Amort Base for change in funding method

[Gary]

A one participant plan uses the aggregate method in year one and switches to EAN in year two.

The dilemma is w/r/t the amort base.

Clearly if plan used EAN in year one then initial AL would have 29 yrs remaining in amort period.

By changing from aggregate to EAN in year 2, the UAL from the change in method is the only base and is amort over 10 yrs per rev proc 2000-40 for min funding and amort over 10 yrs for max tax. Thus no range.

A prior rev proc used 30 - x at time of change, thus in our case it would be 29 yrs, and allow for a meaningful disparity between min and max.

Therefore for eg. say participant entered plan at age 50 with NRA of 60. Under aggregate the PVFB is spread over 10 yrs and if plan used EAN the UAL spread over 30 for min and 10 for max.

So if Employer used aggregate in year 1 and wants to reduce costs in year two, it would seem reasonable to change to EAN and amort over 29 years, which would be the same path if used EAN in year 1 over 30 years.

See the dilemma?

Has anyone analyzed and resolved this situation?

Thank you.

Gary

[david rigby]

A few thoughts:

- Not sure what is the question, or what needs to be "resolved".

- Unless you have a credit balance, the min = max under Agg method anyway (except for possible unfunded current liability).

- Is this a plan with only one participant? If so, I wonder if EAN is a reasonable method for a participant with only 10 years until NRA.

- Having a range for flexibility is good, but there are other factors to consider, such as plan sponsor's funding policy, investment policy, demographics of entire group, ability to plan for regular cash contributions, etc.

[Effen]

Also, wouldn't the method change require IRS approval since you only used aggregate for 1 year?

[Blinky the 3-eyed Fish]

No, why do you think that?

[david rigby]

We may have discussed that before. But here is GrayBook Q&A 2002-14:

Method Change: Automatic Approval for Plan in Effect for Fewer than Five Years

Section 6.02(3) of Rev. Proc. 2000-40 denies automatic approval for any of the funding method changes listed in Section 3 of the Rev. Proc. if a change to the same aspect of the funding method occurred during any of the prior four plan years. May a plan that has been in effect for fewer than five years change funding methods pursuant to Section 3 of Rev. Proc. 2000-40?

RESPONSE

In general, yes. The initial adoption of a funding method upon the establishment of a plan does not count as a funding method change.

However, if the plan is a continuation of another plan that was created as a result of a non-de minimis spin-off, you must consider the funding method history of the predecessor plan in determining whether or not the four-year rule is satisfied. A plan that is created as a result of a de minimis spin-off is considered a newly established plan. See section 3.03 of Rev. Proc. 2000-41.

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