Automatic approval for change in funding method for takeover plans (single-employer defined benefit plans)


Single-employer DB plans subject to Internal Revenue Code Section 430 may be eligible for automatic approval of a change in funding method due to a change in the plan’s enrolled actuary and the business organization that provides actuarial services (takeover plans). This automatic approval is available for plan years beginning on or after January 1, 2013, for plans that meet the conditions outlined in Announcement 2015-3.

This is an expansion of the automatic approval opportunities previously available to single-employer DB plans under Announcement 2010-3.

Conditions for automatic approval under Announcement 2015-3

When a new actuary takes over a plan, he or she is likely to calculate slightly different valuation results than the prior actuary, due to differences in valuation software, techniques, etc., even if the new actuary is otherwise using the same funding method and assumptions. These differences are generally small, but they constitute a change in funding method. Announcement 2015-3 permits automatic approval for this change in funding method if it meets certain conditions:

  • Both the enrolled actuary and the business organization providing actuarial services for the plan are changed.
  • The new actuary uses different valuation software, or otherwise applies the same funding method used by the prior actuary in a different way to determine the funding target, target normal cost and actuarial value of assets.
  • The new actuary’s calculations for the prior plan year are within 5% of the prior actuary’s calculations (using the prior actuary’s assumptions) reported in the prior plan year’s Schedule SB or actuarial report for the:
    • funding target,
    • target normal cost (without taking into account adjustments for employee contributions and plan-related expenses), and
    • actuarial value of plan assets.
  • The new actuary uses a funding method to determine the funding target, target normal cost, and actuarial value of assets that is substantially the same as that used by the prior enrolled actuary and consistent with the description of the method contained in the prior plan year’s Schedule SB.

Alternatively, the new actuary may use the current plan year to compare the funding target, target normal cost, and actuarial value of assets as long as the prior actuary has issued an actuarial report that includes those results or has provided the new actuary with a signed Schedule SB for the current plan year. However, the new actuary cannot revise a signed Schedule SB unless a revision would be permitted under existing rules.

See Announcement 2015-3 for additional details.

Scope of automatic approval

If the plan qualifies for automatic approval, the new enrolled actuary is permitted to use new actuarial assumptions and a new funding method for the current plan year only if those changes are permitted under the generally applicable requirements of IRC Sections 430(h) and 412(d)(1). For example, Announcement 2015-3 doesn’t provide automatic approval for a change in valuation date or asset valuation method.

Expansion of prior automatic approval opportunities

This announcement expands the automatic approval in Announcement 2010-3 by allowing the new actuary to:

  • perform the 5% comparison for the year in which the takeover occurs (instead of requiring that the new actuary compare the results for the prior year), and
  • use a signed actuarial valuation report issued by the prior enrolled actuary for the plan (instead of requiring the comparison to be made based on the plan’s Schedule SB).

One area in which this will be particularly helpful is in connection with the change in interest rates used for minimum funding purposes under the Highway and Transportation Funding Act of 2014 (HATFA). Under HATFA, a plan sponsor is allowed to use the HATFA interest rates retroactively for the 2013 plan year, even if the 2013 Schedule SB was already filed.

Under Announcement 2010-3, if a new enrolled actuary began providing actuarial services to a plan for the 2014 year, the actuary would have had to reproduce the prior actuary’s valuation results for the 2013 year within 5% (and meet other conditions specified in the announcement) in order for the takeover to qualify for automatic approval effective with the 2014 plan year.

If the plan sponsor decided to apply the HATFA interest rates retroactively for 2013 and asked the new actuary to produce 2013 results under HAFTA and sign the 2013 Schedule SB reflecting these results, the takeover would be effective in 2013 instead of 2014. That means that (under the previous rules) the work done to reproduce the prior actuary’s pre-HATFA 2013 valuation results could not be used to determine if the 2013 takeover is automatically approved, and the new actuary would have to reproduce the results of the prior actuary for the 2012 valuation in order to obtain automatic approval for the takeover in 2013. Under Announcement 2015-3, the new actuary’s comparison with the prior actuary’s pre-HATFA results for 2013 could be used for determining whether the 2013 takeover is eligible for automatic approval.