Comments on IRS Revenue
Procedure 99-45, Modifications to Revenue Procedure 95-51, Approval for Changing
the Funding Method Used to Determine the Minimum Funding Standard
May 18, 2000
Ms. Carol Gold
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, D.C. 20224
RE: Comments on IRS Revenue Procedure 99-45, Modifications to Revenue Procedure
95-51, Approval for Changing the Funding Method Used to Determine the Minimum
Funding Standard
Dear Ms. Gold:
ASPPA is a national organization of approximately 3,700 members who provide actuarial,
consulting, administrative, legal and other professional services for about
one-third of the qualified retirement plans in the United States, the majority
of which are maintained by small businesses. ASPPA's mission is to educate pension
actuaries, consultants, administrators and other benefits professionals and
to preserve and enhance the private retirement system as part of the development
of a cohesive and coherent national retirement income policy. Its large and
broad based membership gives it unusual insight into current practical problems
with ERISA and qualified retirement plans, with a particular focus on the issues
faced by smaller employers.
ASPPA is pleased at the issuance of Revenue Procedure 99-45 but concerned that
our earlier comments on Revenue Procedures 95-51 and 98-10 may not have been
adequately considered. We are also concerned with how IRS field actuaries seem
to have been interpreting Section 4.02 of Revenue Procedure 95-51 as required
changes rather than optional changes.
Revenue Procedure 99-45
Revenue Procedure 99-45 is short but positive. In our earlier comments we had
asked that automatic approval be granted to either predecessor plan's method
in a merger. Revenue Procedure 99-45 grants automatic approval in the case of
certain de minimis mergers and with conditions when not de minimis. ASPPA hopes
that, with experience, the Service will simplify the conditions, especially
opening the automatic approval to plans which use methods other than the limited
number of methods allowed under Section 3 of Revenue Procedure 95-51.
Additional Comments
We were encouraged by the initial issuance of Revenue Procedure 95-51, which
continued the practice of allowing certain automatic changes in funding method
as allowed previously by Revenue Procedures 79-50, 80-50, 91-29, and 85-29.
The ability to automatically change a plan's funding method not only reduces
the financial and administrative burden upon a plan sponsor but, also, reduces
the work burden upon the Service and the expense to taxpayers. The ability of
the plan administrator to choose an actuarial funding method, and then change
the method when necessary, is essential to the health of the voluntary private
pension system.
ASPPA was pleased with Revenue Procedure 85-29. We did not, and still do not,
understand the reasons for the major additional restrictions imposed by 95-51
and feel that 99-45 has done little to lessen these restrictions. The only examples
of abuse, which were offered by the Service, were instances, which violated
the requirements of Revenue Procedure 85-29 and existing regulations. Therefore,
rewriting the procedure to limit changes does not appear to have been necessary.
We have restated our earlier suggestions and expanded on certain of them in
light of, and as comment on, Revenue Procedures 98-10 and 99-45 and our experience
with them.
1. Section 3 - - Missing Funding Methods
Two widely used funding methods are missing from the list in Section 3 of Revenue
Procedure 95-51. Revenue Procedure 80-50, section 3.01(3), and Revenue Procedure
81-29, section 4.04, allowed the use of Aggregate and Frozen Initial Liability
(FIL) methods which spread future normal costs using tabular normal costs, over
either individual Entry Age Normal (EAN) normal costs or Individual Level Premium
(ILP) normal costs. (Revenue Procedure 85-29 allowed a change to these and any
other reasonable funding method.) These two methods are known as Tabular FIL
and Tabular Aggregate.
Inasmuch as the above two above methods are widely used and there have been
no reports of any abuses of these methods, we are perplexed as to why they continue
to be left out of the Revenue Procedures.
For smaller employers it is more important to budget the pension expense as
a fixed dollar amount, rather than an amount that is a fixed percentage of covered
payroll. This is especially true when the owner is close to retirement and the
rank-and-file employees are not. In such case to spread future normal costs
as a percentage of payroll can easily underfund the plan.
Since these are very stable and widely used methods, we ask that the Service
add them to the list in Section 3.
