CONDITIONS ARE SET FORTH FOR AUTOMATIC APPROVAL TO CHANGE FUNDING METHOD TO DETERMINE MINIMUM FUNDING STANDARD FOR DEFINED BENEFIT PLAN YEARS 1985-1989

Rev. Proc. 85-29

SECTION 1. PURPOSE

This revenue procedure provides automatic approval to change the funding method used to determine the minimum funding standard for defined benefit plans for plan years described in section 7. However, taxpayers, plan administrators and enrolled actuaries are cautioned to see the conditions and the restrictions of section 3 and the instructions of section 6 of this revenue procedure.

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.

Section 1.412(c)(1)-1 of the Income Tax Regulations provides that the term "funding method" when used in section 412 of the Code has the same meaning as the term "actuarial cost method" in section 3(31) of ERISA. Section 1.412(c)(1)-1 of the regulations 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.

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

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 automatic approval for certain changes of funding method.

SEC. 3. GENERAL APPROVALS FOR CHANGES OF FUNDING METHOD

01 General Approval for Changes -- Subject to the requirements described below, permission to change to any acceptable funding method is hereby granted. Changes for which permission to change is granted include changes to a method such as the entry age normal cost method, the unit credit cost method, etc., changes in the asset valuation method, changes in the valuation date, and changes to or from the shortfall funding method.

02 Rules for Maintaining Amortization Bases -- Any changes in funding method must satisfy the rules of section 4, concerning the maintenance and amortization period of amortization bases.

03 Non-Applicability for Non-Timely Change -- Subsection .01 does not apply to a change in funding method for a plan year if either (1) a Schedule B of Form 5500 has been filed for such plan year using some other funding method of (2) the due date (including extensions) for such Schedule B has passed, unless in either case a timely submission requesting approval for the change in funding method for the plan year was submitted to the Internal Revenue Service pursuant to Rev. Proc. 78-37, 1978-2 C.B. 540, prior to May 20, 1985, provided that such request did not result in either an affirmative or negative ruling, the request was not withdrawn, and the change is made consistent with such submission.

04 Nonapplicability for Reversion Cases -- Subsection .01 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, subsection .01 does not apply to any change described in subsection .07(3) 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.

05 Nonapplicability for Plans Using Universal Life Insurance Products -- Subsection .01 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 (1) 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 (2) the cash value as of the valuation date of such contracts are treated the same as all other assets of the plan in calculating costs. However, the requirements of (1) above will not fail to be satisfied in the case of ancillary benefits, within the meaning of section 1.412(c)(3)-1(f)(2) of the regulations, that are funded on an acceptable one-year term cost method.

06 Use of Alternative Minimum Funding Standard for Changes to Entry Age Normal Methods -- Subsection .01 does not apply to a change to an entry age normal method 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.

07 Three-Year Limitation on Changes -- Except as provided in (4) below, subsection .01 does not apply to any of the following changes:

(1) The asset valuation method is being changed and the asset valuation method was changed in any of the three preceding plan years,

(2) The valuation date is being changed and the valuation date was changed in any of the three preceding plan years, or

(3) The funding method is being changed in a way not described in (1) or (2) and a funding method change not described in (1) or (2) was made in any of the three preceding plan years.

(4) The restrictions of this subsection do not apply for any plan year for which there has been a change in both the enrolled actuary for the plan and the business organization providing actuarial services to the plan.

Thus, for example, if a change in funding method is made for 1984 from an aggregate method in which the normal cost percentage is multiplied by actual compensation for the plan year to the aggregate method under which the normal cost percentage is multiplied by expected compensation for the year beginning on the valuation date, which is the first day of the plan year, the funding method may not be automaticallly changed, pursuant to section 3.01, to the unit credit method until 1988. The asset valuation method or the valuation date, however, may be automatically changed during this time.

08 Ten Percent Participant Rule for Change in Valuation Date -- Subsection .01 does not apply to a change in valuation date if the number of plan participants considered as currently employed by the employer and considered in the valuation at the new valuation date is less than 90 percent or more than 10 percent of the number of participants considered as currently employed by the employer and considered in the valuation at the old valuation date.

09 Valuation Required for Plan Year of Change -- Subsection .01 does not apply unless an actuarial valuation is made for the plan year for which the change is made using the new method and such valuation is used for purposes of section 412 of the Code and section 302 of ERISA for such plan year.

10 Nonapplicability when Liabilities are Adjusted for Assets -- Subsection .01 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.

