Rev. Rul. 81-213

SECTION 1. PURPOSE

This revenue ruling provides guidelines for determining (1) whether a particular funding method must separately calculate experience gains and experience losses (section 3); (2) when any experience gain or loss is reflected in the funding standard account (section 4); (3) the actual unfunded liability for calculating costs for a plan year and gains or losses for a plan year (section 5); (4) the amount of any experience gain or loss (sections 6, 7, and 8); and (5) when the limit adjustment of section 1.404(a)-14(b)(3) of the Income Tax Regulations for any experience gain or loss is reflected in the deductible limit (section 9). This revenue ruling also obsoletes Rev. Rul. 57-549, 1957-2 C.B. 258, Rev. Rul. 57-550, 1957-2 C.B. 266, Rev. Rul. 59-153, 1959-1 C.B. 89 and Rev. Rul. 67-116, 1967-1 C.B. 95.

SEC. 2. BACKGROUND

.01 Section 412 of the Internal Revenue Code provides minimum funding standards for certain pension plans. The funding standard account maintained under this section is charged as prescribed under section 412(b)(2)(B)(iv) with any net experience loss, and credited as prescribed under section 412(b)(3)(B)(ii) with any net experience gain.

.02 Section 404(a)(1) of the Code provides limits on the amount of contribution to a qualified pension plan that may be deducted in any taxable year. Section 1.404(a)-14 of the regulations provides rules for computing these deductible limits, and these rules require, in certain cases, the establishment of 10-year amortization bases to reflect experience gains and losses. Section 1.404(a)-14(g)(1) provides that the net experience gain or loss for that section is equal to the net experience gain or loss determined for section 412.

SEC. 3. APPLICABILITY OF GAINS AND LOSSES TO FUNDING METHODS

.01 Actuarial funding methods can be divided into two groups, according to whether or not the method separately calculates gains and losses.

.02 Methods that do separately calculate gains and losses are called immediate gain type funding methods. An immediate gain type funding method is any method that directly calculates an accrued liability, as described in Rev. Rul. 81-13, 1981-1 C.B. 229. Examples of the immediate gain type funding method are the unit credit method, the entry age normal method, and certain variations of the individual level premium method.

.03 Methods that do not calculate gains and losses are called spread gain type funding methods. If a method is not an immediate gain type method, then it is a spread gain type method. Examples of the spread gain type funding method are the frozen initial liability method, the attained age normal method, and the aggregate method. In these methods, the amortization of the gains and losses is incorporated in the normal cost calculation of the method.

.04 If a spread gain type funding method is utilized, then any charge or credit to the funding standard account that is derived from the amortization of a net experience gain or loss is improper and inconsistent with the funding method. However, certain exceptions may occur when the spread gain type funding method is adopted by the plan through a change in funding method under section 412(c)(5) of the Code and the prior funding method was an immediate gain type funding method.

SEC. 4. CHARGES AND CREDITS FOR EXPERIENCE GAINS AND LOSSES

.01 Under an immediate gain type method, after an experience gain or loss is determined as of a particular valuation date, the funding standard account must be charged or credited in accordance with the rules set forth in this section.

.02 The funding standard account should be charged or credited with amounts necessary to amortize the net experience loss or gain determined as of a particular valuation date, over 15 consecutive years in equal installments payable as of any date within the plan year. As of the valuation date at which the loss or gain is determined, the present value of the annual charges or credits must equal the amount of the loss or gain.

.03 Under section 412(c)(9) of the Code, valuations shall be made not less frequently than once every three years. Therefore, as of a valuation date, normal costs may be determined for more than one plan year. Section 412(b)(2)(A) of the Code provides that the funding standard account shall be charged with the normal cost of the plan for the plan year. The plan year for which the funding standard account is charged with the first normal cost determined by the valuation is the same plan year for which the first annual charge or credit of the amount described in section 4.02 of this ruling shall be made to the funding standard account. For purposes of this revenue ruling, that plan year shall be identified as "the plan year to which the valuation refers."

SEC. 5. DETERMINATION OF THE ACTUAL UNFUNDED LIABILITY

.01 For an immediate gain type funding method the actual unfunded liability as of any valuation date is the excess, if any, of the accrued liability over the actuarial value of assets as of that date.

