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.

Software Changes

Meanwhile, for changes in funding method under Section 430 resulting from a change in valuation software, approval will be granted if:

  • there has not been both a change in the enrolled actuary for the plan and a change in the business organization providing actuarial services to the plan;
  • except to the extent automatic approval has been provided for a change in funding method without regard to this announcement, the underlying method is unchanged and is consistent with the information contained in the prior actuarial valuation report and prior Schedule SB of Form 5500;
  • the new valuation software is generally used by the enrolled actuary for the single-employer plans to which the enrolled actuary provides actuarial services;
  • the funding target and target normal cost (without regard to any adjustments for employee contributions and plan-related expenses) under the new valuation software (for either the current plan year or the prior plan year) are each within 2% of the respective values under the prior valuation software (all other factors being held constant);
  • for plan years beginning on or after January 1, 2011, the actuarial value of assets for the plan under the new valuation software (for either the current plan year or the prior plan year) is within 2% of the value under the prior valuation software (all other factors being held constant); and
  • the modifications to the computations in the valuation software or the use of a different valuation software system are designed to produce results that are no less accurate than the results produced prior to the modifications or change.

The IRS announcement is available here

«