IRS Rev. Proc. 2000-42

[Andy the Actuary]

This lovely pre-PPA Rev. Proc. outlined funding method changes that were granted automatic approval. In particular, a plan that was using an average asset valuation method could change to fair market value providde the average method had been used for the preceding 4 plan years. I'm unable to determine that 2000-42 was revoked or superseded or on the other hand locate any guidance that it does indeed continue to apply..

Any thoughts on this subject would be appreciated because a client could (at least he believes) benefit from changing to FMV but only if the IRS approval process can be avoided.

[My 2 cents]

With the possible exception of changing from the use of three-tiered segment rates to the full yield curve and (I think) if using three-tiered segment rates, changing from basing them on the valuation date month to a lookback, I don't think that the IRS has offered any opportunities to change funding methods without obtaining approval. Example: July to June plan year is changed by amendment (is there another way?) to calendar year plan year. To go from a July 1 valuation date to a January 1 valuation date requires an application to change methods (at least per Gray Book).

Note that if there were to be an application to change from averaged assets to market value, the IRS would probably not consider "we think that we would have a higher asset value with market value" to be a legitimate reason for the change. The argument would probably have to be framed in terms of market value providing a greater degree of transparency or something of that sort.

[Andy the Actuary]

Thank you, although we will have to thumb-wrestle over your conjecture of the IRS thoughtfulness. What justification was given for the date September 1, 2005 in grandfathering frozen plans in the 436 regs.?

[david rigby]

(I think the references above to Rev Proc 2000-42 should be Rev Proc 2000-40.)

Gray Book Q&A 2012-5 starts with this statement,
"Revenue Procedure 2000-40, which provides for automatic approval of certain funding method changes, no longer applies to single-employer pension plans covered by the PPA funding rules."
Note that this is part of the question, not part of the answer. What is the origin of this statement?

Gray Book Q&A 2012-14 includes (as part of the answer):
"Since Rev. Proc. 2000-40 no longer applies to single-employer plans subject to PPA, funding method changes generally require explicit IRS approval (with the few limited exceptions provided by Announcement 2010-3 relating to a change in valuation software or a change in the enrolled actuary)."
IMHO, this statement is not supported by the 2009 regulation or Announcement 2010-3.

Perhaps I've overlooked something. Has there been any formal statement that Rev. Proc. 2000-40 (or any particular part) is not applicable? It's easy to compare PPA and reach the conclusion that certain sections cannot apply since they violate the current statute (for example, sections 3.02 thru 3.09). Does it follow automatically that 3.10 is not valid? or 3.13?

Not trying to be contrary, just pointing out that explicit statements are the most useful ones.

[Andy the Actuary]

David, thank you. I just added the 2 to 40 to come up with 42 and get a number that was divisible by 7!

I have reminded my client that he adopted averaging owing to the investment downturn of 2008 when the plan investment slost 24%. Even if we could adopt FMV automatically, the client might not appreciate the result should assets again lose 24%.

[tymesup]

Quoting myself from another thread:

One can argue that Rev-Proc 2000-40 still applies. It has not been formally superseded.

Announcement 2010-3 mentions the Rev-Proc, specifically saying it has not been updated to reflect the changes made by PPA '06. It does not, however, say the Rev-Proc is defunct.

The Gray Books are not binding. Neither are statements from David Ziegler.

Heck, one could claim the reason that the Rev-Proc hasn't been updated is that it doesn't need to be.

**

However, the consensus here and at ACOPA is we don't have approval. Why take the risk of a change, unless there's a compelling reason to do so?