Plan amendment after beginning of year valuation date - can I take freeze of accruals into account

[Guest saeissler]

A DB plan was amended during the current plan year to freeze accruals, before any benefits accrued during the plan year. I want to take into account this amendment when doing the beginning of the year valuation for this plan year. I don't want to go the 412©(8) route which requires applying to the DOL. Can I take into account this amendment?

[david rigby]

From your first statement, it appears that 412©(8) does not apply. So, the answer is Yes. However, if there is an audit involved, prudence may indicate advance communication with the auditor.

[Blinky the 3-eyed Fish]

Recognizing a 412©(8) amendment does not require applying to the DOL. Where did you get that? Anyway, 412©(8) also doesn't apply because the amendment is not after the end of the year. As for recognizing the amendment, check Rev. Rul. 77-2 for help.

[Guest saeissler]

412©(8) "No amendment described in this paragraph which reduces the accrued benefits of any partiicpant shall take effect unless the plan administrator files a notice with the Secretary of Labor notifying him....." That's where I got that.

I also had looked for Rev Rul 77-2 before with no luck so I assumed that it had been superceded. But I will search for it again. Thanks!

[Guest saeissler]

Per Rev Rul 77-2, which I finally located, I cannot take into account an amendment that is adopted after the valuation date, but I can take into account an amendment that is adopted before the valuation date but effective during the plan year after the valuation date.

[david rigby]

IRC 412©(8) begins:

Certain retroactive plan amendments

For purposes of this section, any amendment applying to a plan year which -

(A) is adopted after the close of such plan year but no later than 2 and one-half months after the close of the plan year (or, in the case of a multiemployer plan, no later than 2 years after the close of such plan year),

The orginal post declared the amendment to be adoped during the current year. Therefore, ©(8) does not apply.

Your synopsis of Rev. Rul 77-2 is not quite correct, but close. Also, take note of section 3.

[Effen]

Also take note of Q/A 2 of the 97 Grey book.

[Guest saeissler]

Is there any way to get access to the 1997 Gray Book Q/A 2?

[david rigby]

Here is Gray Book 97-2:

Funding: Recognition of Mid-year Changes in Benefit Structure

A collectively bargained plan with a calendar plan year provides a benefit of $20 per month per year of service. Under the collectively bargained agreement adopted on 5/1/97, the benefit level will increase to $21 per month per year of service on 7/1/97, $22 on 7/1/98, and $23 on 7/1/99. What benefit level should be used for the normal cost and actuarial accrued liability for determining the minimum funding requirements under the regular FSA for the 1/1/97 and 1/1/98 valuations? What benefit level should be used for the various current liability calculations under 412(l) for those valuations?

RESPONSE

ERISA (Regular FSA) Normal Cost and Accrued Liability:

Code section 412©(12) requires that the ultimate ($23) benefit level be used to calculate the normal cost and actuarial accrued liability for the regular FSA for everyone projected to terminate after 7/1/99. Because the plan amendment providing that benefit level was adopted after the 1/1/97 valuation date, Rev. Rul. 77-2 permits the actuary to ignore this plan amendment for the 1997 valuation and instead to use the benefit level in effect prior to the amendment ($20).

For the 1/1/98 valuation the $23 benefit level will be recognized for everyone projected to terminate after 7/1/99.

Current Liability:

The statutory definition of current liability is based on plan provisions as of the beginning of the plan year, although some current liability values (e.g., the 150% current liability full funding limit and the 100% current liability deduction limit) involve projection with the year's current liability normal cost. While the IRS has not defined the impact of a mid-year plan change on all of the current liability calculations, three approaches were described as potentially reasonable:

(1)The first approach would be to calculate current liability for the year based on the plan provisions as of the beginning of the plan year and to determine the current liability normal cost (i.e., the value of the benefits earned on account of the amount of additional service during the year) as the weighted average of the amounts based on plan provisions before and after amendment based on the period in the plan year during which each benefit structure was in effect. Under this approach, the current liability would be based on the 1/1/97 benefit level ($20) for the 1997 plan year and on the 1/1/98 benefit level ($21) for the 1998 plan year and the current liability normal cost would be based on the prorated benefit levels of $20.50 for 1997 and $21.50 for 1998.

(2)The second approach would be for the employer to take the 412©(8) election on Form 5500, advancing recognition of the benefit level in effect at the end of the plan year. Under this approach, all current liability calculations (including current liability normal cost) would be based on the 12/31/97 benefit level ($21) for the 1997 plan year and on the 12/31/98 benefit level ($22) for the 1998 plan year.

(3)The third approach would be to base the current liability calculations on the benefit level in effect as of the beginning of the plan year, but to include the full impact of the mid-year plan amendment (including its effect, if any, on service in prior plan years) in the current liability normal cost. Under this approach, the 1997 valuation would start with a 1/1/97 current liability at the $20 benefit level, but projections using the 1997 current liability normal cost would end with a 12/31/97 current liability at the $21 benefit level. Similarly, the 1998 valuation would start with a 1/1/98 current liability at the $21 benefit level, but projections using the 1998 current liability normal cost would end with a 12/31/98 current liability at the $22 benefit level. Since the full effect of the mid-year plan amendment is included with the current liability normal cost under this approach, the additional funding charge is likely to be larger under this third approach than under the first two approaches.

Copyright © 1997, Enrolled Actuaries Meeting

All rights reserved by Enrolled Actuaries Meeting. Permission is granted to print or otherwise reproduce a limited number of copies of the material on the diskette for personal, internal, classroom, or other instructional use, on the condition that the foregoing copyright notice is used so as to give reasonable notice of the copyright of the Enrolled Actuaries Meeting. This consent for free limited copying without prior consent of the Enrolled Actuaries Meeting does not extend to making copies for general distribution, for advertising or promotional purposes, for inclusion in new collective works, or for sale or resale.

[Guest saeissler]

Thanks very much for your help!

[Guest embeem]

Several posters (Blinky & pax) previously stated that 412©(8) would not apply because the amendment was adopted during (rather than after) the plan year.

The language in the statute clearly includes the words "after the close of such plan year".

However, I found the following excerpt from IRS Notice 2004-59:

"Section 412©(8) provides that any amendment applying to a plan year that is adopted after the close of the plan year but no later than 21/2 months after the close of the plan year and that does not reduce the accrued benefit of any participant determined as of the beginning of the first plan year to which the amendment relates shall, at the election of the plan administrator, be deemed to have been made on the first day of such plan year (subject to additional restrictions on plan amendments that reduce benefits). Pursuant to Rev. Proc. 94-42, 1994-1 C.B. 717 and Rev. Rul. 79-325, 1979-2 C.B. 190, § 412©(8) also applies to plan amendments adopted during the plan year to which the amendment relates."

This last sentence makes me think that the Service has a different interpretation.

Also, response 2 from Q&A 2 from the 1997 seems to imply that an amendment during the year could qualify for 412©(8) treatment.

I'd appreciate hearing comments.

[AndyH]

Hey board regulars, that was (finally) my friend embeem's first post. How about a Welcome. We can use some new viewpoints and his is second to none IMHO.

[Guest ritchie]

Welcome aboard Mr. Embeem. Are you in construction?