2. Section 3.08(3)(d) and 3.09(3)(c) -- Definition of Assumed Entry Age
The definition of assumed entry age under Section 3.08(3)(d) and 3.09(3)(c)
is too restrictive. What if the plan's funding method includes all employees,
rather than those who have already met the plan's eligibility requirements-
The actuarial valuation will produce erroneous results because these employees'
attained ages will be before their entry ages.
We think alternate definitions of "entry age" should be allowed as follows:
1. Age at the valuation following participant's actual entry date.
2. Age at the valuation following participant's entry date assuming the current
plan provisions were always in effect.
3. Age at the valuation following participant's hire date.
3. Section 3.13 -- Change in Valuation Date
Section 3.13 only grants approval for a change in the valuation date to the
first day of the plan year. We ask that a change to the last day of the plan
year be allowed.
4. Section 3.14 -- Change in Method for Valuing Ancillary Benefits
Section 3.14 grants approval to change the method used for valuing ancillary
benefits to the funding method used for valuing retirement benefits if the prior
method for valuing ancillary benefits had been the one-year term method. We
ask that the reverse be allowed, i.e. changing the method from the funding method
used for valuing retirement benefits to the one-year term method where permissible
by the regulation.
5. Section 4.02(1) - Special Approval to Remedy Negative Individual Aggregate
Normal Costs
Section 4.02(1) allows the reallocation of assets to avoid negative normal costs
for participants under Individual Aggregate. It has come to our attention that,
in at least one instance, the IRS field actuary has interpreted this section
to require that this Section 4.02(1) be used when there are negative normal
costs for one or more participants but an overall positive normal cost.
Our understanding is that the Revenue Procedure permits these changes in section
4.02 but does not require them. To require them would require a change in existing
regulations. We ask the IRS to clarify this issue.
It should also be understood that some varieties of FIL and Individual Aggregate
include appropriate procedures for dealing with negative normal costs or negative
unfunded liabilities.
6. Section 4.02(2) -- Special Approval to Remedy Negative FIL Normal Costs
Section 4.02(2) allows a reestablishment of the unfunded liability to avoid
the calculation of a negative normal cost. This is only permitted if the normal
cost under the plan's funding method is either determined as a level percentage
of compensation or as a level dollar amount. Assuming the same definition of
"level dollar amount" as used in Section 3.07, this would exclude the Tabular
FIL as described in our comment number 1. If so, then plans using Tabular FIL
would have no choice but to live with negative normal costs.
Assuming this result was not intended, we ask that the section be clarified
to allow the reestablishment of the unfunded liability as long as the funding
method meets the requirement of a reasonable method as defined by the regulations.
We also ask that the section be changed to allow a full amortization of the
amortization bases in addition to the option of re-establishing the bases.
7. Section 4.02(3) -- Special Approval for Fully Funded FIL or AAN Plans
This section permits a fully funded FIL or Attained Age Normal plan to switch
to the Aggregate method after the full funding limit applies. In many cases,
a subsequent amendment to the plan pulls the plan out of full funding. In such
situations, it may be preferable to set up a liability base as contemplated
by the method prior to the automatic change. The option of changing to the Frozen
Initial Liability or Attained Age Normal method with a zero fresh start base
should be permitted in these situations.
8. Section 4.03 -- Approval for Change in Funding Method for Fully Funding
Terminated Plans
Section 4.03 allows for a change to a form of unit credit with optional changes
in either valuation date to the plan termination date or first day of the plan
year or asset valuation method to value assets at fair market value. The main
condition for such change(s) is that as of the date of plan termination, the
fair market value of the assets of the plan (exclusive of contributions receivable)
is not less than the present value of all benefit liabilities (whether or not
vested).
We ask that this restriction be eliminated.
Even underfunded plans may need a funding method change in the year of plan
termination. If the valuation date currently is the last day of the plan year,
there will be no valuation date for the plan year prior to the ending date for
the minimum-funding requirement. This presents practical problems.
