Unit Credit Funding In the Year of Plan Termination

[Guest merlin]

A calendar year plan is funded on the tradional unit credit method. Benefits are frozen at 6/30. All participants have 1000 hours, so have earned a full accrual for the year. For 412 purposes is the TUC NC still subject to proration for 6 months as per RR 79-237 due to the plan termination, even though all participants have accrued the full year's benefit?

[Andy the Actuary]

The attached Rev. Rule 77-2 is clear about this situation. It does not say use common sense and act in a reasonable manner.

It simply states that if the freeze amendment is adopted as of the valuation date, you must prorate costs and if the freeze amendment is adopted after the valuation date, you may prorate costs or optionally defer recognition until the subsequent Plan Year.

IRS_Rev._Rul._77_2.PDF

[Guest merlin]

Andy, I've always considered 77-2 as being applicable to ongoing plans, and 79-237 to terminating plans. Maybe the distinction is wrong, but in either instance it seems that the answer I'm getting from the valuation software answer of an unprorated cost is incorrect. Do you agree?

[SoCalActuary]

Pro-ration makes sense if mid-year termination means that full accrual did not occur. Otherwise, it is an example of a regulation that just gets it wrong. The only advantage of pro-ration in your situation is that you can understate the true cost of the benefits earned and either get a lower required contribution or a larger FSA credit balance.

[Mike Preston]

Whether it makes sense or not is not the issue. The question is what is the minimum funding requirement that the actuary will be certifying to. Andy had it right. What is the valuation date? If it is EOY, it doesn't look like you have much choice. If it is BOY, what do you want it to be?

[Penman2006]

And if it is an EOY val date, if you have a fully funded plan, you can switch to a BOY val in the year of termination per 2000-40. So you can give yourself the choice as noted in the prior post.