Terminated Plan Valuation Date Change

[SRM]

Plan terminates under standard termination on 1/15/03.

All benefits are distributed by 10/15/03. Plan is not fully funded, but substantial owner elects to receive a lesser allocation of assets to enable all other benefits to be paid.

Prior years method is EAN and valuation date is 12/31.

Rev. Proc. 2000-40 Sec. 6.01(5) indicates that terminated plans can only rely on the Rev. Proc. for automatic changes described in Sec. 4.02.

Sec. 4.02 permits a valuation date change to the first day of plan year if assets are greater than present value of benefits as of the date of termination.

Question:

Is automatic approval available for a change to first day of year (1/1) in this situation? It seems it would not be since assets are less than pvab as of termination date, however does this change considering the treatment of substantial owner's benefit under standard termination?

or

Is a valuation date 12/31 permitted after the complete distribution of benefits (i.e. 0 assets, 0 liabilities, etc.)?

[Blinky the 3-eyed Fish]

No, you cannot consider the majority owner's waiver for the ability to change funding methods with automatic approval.

Your next question will draw different opinions I am sure. My thought is that the valuation date is the end of the year, not 12/31. In this case your year ends on the date the assets are distributed (10/15/03). Now, the question is to value the plan the instant before the distribution or just after. In practice I have leaned toward the former approach. The latter approach would yield a valuation with some liabilities and no assets in your case, and would force the consideration of 417(e) rates.

The fact that your funding method is EAN adds some complexity. How to recognize the future service component in determining the EANC is probably something that has been addressed in a Gray Book at some time. Pax?

[david rigby]

I appreciate the vote of confidence Blinky.

I could find nothing in the Gray Book, either before or after issuance of Rev. Proc. 2000-40, that helps in this area. I like Blinky's logic and comments.

However, don't forget that the 10/15/03 valuation should include any plan amendments since 12/31/02 valuation, which includes the plan termination. (Not sure if that helps any. I confess to being confused about the goal.)

Another considerations:

- Modification of actuarial assumptions might still be available;

- You can still apply for a method change. If the goal is to get to UC, I think it likely that the IRS would approve it.

[SRM]

Thanks for the responses. The goal of the valuation (funding amount) isn't much of a concern at this point, I was just questioning the mechanics of a valuation under the circumstances.

Blinky, considering your comments, it does seems like the last day valuation before final distributions makes the most sense.

[Mike Preston]

It might make sense, but I'm not sure it is easy to get there. Is this change one of the ones that is approved automatically? I seem to recall that it isn't in all cases.

How about the following? Keep the date 12/31 and consider the assets distributed to be still owned by the plan. The liabilities will be based on the actual benefits settled, plus an amount that represents the substantial owner's benefits that were not settled. If you have a credit balance coming into the year, and pro-rate the charges to reflect the 1/15/03 termination date, my guess is that minimum funding will approach zero faster than a good diff-E-Q.