automatic approval to move to the full yield curve for FT purposes

[ishi]

There has been a lot of talk recently about some plans switching to use the full yield curve for funding purposes to save PBGC premiums, and enjoying an automatic IRS approval to do so.  Is this really automatically approved for all plans/circumstances?  §1.430(h)(2)-1(b) indicates to use segment rates for the month containing the valuation date.  Alternately, under §1.430(h)(2)-1(e)(1) & (2) you can elect to use segment rates with up to a 4 month lookback.  Most plan I've seen use segment rates with a lookback. §1.430(h)(2)-1(e)(1) further indicates "Any election in this paragraph (e) may be adopted for a plan year without obtaining the consent of the Commissioner, but, once adopted, that election will apply for that plan year and all future plan years and may be changed only with the consent of the Commissioner."  So, it appears a plan that elected to use segment rates with a lookback does not get automatic approval to switch to the full yield curve under §1.430(h)(2)-1(e)(4).  What am I missing here?  Initially, I was always under the impression that you can have automatic approval to switch the full yield curve, but the analysis above seems to contradict that.  Thanks in advance!

[C. B. Zeller]

If the plan sponsor has not previously made an election to use the segment rates for a month other than the month containing the valuation date, then they may make an election to use the yield curve without IRS approval. Once they have made an election—either to use a lookback month, or to use the yield curve—that election can only be revoked or changed with IRS approval. See also rev. proc. 2017-57.

[ishi]

That is exactly my point.  There are numerous articles out there indicating you can switch to the full yield curve without getting IRS approval, but the vast majority of the plans I've seen have already elected to use segment rates with a lookback, and DO NOT get the "free" change to the full yield curve without approval.  Thank you for your quick reply!

[C. B. Zeller]

Your comment made me curious, as I almost never see plans with a lookback month election. I went and downloaded the 2021 schedule SB data set from EFAST and did a quick pivot table on the applicable month code.

The blanks are probably yield curve elections, I don't know how the other numbers got in there.

Anyway, it seems like an election to use the 4-month lookback is not entirely uncommon, which I suppose makes sense—the benefit of using a lookback month is that you can determine your funding liabilities earlier in the year, so why not go as early as possible? But still, use of the month containing the valuation date is the overwhelming popular favorite. And for those plans, they could switch to the yield curve without IRS approval.

[ishi]

Very interesting summary - thank you!   My experience is by-and-large limited to the plans at my firm.  

[Effen]

Our understanding is different.  The example seems to indicate that you can always change to full yield curve, although I admit, it doesn't mention the lookback

Example 1 – Plan liabilities are valued using the corporate bond yield curve for the 2016 plan year, the segment rates for the 2017 plan year, and the corporate bond yield curve for the 2018 plan year. The change from interest rates under the corporate bond yield curve for the 2016 plan year to the segment rates for the 2017 plan year is made through a revocation of an election to use the corporate bond yield curve, which requires the approval of the IRS, in accordance with § 430(h)(2)(D)(ii) and § 1.430(h)(2)-1(e). The change from segment rates to the corporate bond yield curve for the 2018 plan year is an election to use the corporate bond yield curve, which does not require the approval of the IRS, in accordance with § 430(h)(2)(D)(ii) and § 1.430(h)(2)-1(e).

[C. B. Zeller]

Good point. I think the difference is that an election to use the yield curve would also require a revocation of the prior election to use an alternate applicable month. It would have been nice if the IRS had addressed this in the rev proc, as it's not really clear either way.

[acm_acm]

Can't one use a different discounting method for the IRS versus PBGC purposes?  If so, the IRS has no say over the discounting method used for determining PBGC premiums, filings, etc.

[C. B. Zeller]

No. You have to use the same elections for all purposes.

From the 2023 premium filing instructions:

Quote

Alternative Premium Funding Target – This term describes the Premium Funding Target if the election described above is in effect. The Alternative Premium Funding Target is determined using the discount rates that would have been used to determine the ERISA section 303 funding target for the Premium Payment Year (or, for a plan using the Lookback Rule, the Lookback Year) if not for the Interest Rate Stabilization Rules. Thus, if an election is made under:

- ERISA section 303(h)(2)(D)(ii) to use the full yield curve instead of the three segment rates for purposes of determining the minimum required contribution, that same yield curve is used to determine the Alternative Premium Funding Target; or

- ERISA section 303(h)(2)(E) to use one of the four months preceding the valuation date as the “applicable month,” instead of the month containing the valuation date, for determining which month’s rates to use, that same month’s rates, determined without regard to the Interest Rate Stabilization Rules, are used to determine the Alternative Premium Funding Target.