OBRA FFL Bases an Aggregate Method - HOT NEWS

[Guest]

Just returned from the EA meetings and they made it clear that all OBRA FFL Bases in a funding method which does not produce amortization bases (ie:aggregate) should be wipe out and no new bases created. This can be done for either the 1999 or 2000 valuation.

There was some discussion regarding an FIL w/ a zero unfunded and most people agreed that it would also apply, since the Regs state you must change to aggregate in this case.

[mwyatt]

Thanks for the info. Now, I've done a bunch of BOY 1999 valuations using Individual Aggregate where, based on the best information available at that time, we maintained prior amortization bases but redid the payment over 20 years - # years amortized through EOY 1998. Clients have contributed and deducted on this basis. Is the IRS going to have us redo these valuations or can we get rid of these bases with the 2000 valuation year?

Also, I went back in time on the Board because I remember this issue being discussed early last year. Here is a quote from Pax's response:

pax

Contributor

Posts: 381

From:NC

Registered: Oct 98

posted 01-29-1999 05:43 PM

--------------------------------------------------------------------------------

No problem.

I spoke to Rowland Cross of the IRS yesterday and asked this question. He stated that since the referenced comment is not in the Code, it will not be applied as a statutory exception to the requirement to establish a base. Therefore, the continued use of the base, and its switch from 10-year to 20-year amortization, is required even for aggregate method.

He did seem to be open to other possibilities, but was not planning on taking a poll at the EA meeting, for example. If you have an opinion, he was interested in hearing from you.

My opinion is that for larger plans, it (using a 20-year amortization vs. having no base) won't make much difference in the resulting contribution, but that it could in smaller plans, especially if funded with the IA method.

[This message has been edited by pax (edited 01-29-99).]

Looks like the IRS has switched their thinking...

[This message has been edited by mwyatt (edited 03-30-2000).]

[Guest]

They said that the change can be made in either 1999 or 2000 and that you should NOT redo any prior (pre 1999) valuations.

Also, regarding the FIL w/ O UAL, the more I discuss it I think it comes down to - how did you get to 0 UAL. If it was due to EAN FFL, then your probably still FIL and should not wipe out OBRA bases, but if you were force to switch from FIL to aggregate due to an unreasonble result (ie: Negitive NC or UAL) then you probably are aggregate and should wipe them out. Anyone else have any ideas?

Also, regarding the IRS switching position, I believe they also switched on the benefits to be paid to those beyond age 70 1/2. I am quite sure they said previously that the participants should be given BOTH the age and service AND the actuarial equivelant. Q/A - 34 of the Gray Book states "It is not necessary to provide more than the greater of the actuarially increased benefit or the benefit with additional accruals"

I think this is also a direct flip!

[david rigby]

I'm a bit rusty on this, but I think that if you have FIL and get a zero UAL, then you have more than one choice:

1. switch to Agg.,

2. switch to any other method that is valid,

3. fresh-start the UAL under the EA method (this is equivalent to switching from FIL to FIL).

I don't think you are *required* to switch to Agg. method.

[Chester]

We have already performed many 1/1/2000 valuations for our calendar year plans using FFL bases. I would imagine the IRS would allow us on a "good faith compliance" basis to wait until 2001 to get rid of the bases for these plans, especially since nothing has actually been put in writing yet. Was this discussed at all?

[Guest]

Pax: Near the end of PLR 9146005 it states "if the unfunded liability is negative under the entry age normal method, then the aggregate funding method must be used". I don't know if there is a better site, but I think what this means is that if your UAL or NC goes negitive, then you must switch to Aggregate.

I'm not 100% sure that you can't use another reasonable method.

Chester: It was just mentioned during the final general session of the conference. I don't know if it was discussed in more detail during another session, but they were clear that it was a 1999 or 2000 clarification. They didn't say anything about 2001. I would hope that there is some sort of formal notice.

[david rigby]

Well, my guess is that the quote from that PLR is taken out of context.

See Rev.Rul. 95-51, esp Sec. 4.02(2) for references to an Unfunded becoming negative. Note that it states "approval is granted". Thus no specific method is required, just that a change of some type must be made to avoid an unreasonable funding method.

[Guest Steve C]

Chester,

Revenue Ruling 2000-20, dated today (3/31), addresses the issue in Q&A format. The guidance is effective with the 1999 plan year, although a special transition rule allows you to defer to the 2000 year. It doesn't appear that you can wait until 2001.

You can find the Rev Rul at this address:

http://ftp.fedworld.gov/pub/irs-drop/rr-00-20.pdf

[Chester]

Thanks for the info Steve. Not exactly the news I was hoping for. Why couldn't the IRS have released this prior to the beginning of the 2000 plan year--certainly they must realize that some of us practitioners start performing valuations right away in the first quarter of the new year? I thought this was a kinder, friendlier IRS (HA!). They should really make some of those pinheads like Jim Holland work in the real world for a while, so they can experience firsthand some of our frustrations at the lack of guidance (or in this case, changes in IRS thinking). Oh well, c'est la vie!

[mwyatt]

Here, here, Chester!

This is especially frustrating as the Conference Committee report stated that these bases would go away for spread gain methods, but on the basis of Rowland Cross's response (see above) when questioned directly on this point, I (and I assume several other readers of this Message Board) maintained these bases. One point to consider is the allocation of assets for 412 purposes if using the Individual Aggregate cost method in 2000. The normal costs may go up/down (who knows) as assets have been allocated @ 1/1/99 including the value of outstanding bases as an "asset" for 412 purposes. Now these bases go away so the 412 Normal Cost in 2000 will be determined on possibly huge "losses" in assets due elimination of CL bases. Anyone's thoughts on this point (reallocate in accordance with 404 allocated assets per chance?).