It is vital that all terminating plans be allowed to automatically change the
valuation date to either the first day of the plan year or the plan termination
date. It is the position of ASPPA that a plan sponsor terminating an underfunded
plan with a last day of the plan year valuation date should not be required
to bear the extra financial and administrative burden of filing for such a change
with the Service. Usually they are already paying the Service a user fee for
a final favorable determination letter. It would appear that absent any such
automatic approval, the enrolled actuary is allowed under existing regulations
to continue to use a last day of the year valuation date, even if such is after
the plan termination date, and to make any adaptations and assumptions which
he or she deem reasonable. For the Service to take a contrary position is the
same as taking the position that such plan sponsors are required by regulation
to file for a change in funding method in the year of plan termination and,
hence, required to pay the Service a user fee in addition to the one for the
final favorable determination letter.
Many plan sponsors seek to limit the final plan contribution to the amount needed
to make the plan sufficient. If this restriction is retained, a plan that is
marginally insufficient will be forced to either apply for a change in funding
method or be forced into making a larger contribution that may then be refunded
and subject to the reversion penalty. To address this problem, the Plan Termination
change to the unit credit method should be permitted where assets, including
all contributions for the current year that are required to meet the minimum
funding standards under Internal Revenue Code §412, are not less than the present
value of all benefit liabilities.
We ask that an underfunded terminating plan be able to change the funding method
if the required contribution is not decreased as a result of the change.
9. Section 4.04 -- Approval for Takeover Plans
We are pleased that the Service included a special rule for takeover plans in
Revenue Procedure 95-51 in recognition of the unknown differences that may exist
in methods that have similar descriptions. It appears that section 4.04 essentially
recognizes situations that are not changes in funding method due to de minimis
differences in methodology.
We are concerned with the apparent lack of relief where the new actuary is unable
to fit within the constraints of section 4.04, especially where the new actuary's
judgement calls for the use of an entirely different funding method. In such
situations the plan administrator should be permitted to use one of the methods
in section 3 without regard to the limits in section 6.02(3) (single change
every five years). The plan administrator's ability to make the best choices
for the plan, including the choice of actuary, should not be inhibited by the
penalty of the cost of a mandatory individual submission for what is viewed
as a "standard" funding method.
We are also concerned with the implication that the change in the enrolled actuary
and firm represents a change in funding method. The revenue procedure allows
approval of this "change" as long as it is de minimis rather than stating that
the de minimis difference is not a change in funding method at all. We submit
that the latter description is closer to the mark. We also submit that this
point should be clarified to apply to any change, even where there is not a
change in actuary or actuarial firm. In other words, if any change in enrolled
actuary, or the enrolled actuary's tools (such as software) can be shown to
fall within the 5% corridor of prior cost, then no change in funding method
has occurred.
10. Revenue Procedure 99-45 modified 98-10, which added a new section 4.05.
Our concerns with section 4.05 are:
a. The corridor, which has been set, is 2%, not 5%. 2% is much too small to
be of help to all but plans of large employers. A 2% corridor is essentially
the same as no corridor at all for a small plan.
b. In our opinion, if the change is within a corridor of 5%, it should not be
considered a change. We cannot over-emphasize the importance of this point.
Software firms are constantly making changes in their valuation software. If
such a change results in a difference of $1 in the net charges for a plan, and
the plan administrator doesn't make use of Section 4.05, then in the opinion
of the Service the enrolled actuary has violated the regulations and the law.
In many instances, the cost of finding and disclosing a 2% change in the net
charges may well exceed the actual change.
c. It is unreasonable to expect that the enrolled actuary will be able to run
all valuations for a year on both the old software and the new software so as
to be able to prove that the change in the net charges for all affected plans
are within the corridor. No actuarial or administrative firm can afford to run
their valuations on two different computer systems for a year to look for all
greater-than-2% differences.
d. There is substantial concern that enrolled actuaries may be unable to change
software when such a change is appropriate.
11. Section 6.01(4) -- Restriction if Plan is under an EP Examination
Section 6.01(4) prevents a plan from using the revenue procedure if the plan
is under an EP examination for any plan year or if there has been verbal or
written notification from EP/EO of an impending EP examination.
