Change in Plan Year-Is this a change in the valuation date/funding method?

[AndyH]

Plan effective 10/1/2000 and had a short year 10/1/2000-12/31/2000. The valuation date was 10/1/2000.

The second plan year was calendar 2001. The valuation date used was 1/1/2001 and the Schedule B reported a change in valuation date/funding method subject to automatic approval under RP 2000-40.

Now the plan year has again changed to a 4/1-3/31 year causing a plan year of 4/1/2004-3/31/2005, thus making a valuation date of 4/1 desirable.

Is this a change in valuation date/funding method? Do we have to file for approval since the 4 year period has not passed?

Note that at no time was a change from a date other than the first day of the plan year used, so no change was made to the first day of a plan year.

Help please. Thanks.

[mwyatt]

Hey Andy:

This is indeed a change in funding method, and you unfortunately fall within the 4-year window (1/1/04, 1/1/03, 1/1/02, 1/1/01 - Change). Looks like you will need to file for IRS approval.

[AndyH]

Thanks, Mike. Wishful thinking I suppose.

[david rigby]

Be careful. Did you change the plan year properly? I believe that the appropriate amendment must have been adopted by March 31, 2004.

[AndyH]

Yeah, it's the valuation that is behind.

[Blinky the 3-eyed Fish]

This is indeed a change in funding method, and you unfortunately fall within the 4-year window (1/1/04, 1/1/03, 1/1/02, 1/1/01 - Change). Looks like you will need to file for IRS approval.

I was wondering if you could elaborate as to why you feel this way? I guess it boils down to your thought that a change in valuation date due to a change in plan year is indeed a funding method change. But then what of an end of the year valuation in the year of distribution when the assets are paid out during the year sometime? The last day of the plan year is altered. No automatic approval is available, so how is this different?

Just curious.

[mwyatt]

Well, I'm home with the flu, but if you look at 2000-40, I believe Sec 6.02 or .03 details this specifically. There was a change in the valuation method @ 1/1/2001; doesn't make a tremendous amount of sense since you're only conforming to a change in the plan year, but there you go. Now this Plan is changing the valuation date effective 4/1/2004 to conform with the new plan year. Preceding valuations: 1/1/2004, 1/1/2003, 1/1/2002, and 1/1/2001, which had a change in plan year. Hence you can't rely on automatic approval under 2000-40 but must file with the IRS. And yes, the IRS does count a change in the valuation date due to a change in plan year as a funding method change. Not saying that it makes alot of sense, but pretty clear from 2000-40 what the IRS's position is here.

[Blinky the 3-eyed Fish]

Sorry about your health status. I am not questioning the 4-year rule. That I agree on. What I am questioning is the statement that "..the IRS does count a change in the valuation date due to a change in plan year as a funding method change". Can you elaborate on this? I certainly don't see it in 2000-40. I honestly have never had to consider this question, so I am just looking for some backup. Logically, I would disagree that a plan year change could cause a funding method change for the reasons I stated in my first post and because I don't believe the valuation date to be crux of the funding method but rather the date within the plan year.

[mwyatt]

Hey Blink:

I agree with your analysis that this is somewhat ludicrous. However, in Andy's case where the initial year was a short year, the change in beginning of year from year 1 to year 2 constitutes a change in valuation date. Does that make alot of sense, since the valuation date still stays at the beginning of the plan year? No, but the IRS is pretty clear in 2000-40 that this is a change in the Funding Method.

Hence the change again in '04 is a change in the valuation date. Is the IRS going to bust Andy's chops over this submission? Probably not, but it is clear from 2000-40 that his circumstance falls outside of automatic approval.

PS will look through past Gray Books tomorrow - I know that this issue was addressed. Looked at 2000-40 and 95-51 tonight via Checkpoint and no this isn't entirely clear from respective 3.13 of each.

[AndyH]

I do appreciate the help gentlemen. I don't see this being specifically addressed in 2000-40, but my knowledge is limited in this area. And a couple of my associates are unsure as yet, thus my post.

I suspect that the answer as to whether a change from one day to another when both are the FDOPY pre-dates 2000-40.

[mwyatt]

Hey Blink, here you go from Rev. Proc. 2000-41:

Section 3. Scope and Definition

.02. Any change in a plan's current method of computing the minimum funding requirement under section 412 of the Code or section 302 of ERISA is a change in funding method (see section 1.412©(1)- 1(b) of the Income Tax Regulations). The following are examples of a change in funding method:

...

Example 5 — The valuation date for the plan is the date that is the first day of the plan year. The plan year is changed, and the valuation date is changed to the date that is the first day of the new plan year. This is a change in funding method.

...

[Blinky the 3-eyed Fish]

Ah, there it is and right on point. Thanks and good job.

[AndyH]

Thanks again gentlemen and marine life. That's a Bingo.

[Earl]

Follow up to this:

The fee for this "funding method change" filing is $2,800 starting next week? Am I reading this correctly?

Thanks

[mwyatt]

Unfortunately so. What I think is a real kick in the pants (and will certainly lead to a falloff of termination DLs) is the increase from $225 to $1000 for 5310 apps, regardless of the size of plans.

[SoCalActuary]

Jim Holland was asked this question on Jan 25 at the LA Benefits Conference.

He affirmed that it is a second change in funding method, requiring the user fee for approval. But if you get the request postmarked by Jan. 31, you get the old rate.

Determination letter requests have until June 30 on the old rates, because they are "on a different program" to quote Holland.