Demise of IRS 77-2

[Andy the Actuary]

In perusing the IRS's (near) New Year's Eve present of a 74 page proposed reg, we note with sadness the demise of IRS Rev. Rule 77-2.

Am I to understand correctly that if say in January '08 we decide to freeze a calendar year plan (that contains the 1,000 hour service rule) effective March 1, we must recognize a full TNC in the funding equation? In such case, such result -- at least in theory -- could force a plan to become overfunded. In short, if you want to freeze a Plan and pay a reduced fare, you now have to have an amendment adopted (sounds like that means signed) by the valuation date, which will in most cases be the first day of the plan year.

[david rigby]

For easy reference, you can read Rev. Ruling 77-2 here: http://www.taxlinks.com/

This is the proposed regulation in the 12/31/07 Federal Register:

http://a257.g.akamaitech.net/7/257/2422/01...df/E7-25125.pdf

See page 74218.

Andy raises a good point in his second paragraph. Perhaps he will submit that comment to the IRS (after all, it is a proposed reg).

[Andy the Actuary]

David, thank you. I had intended to include this in the letter I will send. It will also address the possibility for small plans of excluding pre-retirement decrements as well as proposing a single interest rate alternative (e.g., the lessest of the three segment rates). It simply does not make sense to impose PPA's overhead on small plans.

I urge practitioners of small plans to respond to the proposed regs. Whether or not they choose to act, the IRS needs to hear about pain and suffering that truly doesn't make a result any "better" -- it's still an estimate.

Thanks for your comment and Happy New Year.

andy T.A.

[ak2ary]

I must be missing something....

The proposed regs say that you cannot recognize an amendment adopted after the valuation date for determining the funding target or target normal cost. They also say that 412(d)(2) {the PPA nomenclature for 412©(8)} controls the date that the amendmemt is deemed adopted. So an amendment adopted upto 2.5 months after the end of the plan year could be considered adopted as of January 1.

So assuming the employer makes a 412©(8)/412(d)(2) election; the amendment will be an amendment effective during the plan year adopted no later than the valuation date for the plan year and clearly would be taken into account.

In your case then, since I assume no one is expected to get 1000 hours before the freeze date, you will have a zero target NC

I have heard several people give the same opinion as you have on this issue, so I wonder what I am missing

[ak2ary]

On the issue of using a single interest rate, I agree that the whole PPA valuation scheme is silly for small plans. Having said that, the determination of the funding target using the segment rates is statutory and I would imagine that, assuming the IRS agrees that its silly, they still would say they have no authority to directly contradict the statute

[Andy the Actuary]

Mr. Ak2ary:

The erstwhile IRC 412©(8)© provides that the retroactive amendment "does not reduce the accrued benefit of any participant determined as of the time of adoption." 412©(8) also says the retroactive amendment is "deemed to have been made on the first day of the plan year." It does not (unless I am misreading) say that it is deemed adopted as of the first day of the plan year. So, do you interpret "deemed to have been made" as "effective" or "adopted?" Do the words "time of adoption" pertain to when the amendment is signed or the effective date of the amendment? Perhaps, these ambiguities are the source of contention overwhich a dichotomy of opinion arises.

Agree wholeheartedly with your conclusion that the IRS may not modify the statute regarding using a single interest rate. Nonetheless, you will find that the 1983 IRS 415 Regs. contravened the statutory definition of high three average compensation, so there is a precedent.

Happy New Year,

andy T.A.

[ak2ary]

Except as provided in section 412(d)(2), the determination of a plan's funding target and target normal cost for a plan year is based on plan provisions that are adopted no later than the valuation date and that become effective during the plan year. Section 412(d)(2) applies for purposes of determining whether a plan amendment is treated as having been adopted on the first day of the plan year (including a plan amendment adopted within 2 1/2 months after the close of the plan year)

That's the whole proposed reg section. To me, and I could be wrong, its telling us to look at the "date deemed to have been made" as the date deemed adopted, otherwise it ridiculous to include the sentence.

No amendment reduces the the acccrued benefit as of the date actually made because it would violate 411(d)(6). So you could freeze benefit acruals as of December 1, 2009, deem the amendment to have been adopted as of 1/1/2009.....still the amendment would allow benefit accruals thru 12/1 but could be recognized on the 1/1/09 val

I am not saying that the IRS never oversteps its authority, it just in the last couple years has used the, we dont have authority sentence as its reason for not doing things regulatorily more and more often

[Andy the Actuary]

UPDATE

I have recently worked through this issue with a benefits attorney. He believes that the preamble to the December proposed regulations in conjuction with the old 412©(8) make no sense. In particular, 412©(8) speaks of an amendment after the close of the plan year and effectively all the cited rev ruling did was state what you couldn't do -- cut back accrued benefits. As I review all of this gobbleygook in light of the 5500 instructions, I never (and perhaps I was wrong) checked the 412©(8) box on Schedule R nor attached the required employer statement when an amendment was made during the year. He simply believes there was (perhaps the unwritten) position of the IRS that you could amend the plan in mid year. Further, he is convinced that the proposed regulation was talking about benefit increases, and not benefit decreases. As such, we get to not recognizing in the TNC benefits earned after the freeze date. This attorney is from a national law firm and is of long-time local renown and respect.

Besides, his position makes total sense and he is willing to defend it should that need arise.