section 1.412(c)(2)-1(c). The stated averaging period may not exceed five (5) plan years.

In the first year this method is used, the average is calculated as in subsection .11, except that the adjusted values for all but the most recent prior year are replaced by the adjusted value for the most recent prior year. In the second year, the average is calculated as in subsection .11, except that the values for all but the most recent two prior years are replaced by the adjusted value for the second most recent prior year. This process is continued until values for all prior years in the averaging period are phased in.

.13 Approval 13. Approval is granted for a change in the valuation date to the first day of the plan year.

.14 Approval 14. Approval is granted to change the funding method used for valuing ancillary benefits to the funding method used to value retirement benefits, if the prior method for valuing ancillary benefits had been the one-year term method. For this purpose, ancillary benefits are defined in section 1.412(c)(3)- 1(f)(2) of the regulations and include pre-retirement death and disability benefits.

SECTION 4. SPECIAL APPROVALS

.01 Approval to Anticipate Scheduled Benefit Increases. Approval is granted to change the funding method currently used for a collectively bargained plan described in section 413(a) to a method which is the same as the old method except that the new method will anticipate benefit increases scheduled to take effect during the term of the collective-bargaining agreement currently applicable to the plan.

.02 Approvals to Remedy Unreasonable Allocation of Costs.

(1) If a plan uses an individual aggregate funding method and an individual normal cost becomes negative for a participant, approval is granted to re-allocate excess assets in proportion to the present value of accrued benefits, or in proportion to the accrued liability determined under the immediate gain funding method described in section 3.01, section 3.08 (only if the normal cost for a participant is determined as a level percent of compensation under plan's method), or section 3.09 (only if the normal cost for a participant is determined as a level dollar amount under the plan's method). For this purpose, excess assets are defined as the excess of the assets currently allocated for the participant over the present value of the participant's future benefits.

(2) If a plan uses a spread gain funding method which establishes an initial unfunded liability using an immediate gain funding method (e.g., frozen initial liability or attained age normal), and the normal cost and/or unfunded liability become(s) negative, then, in the case where the normal cost under the plan's method is determined as a level percentage of compensation, approval is granted to reestablish the unfunded liability under the funding method described in section 3.01 if the unfunded liability was originally established under the unit credit method, or under the funding method described in section 3.08 if the unfunded liability was originally established under the entry age normal method. See Rev. Rul. 81-213, 1981-2 C.B. 101, regarding whether a funding method is a spread gain funding method or an immediate gain funding method. In the case where the normal cost under the plan's method is determined as a level dollar amount, approval is granted to reestablish the unfunded liability under the funding method described in section 3.01 if the unfunded liability was originally established under the unit credit method, or under the funding method described in section 3.09 if the unfunded liability was originally established under the entry age normal method. If the reestablished unfunded liability is less than zero, approval is granted to change to the aggregate funding method described in section 3.02 (if the normal cost under the plan's method is determined as a level percent of compensation), or section 3.03 (if the normal cost under the plan's method is determined as a level dollar amount).

(3) If a plan that uses a spread gain funding method which establishes an initial unfunded liability using an immediate gain funding method (e.g., frozen initial liability or attained age normal), becomes fully funded within the meaning of section 412(c)(6) (without taking into account section 412(c)(7)(A)(i)(I)), approval is granted to change to the aggregate funding method described in section 3.02 (if the normal cost under the plan's method is determined as a level percent of compensation), or section 3.03 (if the normal cost under the plan's method is determined as a level dollar amount).

(4) If a plan uses an individual aggregate funding method and the actuarial value of plan assets is less than the present value of benefits for inactive participants and beneficiaries, or if the actuarial value of the assets, plus the sum of the outstanding balances of the amortization bases established on account of the current liability full funding limitation, if any, funding waivers under section 412(b)(2)(C), switchback to the regular funding standard under section 412(b)(2)(D), use of the shortfall method under section 1.412(c)(1)-2 of the regulations, and the transition under section 1.412(c)(3)-2(d), minus the credit balance (or plus the funding deficiency), if any, in the funding standard account, minus any liabilities retained by the plan for any inactive participant or beneficiary is less than zero, approval is granted to change to the aggregate funding method described in section 3.02 (if the normal cost under the plan's method is determined as a level percent of compensation), or section 3.03 (if the normal cost under the plan's method is determined as a level dollar amount).

(5) If a plan provides that no participant may accrue a benefit as of a date that is no later than the first day of the plan year, approval is granted to change to the unit credit method described in section 3.01.

.03 Approval for Change in Funding Method for Fully Funded Terminated Plans.

(1) For a plan year during which a plan is terminated, the funding method may be changed to a method described in paragraph (2) provided that the conditions set forth in paragraph (3) are satisfied. As part of the change in method, the valuation date may be changed to the date of termination or the first day of the plan year, and the asset valuation method may be changed to value plan assets at fair market value.