11 Nonapplicability where Plan Administrator Does Not Agree -- Subsection .01 does not apply unless there is attached to the Schedule B for the plan year of the change a statement signed by the plan administrator (within the meaning of section 414(g) of the Code) or by an authorized representative of the plan sponsor stating that the plan administrator or plan sponsor agrees to the change in funding method.

SEC. 4. AMORTIZATION BASES

01 Continued Maintenance of Waiver, Shortfall, Five Year Alternative Switchback, and Transition Bases -- Except as provided in subsection .02 below, in the case of a plan which prior to a change in funding method has a base described in section 401(b)(2)(C) or (D) of the Code, or a base described in either section 1.412(c)(1)-2(g) or section 1.412(c)(3)-2(d) of the regulations, the current funding method regardless of any other characteristics must maintain such base as if the funding method had not changed and must charge (credit) the funding standards account with the amortization charge (credit) for such base after the change in funding method.

02 Full Amortization of Shortfall Bases -- In the case of a change of a funding method using the shortfall method to a funding method which does not use the shortfall method, the excess, if any of the unamortized balance of shortfall losses over the unamortized balance of shortfall gains must be established as an amortization charge base with an amortization period of one year and the existing shortfall bases shall be dropped.

03 Creation of a Funding Method Change Base -- In the case of a change to a funding method that directly calculates an accrued liability, 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 balance 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) 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 which does not directly calculate an accrued liability, (1) the bases described in subsection .01 must be maintained, (2) all other amortization bases shall be considered fully amortized, and (3) the assets of the plan shall be increased by the net unamortized balance of the amortization bases described in subsection .01 in determining normal costs.

However, for the plan year of change, changes to a frozen initial liability method or an attained age normal method shall be considered to be changes to a method that directly calculates an accrued liability and the unfunded liability used in determining the amortization base shall be based upon the accrued liability used to determine the initial unfunded liability under the new method. For purposes of this subsection, see Rev. Rul. 81-13, 1981-1 C.B. 229, for when an accrued liability is directly calculated.

04 Amortization Period for Charge Bases -- For any charge base established pursuant to the requirements of subsection .03, the amortization period is the greater of

(i) the excess, if any, of (1) 40 years, if the plan was in existence on January 1, 1974, or 30 years if it was not then in existence over (2) the number of prior plan years for which section 302 of ERISA or section 412 of the Code applied, or

(ii) the lesser of 15 years or the weighted average future working lifetime of the active employees.

For purposes of this subsection the weighted average future working lifetime is the number n such that an annuity certain of duration n is determined by any of the following: (a) If the plan benefits are related to salary, the present value of future compensation for all active employees divided by the sum of the current compensation for such employees; or (b) the sum for all active employees of the present value of an annuity of $1 payable from the current attained age to the assumed retirement age of an employee divided by the total number of active employees. For this purpose the weighted average future working lifetime may be determined by rounding off to a whole year by dropping the fractional part.

05 Amortization Period for Credit Bases -- For any credit base established pursuant to subsection .03, the amortization period is 30 years.

SEC. 5. CHANGE IN FUNDING METHOD FOR FULLY FUNDED TERMINATED PLANS

In the case of a defined benefit plan that is terminated in a plan year in which all plan benefits (whether or not vested), including the benefits for any participant who as of the date of termination did not satisfy the condition for a benefit and who after such date satisfies such conditions, are provided from the plan assets, the funding method may be changed to any acceptable method, which may reflect the effect of plan termination, for the plan year in which the plan is terminated provided that a Schedule B of Form 5500 has not been filed for such plan year using some other method or that the due date of such Schedule B has not passed.

SEC. 6. INSTRUCTION WITH RESPECT TO CHANGE IN FUNDING METHODS UNDER REVENUE PROCEDURE

01 In an attachment to the Schedule B of Form 5500 that is filed for the plan year for which the change of funding method is made, there must be the following:

(1) A description of the new funding method that is sufficiently complete so that another enrolled actuary can reproduce the result of the valuation of the plan year of change and for later plan years based upon such description:

(2) A description of each amortization base that is being maintained for the funding standard account for the plan, including the original amount of the base, the outstanding balance of the base as of the valuation date for the plan year for which the change in funding method is made, the remaining amortization period of the base, and the amortization charge or credit with respect to the base.

SEC. 7. EFFECTIVE DATE

This revenue procedure is effective for plan years, commencing on or after January 1, 1984, but not after December 31, 1989.

SEC. 8. EFFECT ON OTHER REVENUE PROCEDURES

Rev. Procs. 78-17, 79-50, 80-50, and 81-29 are hereby superseded.