Plan Freeze

[david rigby]

Need a gut check. Anything wrong with this?

CY plan year, val date at BOY. Aggregate funding method. Sponsor gasps when told of the 2003 minimum funindg requirement and asks to freeze the plan, as of the end of current year. As of 10/1, we amend the plan as of 12/31 and re-do the valuation results, using only one year of future service. (Assume the 204(h) notice is adequately distributed.)

The IRS has stated (see Gray Book 99-6) that the method must be changed from aggregate to an individual method if the plan is frozen. However, that statement clearly is focusing on the year(s) after the freeze is effective, not the previous year. Any problem with using the Aggregate method for the 2003 year? Does Rev. Ruling 77-2 inhibit my process?

[MGB]

I am not sure what you are doing.

1) Spreading costs over one future year of service.

2) Spreading costs over all future service (beyond the one year of accrual).

I think (2) would be an unreasonable allocation of costs.

I don't know if (1) is an allowable method and you may need to do a formal request for change from the IRS and get their opinion. I don't think it meets the automatic approval.

[AndyH]

May I interject a related question?:

Is there or is there not a requirement that the normal cost be prorated for the portion of the year that the plan was active versus the portion of the year in which it was frozen (unless of course you choose to ignore the post-valuation date freeze)?

[david rigby]

GrayBook 93-10 and 93-12 indicate that spreading over one year of service is not acceptable. My current situation is to recalculate the 2003 aggregate normal cost, without any change in my PV of future comp, which appears to be (2) in above post. MGB does not like it, but I'm not so sure. I agree that the method should be changed effective 1/1/2004.

[Blinky the 3-eyed Fish]

Andy, you are thinking of Rev. Rul 77-2. It depends on how the amendment is recognized.

Pax, I agree with your assessment. Although be careful because the automatic approval for funding method changes does not apply to frozen plans, so you may be stuck unless you change the method this year.

[david rigby]

Thanks for the comment Blinky. I read Rev. Proc. 2000-40 differently.

Rev. Proc. 2000-40, section 6.02(5) reads:

“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).”

I think the reference to 4.02(5) is a typo that should be 4.01(5), which reads:

“(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.”

Thus, in my example, I can (must, apparently) change to UC on 1/1/2004, without regard to the 5-year cycle, but cannot use automatic approval to change on 1/1/2003 unless I have permission under section 3 of that Rev. Proc.

[Blinky the 3-eyed Fish]

Pax, I was just saying you can't change to IA for 1/1/2004. You are correct that you do have the UC option to change to.

[Mike Preston]

pax, why "must"? I always have thought that you must change to UC *IF YOU CHANGE*, but if you maintain what has been in use in the past, you may continue. I know the IRS doesn't like it. But I'm not aware of anything that says you must change the funding method unless you end up with unreasonable results. If I recall, the IRS has stated that unreasonable results are established if the normal costs are negative, or the UAL is negative. But other than that I haven't seen anything.

The problem with forcing people to UC is that it flies in the face of the old RR (I don't have the cite handy) that requires an actuary to ignore the plan's termination when developing PVFService. That is, some actuaries had tried to argue that once a plan was terminated, future service went to zero and NC = PVFB - ASSETS. IRS *really* didn't like that.