(2) A method is described in this subsection if the normal cost for the plan year is the present value of the benefits accruing in the plan year, and the accrued liability is the present value of the benefits accrued as of the first day of the plan year.

(3) The conditions in this subsection are satisfied if:

(a) As of the date of termination, the fair market value of the assets of the plan (exclusive of contributions receivable) is not less than the present value of all benefit liabilities (whether or not vested), and

(b) if applicable, a timely notice of intention to terminate was filed with the PBGC.

.04 Approval for Takeover Plans.

(1) Approval is granted by this paragraph for a change in funding method where all the conditions set forth in paragraphs (2) through (4) are satisfied.

(2) 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.

(3) The method used by the new actuary is substantially the same as the method used by the prior actuary, and is consistent with the information contained in the prior actuarial valuation reports or prior Schedules B of Form 5500. Also, the method used by the new actuary must be applied to the prior year (using the assumptions of the prior actuary) and the net charge in the funding standard account produced must not differ by more than five percent (5%) from the net charge calculated by the prior actuary for that year.

(4) The change in costs due to the change in method is treated in the same manner as an experience gain or loss, unless the actuarial assumptions are being changed, in which case the change in method is treated as part of the change in assumptions.

SECTION 5. GENERAL RULES RELATING TO FUNDING METHODS

Approval for a change to any method in this revenue procedure does not apply unless the provisions of sections .01 through .03 are satisfied.

.01 Amortization Bases.

(1) Continued Maintenance of Waiver, Shortfall, Five-Year Alternative Switchback, Transition, and Current Liability Bases. In the case of a plan which, prior to a change in funding method, has a funding waiver base described in section 412(b)(2)(C), a base due to a switchback to the regular funding standard account described in section 412(b)(2)(D), a shortfall base described in section 1.412(c)(1)-2(g) of the regulations, a transition base described in section 1.412(c)(3)-2(d), or a base that was established to amortize a credit in the funding standard account due to the 150 percent of current liability full funding limitation, the current funding method, regardless of any other characteristics, must maintain such base(s) as if the funding method had not changed and must charge, or credit, the funding standard account with the amortization charge(s), or credit(s), for such base(s) after the change in funding method.

(2) Creation of a Funding Method Change Base. Except in the case of a change to a funding method described in section 3.02, 3.03, 3.04, or 3.05, all existing bases shall be maintained and an amortization base shall be established equal to the difference between the unfunded accrued liability under the new method and an amount equal to (A) the net sum of the outstanding balances of all amortization bases (including, when the preceding method was an immediate gain method, the gain or loss base for the immediately preceding period), treating credit bases as negative bases, less (B) the credit balance (or plus the funding deficiency), if any, in the funding standard account, all adjusted for interest at the valuation rate to the valuation date in the plan year for which the change is made. If this difference is a positive or negative number, the resulting base will be a charge base or a credit base, respectively. In the case of a change to a funding method described in section 3.02, 3.03, 3.04, or 3.05, (a) the bases described in paragraph (1) must be maintained, and (b) all amortization bases other than those described in paragraph (1) shall be considered fully amortized.

(3) Amortization Period. For any charge or credit base established pursuant to the requirements of paragraph (2), the amortization period is 10 years.

(4) No base is established due solely to a change in valuation date.

.02 Although compensation must be limited in accordance with section 401(a)(17) in determining benefits to be valued, it may or may not be so limited in determining the present value of future compensation expected to be paid to the participant for each year of the participant's anticipated future service. However, the alternative used is part of the method and any change in such practice is a change in funding method.

.03 Whenever, under the funding method, the normal cost is calculated as a level percentage of compensation, then an individual's compensation is included in the amount of current year's compensation to which the normal cost percentage is applied if and only if the compensation for that individual is included in the present value of future compensation over which normal costs are spread. Similarly, whenever the normal cost is calculated as a level dollar amount, then an individual is included in the determination of the number of individuals by which the normal cost per participant is multiplied if and only if that individual is included for purposes of determining the present value of an annuity of $1 for years of anticipated service over which normal costs are spread.

SECTION 6. RESTRICTIONS UNDER REVENUE PROCEDURE

.01 General Restrictions.

(1) This revenue procedure does not apply to a change in funding method for a plan year if either (a) a Schedule B of Form 5500 has been filed for such plan year using some other funding method or (b) the due date (including extensions) for such Schedule B has passed.

(2) This revenue procedure does not apply unless the plan administrator (within the meaning of section 414(g)) or an authorized representative of the plan sponsor indicates as part of the series Form 5500 for the plan year for which the change is effective that the plan administrator or plan sponsor agrees to the change in funding method.

