An Internal Revenue Service announcement provides for automatic approval of a change in funding method with respect to a single-employer defined benefit plan under certain circumstances in which the change in method results from a change in the plan’s enrolled actuary.
According to Announcement 2015-3, under Section 412(c)(5) of the Internal Revenue Code, as in effect prior to the Pension Protection Act of 2006 (PPA), any change of funding method requires the approval of the IRS. However, Revenue Procedure 2000-40 provided automatic approval for certain changes in funding method that occurred with respect to “takeover plans”—plans for which both the enrolled actuary and the business organization providing actuarial services are changed.
Section 412(d)(1) of the Code, as amended by PPA, retained the requirement that a change in funding method be approved by the IRS. Under PPA, a single funding method must be used to determine the liabilities for any single-employer defined benefit plan subject to Section 430, but there may be some variation in the manner the method is applied. The prior Revenue Procedure has not been updated to reflect the changes made by PPA, and calculations used for a “5% test” that was a condition of automatic approval for takeover plans are not used under Section 430. The test basically requires that the actuarial value of plan assets for the prior plan year, as calculated by the new enrolled actuary, be within 5% of the value for the actuarial value of plan assets reported in the prior plan year’s Schedule SB (Form 5500, Single-Employer Defined Benefit Plan Actuarial Information).
For plan years beginning on or after January 1, 2009, Announcement 2010-3 provides automatic approval for certain changes in funding method used to determine the minimum funding requirement for defined benefit plans subject to the requirements of Section 430. These approvals apply to certain funding method changes that result either from a change in the valuation software used to determine the liabilities for such plans or from a change in the enrolled actuary and the business organization providing actuarial services to the plan. Under Announcement 2010-3, 5% tests similar to those under Revenue Procedure 2000-40 are required to be applied with respect to the liabilities and assets reflected on the Schedule SB for the prior plan year.
The current announcement expands upon the automatic approval for takeover plans under Announcement 2010-3 by allowing the 5% tests to be performed for the year in which the takeover occurs, and permits the newly hired enrolled actuary to use a signed actuarial valuation report issued by the prior enrolled actuary for the plan in lieu of the Schedule SB. This change facilitates the filing of an amended Schedule SB for the 2013 plan year for a takeover plan without the need for the newly hired enrolled actuary to perform the 5% test using the valuation results for the 2012 plan year.
The announcement lays out four conditions for a plan to have automatic approval of a change in funding method.