The fact that the plan is under examination for an earlier plan year or a later
plan year does not change the problems faced by the enrolled actuary in the
current plan year. What does a terminating plan do when a last day of the plan
year valuation doesn't make sense? What does a takeover actuary do when he cannot
duplicate the prior actuary's numbers exactly? What does a fully funded frozen
plan do to avoid an unnecessary but required contribution? Neither 95-51, 98-10,
nor 99-45 address these concerns.
Clearly what the plan sponsor must do is to shoulder the burden of additional
administrative expenses of filing for a funding method change with IRS Headquarters
office, with additional user fees payable to the IRS.
Consider the added problem of timing. What if the valuation has been run, the
contribution has been made, the plan sponsor has filed its tax return, but the
Schedule B has not yet been filed when the actuary finds out that an EP/EO audit
is scheduled? What if changing the funding method back to the prior method results
in a lower contribution? The plan sponsor has relied upon the automatic approval
process in claiming a tax deduction and now must face not only re-filing its
tax return but, moreover, penalties and interest solely because of a pending
audit which might be due to a completely random process.
We ask that this section be deleted.
12. Section 6.02(3) -- Four-Year Limitation on Changes
Prior Revenue Procedures had a three-year limitation. Unless the Service can
point out specific abuses, which would justify extending the limitation, we
ask that the limitation be changed back to a three-year limitation.
13. The Definition of Funding Method "Change"
Our final comment is that the very definition of what change constitutes a change
in the funding method has never been very clear. Some changes are obvious, such
as a change in asset valuation method. Others are not so clear, such as a change
in the assumed entry age.
Many assumptions and methods of calculation go into an actuarial valuation.
Over the years we have heard actuaries from the IRS Headquarters Office assert
that certain changes, such as a change in the computer valuation system, are
funding method changes. We do not think this is a change in funding method at
all.
ASPPA believes it is important that the authority of the Internal Revenue Service
to approve changes in actuarial funding methods not undermine the ERISA authority
granted to enrolled actuaries to choose actuarial assumptions. We believe that
the issue of what constitutes a change in funding method as opposed to a change
in actuarial assumptions needs to be discussed with and addressed. We believe
that what constitutes an unreasonable variation of an otherwise acceptable funding
method needs to be discussed. We suggest that the IRS discuss these issues with
the Actuarial Standards Board (ASB).
ASPPA has been very pleased with the recent, significant efforts of the Service
towards expanding programs of voluntary compliance. However, we believe that
the issuance of Revenue Procedures 95-51, 98-10, and 99-45 is inconsistent with
these efforts.
We recommend that the Service write rules regarding automatic changes in actuarial
funding method in accordance with the following criteria:
1. The definition of what is part of the funding method and what is an actuarial
assumption should be discussed with the Actuarial Standards Board (ASB) so that
there can be mutual agreement;
2. Any requirements should not impose unwarranted financial and administrative
burdens upon the voluntary sponsor of a qualified retirement plan;
3. Any requirements should minimize the work burden upon the Service and the
expense to taxpayers;
4. Perceived abuse by one plan sponsor in ten thousand should not unreasonably
restrict the rights of the others; and
5. Any requirements should reflect the real world limitations faced by enrolled
actuaries, pension administration firms, software vendors, and, most importantly,
voluntary sponsors of qualified retirement plans.
ASPPA would appreciate the opportunity to work with the Service in any way possible
to accomplish these goals. We suggest that the IRS meet with the actuarial profession
to develop workable regulations in this area.
These comments were written by Kurt F. Piper, Richard Block, Larry Deutsch,
Jeffrey Wadle, and George Taylor, and are filed on behalf of ASPPA's Government
Affairs Committee.
Sincerely,
Kurt F. Piper, MSPA, Chair, Regulations Committee
Brian H. Graff, Esq., ASPPA Executive Director
Bruce Ashton, APM, Co-Chair, ASPPA Govenmental Affairs Committee
Craig Hoffman, APM, Co-Chair, ASPPA Government Affairs Committee
R. Bradford Huss, APM, Co-Chair, ASPPA Governmental Affairs Committee
Theresa Lensander, CPC, QPA, Chair, ASPPA Administration Relations Committee
CC: Evelyn A. Petschek
Mark Iwry
Alan Tawshunsky
James E. Holland, Jr.
Martin Pippins