(3) This revenue procedure does not apply if, for the plan year of the change, a minimum funding waiver under section 412(d) has been requested for the plan or is being amortized, or if an extension of an amortization period under section 412(e) has been requested or is currently applicable for computing minimum funding requirements, for the plan.

(4) This revenue procedure does not apply if the plan is under an Employee Plans examination for any plan year, or if the plan sponsor, or a representative, has received verbal or written notification from the EP/EO Division of an impending Employee Plans examination, or of an impending referral from another part of the Service for an Employee Plans examination, or if the plan has been under such an examination and is in Appeals or in litigation for issues raised in an Employee Plans examination.

(5) Except as provided in section 4.03, this revenue procedure does not apply to a change which is made for a plan year in which the plan is terminated.

(6) Non-Applicability if Shortfall Method is Discontinued. If the current method makes use of the shortfall method, approval to change to another funding method under this revenue procedure will apply only if the new funding method continues to make use of the shortfall method. For example, approval is not granted to change from the entry age normal method (which uses the shortfall method) to the unit credit method under section 3.01 unless the unit credit method makes use of the shortfall method.

.02 Additional Restrictions For Approvals in Section 3.

(1) Non-Applicability for Reversion Cases. This revenue procedure does not apply to changes in funding method required by Treasury Release R-2697 dated May 24, 1984, concerning the reversion of assets from a terminated plan. Furthermore, approval under section 3 does not apply if, in the 15 years preceding the date of change, such plan was involved in a transaction described in such Treasury Release subsequent to May 24, 1984.

(2) Non-Applicability for Plans Using Universal Life Insurance Products. Approval to change to a method described in section 3 does not apply in the case of a plan for which some of the assets are provided through universal life insurance policies unless, under the funding method adopted, (a) all plan benefits including those provided by the universal life insurance policies are considered liabilities in calculating costs and are funded using the same method as used for retirement costs, and (b) the cash value as of the valuation date of such contracts is treated the same as all other assets of the plan in calculating costs. However, the requirements of (a) above will not fail to be satisfied merely because ancillary benefits, within the meaning of section 1.412(c)(3)-1(f)(2) of the regulations, are funded on a reasonable one-year term funding method.

(3) Four-Year Limitation on Changes. Approval to change to a method described in section 3 does not apply to any of the following changes:

(a) the asset valuation method is being changed and the asset valuation method was changed in any of the four (4) preceding plan years,

(b) the valuation date is being changed and the valuation date was changed in any of the four (4) preceding plan years, or

(c) the funding method is being changed in a way not described in (a) or (b) and a funding method change not described in (a) or (b) was made in any of the four (4) preceding plan years.

(4) Non-Applicability when Liabilities are Adjusted for Assets. Approval to change to a method described in section 3 does not apply to a change in funding method under which the liabilities are adjusted to reflect the performance or expected performance of the assets.

(5) Non-Applicability if Benefit Accruals are Frozen Under the Plan. Approval to change to any method described in sections 3.02 through 3.09, does not apply if a plan provides that no participant may accrue a benefit as of a date that is no later than the first day of the plan year. In such a case, approval to change to the method described in section 3.01 applies only as described in section 4.02(5).

(6) Non-Applicability if Negative Normal Cost or Negative Unfunded Liability Results From the Change. Approval to change to a method described in section 3 does not apply if, as a result of the change in method, a negative normal cost or a negative unfunded liability is produced.

(7) Non-Applicability if Change in Method is Being Made Pursuant to a Spin-off or Merger. Approval to change to a method described in section 3 does not apply if the funding method for a plan year is being changed in connection with a plan spin-off or merger.

SECTION 7. EFFECTIVE DATE

This revenue procedure is effective for plan years commencing on or after January 1, 1995.

SECTION 8. COMMENTS REQUESTED FOR ADDITIONAL METHODS SUBJECT TO APPROVAL

Taxpayers, plan administrators, and enrolled actuaries may wish to use other funding methods for which approval is not provided in this revenue procedure, but which satisfy the requirements of the regulations under section 412. The Service requests written comments concerning additional funding methods that may be considered for approval in future guidance. Comments and information should be sent to: Commissioner of the Internal Revenue Service, Attention: CP:E:EP, Washington, DC 20224.

DRAFTING INFORMATION

The principal authors of this revenue procedure are John Heil and William Kerr of the Employee Plans Division. For further information regarding this revenue procedure, please contact the Employee Plans Division's taxpayer assistance telephone service between the hours of 2:30 p.m. and 4:00 p.m., Eastern Time, Monday through Thursday at (202) 622-6076 (not a toll-free number). Mr. Heil's telephone number is (202) 622-7383 (also not a toll-free number). Mr. Kerr's telephone number is (202) 622-7632 (also not a toll-free number).