IRS Updates Revenue Procedures on DB Plan Funding Methods

By John Iekel • October 11, 2017 • 0 Comments
The IRS on Oct. 10 announced that it has issued two revenue procedures (Rev. Procs.) that update earlier revenue procedures that concern funding methods for pension plans. Rev. Proc. 2017-56 is effective for plan years commencing on or after Jan. 1, 2018; Rev. Proc. 2017-57 is effective for requests for a change in funding method submitted on or after Jan. 1, 2018. Both also may be applied for earlier plan years and requests. Both will be published in Internal Revenue Bulletin 2017-44 on Oct. 30, 2017.

Rev. Proc. 2017-56 provides automatic approval for certain changes in funding method used for single-employer defined benefit plans for calculations described under Code Section 430. It updates Rev. Proc. 2000-40 to take into account the provisions of Section 430.

Rev. Proc. 2017-57 sets forth the procedure for obtaining IRS approval of a change in the funding method used for a DB plan, as provided for by Code Section 412(d)(1) and Section 302(d)(1) of ERISA. It also sets forth the procedure for obtaining approval of the IRS to revoke an election relating to interest rates under Code Sections 430(h)(2)(D)(ii) or 430(h)(2)(E) and the corresponding sections of ERISA.

Rev. Proc. 2017-56

This revenue procedure provides automatic approval for:

  • three asset valuation method changes;

  • automatic approval for two valuation date changes;

  • automatic approval for one type of change in the treatment of benefits funded through insurance contracts;

  • a change in funding method in special situations in which there is a change in the plan’s actuary, actuarial software or the data elements used in the actuarial valuation, and for fully funded terminating plans; and

  • a change in funding method in connection with a plan merger.

The application of a funding method approved under Rev. Proc. 2017-56 must conform to all of the requirements of the regulations under Code Section 430. For example, the funding method must comply with the requirements for the determination of target normal cost and funding target, as required under Treas. Reg. §1.430(d)-1. Similarly, in accordance with Treas. Reg. §1.430(a)-1(c)(2), the difference in the funding shortfall attributable to the change in funding method is used, in conjunction with the present value of existing amortization installments, to determine the shortfall amortization base for the year of the change.

The IRS cautions taxpayers, plan administrators and enrolled actuaries that there are restrictions on use of automatic approval under this revenue procedure and to consider the specific restrictions regarding each of the approvals.

Rev. Proc. 2017-57

This revenue procedure applies to any DB plan that is subject to Code Section 412 or Section 302 of ERISA. Both require IRS approval of any change in funding method. Code Section 433(c)(5)(B) and Section 306(c)(5)(B) of ERISA also require IRS approval of a change of funding method for a CSEC plan. Thus, Rev. Proc. 2017-57 applies for purposes of all of those sections. This revenue procedure also provides for approval of the revocation of an election relating to interest rates under Code Sections 430(h)(2)(D)(ii) or 430(h)(2)(E) and Sections 303(h)(2)(D)(ii) or 303(h)(2)(E) of ERISA.

Rev. Proc. 2017-57 provides that approval will be given to a change in funding method only if the proposed method is permitted under applicable funding rules and the transition to the proposed method is acceptable. In addition, a change in funding method that has a significant effect on a plan’s minimum required contribution, maximum tax deductible contribution, operations under Code Section 436 for the year of change, or status under Code Section 432(b) (in the case of a multiemployer plan) may be reviewed to assess the appropriateness of the change in light of that effect.

Rev. Proc. 2017-57 also does the following:

Sets procedures
for requests for approval of changes in funding methods.

States that in cases in which approval is sought for a change in funding method for a group of plans, a class ruling providing approval of that change may be requested, and provides guidelines for how that may be accomplished.

Sets guidelines for how plan sponsors of a plan subject to Code Section 430 or their authorized representatives may request approval for revocation of an interest rate election.