IRS Explains New DB Auto Approval Procedure

December 31, 2009 (PLANSPONSOR.com) – Saying it has gotten “numerous” questions from single-employer defined benefit plan sponsors or their actuaries about changes in plan valuation software,  Internal Revenue Service (IRS) officials on Thursday said they would grant automatic approval of the method changes under certain circumstances.

Announcement 2010-3 noted that funding rules in the Pension Protection Act , the Worker, Retiree, and Employer Recovery Act of 2008, and guidance regarding that legislation has prompted plan valuation software changes and prompted inquiries about approval of such alterations as they are implemented.

The IRS document explained that automatic approval would be granted for plan years on or after January 1, 2009, for certain funding method changes under Section 430 of the tax code.

For example, such approval will be forthcoming for funding method changes if:

• there has been a change both in the enrolled actuary for the plan and in the business organization providing actuarial services to the plan;
• the new method is substantially the same as the method used by the prior enrolled actuary and is consistent with the description of the method contained in the prior actuarial valuation report or prior Schedule SB of Form 5500;
• the funding target and target normal cost (without regard to any adjustments for employee contributions and plan-related expenses) as determined for the prior plan year by the new enrolled actuary (using the actuarial assumptions of the prior enrolled actuary) are both within 5% of those values as determined by the prior enrolled actuary; and
• for plan years beginning on or after January 1, 2011, the actuarial value of plan assets, as determined for the prior plan year by the new enrolled actuary (using the actuarial assumptions of the prior enrolled actuary), is within 5% of the value as determined by the prior enrolled actuary.

Tax officials said the second, third, and fourth conditions are each applied by disregarding any change in funding method for which approval has been automatically provided (without regard to this announcement) for the current plan year.