.02 The accrued liability is equal to the present value of future benefits less the present value of future normal costs. Generally, for purposes of computing costs for a plan year and gains and losses for a plan year, the normal cost for the plan year to which the valuation refers is considered to be a future normal cost and is not included in the accrued liability.

.03 The value of assets must be determined in a manner consistent with section 412(c)(2) of the Code and section 1.412(c)(2)-1 of the regulations. Furthermore, for purposes of computing costs for a plan year and gains and losses for a plan year, the assets must be treated in a manner that is consistent with the method of calculation of the accrued liability. If, in determining the accrued liability, the normal cost for the plan year to which the valuation refers is treated as a future normal cost, then the assets used to compute the unfunded accrued liability should not include contributions that are credited to the funding standard account for the plan year to which the valuation refers or for any plan year thereafter.

SEC. 6. AMOUNT OF EXPERIENCE GAIN OR LOSS--GENERAL RULES

.01 Under an immediate gain type funding method an experience gain or loss must be calculated as of the date of each valuation. The gain or loss reflects the difference between actual and expected experience since the last prior valuation date. For an immediate gain type funding method, the experience gain calculated as of a valuation date is equal to the excess of the expected unfunded liability over the actual unfunded liability as of that date. A loss is the excess of the actual unfunded liability over the expected unfunded liability.

.02 The expected unfunded liability as of any valuation date for an immediate gain type funding method is:

(1) the actual unfunded liability as of the prior valuation date increased with interest at the valuation rate to this later valuation date, plus

(2) normal costs representing accrued liabilities that were not included in determining the accrued liability as of the prior valuation date (i.e., such costs were considered future normal costs as of the prior valuation date) but that are included (i.e., are not considered future normal costs) in determining the accrued liability as of this later valuation date, plus interest at the valuation rate from the date as of which the normal costs were assumed payable to this valuation date, minus

(3) contributions credited according to section 412(b)(3)(A) that were not included in accordance with section 5.03 of this ruling in the calculation of the actual unfunded liability as of the prior valuation date and were included in the calculation of the actual unfunded liability as of this later valuation date, plus interest at the valuation rate from the date on which the contribution was made if made during the plan year, or under section 412(c)(10) was deemed to have been made if made after the plan year, to this later valuation date.

SEC. 7. SPECIAL DETERMINATION OF EXPERIENCE GAIN OR LOSS

.01 If an experience gain or loss will be amortized beginning in a particular plan year, then, under section 1.412(c)(3)-1(b)(1) of the regulations, as of the valuation date for that plan year the present value of future benefits must equal the present value of future normal costs plus the plan assets, plus the outstanding balance of the amortization bases, minus the credit balance (or plus the deficiency). The actual unfunded liability is, therefore, equal to the outstanding balance of the amortization bases minus the credit balance (or plus the deficiency).

02 If an experience loss occurs in a particular plan year and there are no other amortization charges (under section 412(b)(2)(B), (C), and (D)) or amortization credits (under section 412(b)(3)(B)) for such year (which might occur in a year following a plan year in which the plan was fully funded), then the amount of the amortization base that is established is:

(1) the actual unfunded liability as of the valuation date as of which the loss is determined, plus

(2) any credit balance (or minus any funding deficiency) in the funding standard account as of the first day of the first plan year in which the loss will be amortized adjusted with inerest at the valuation rate to the valuation date as of which the loss is determined.

SEC. 8. SPECIAL RULES FOR CHANGES IN ACTUARIAL ASSUMPTIONS, FUNDING METHODS OR PLAN AMENDMENTS

.01 In applying the rules in sections 6 and 7, the amount of the experience gain or loss as of a particular valuation date should be determined based on the actuarial assumptions used and the plan benefit structure in effect as of the prior valuation date. Thus, the expected unfunded liability should be determined using the valuation interest rate assumed in the prior valuation and the actual unfunded liability should be determined as of this valuation date based on the assumptions and benefit structure as of the prior valuation date.

.02 In applying the rules in sections 6 and 7, where an immediate gain type funding method was used to determine costs as of the prior valuation date but a different funding method is used as of this valuation date, the experience gain or loss must be determined based on the funding method used in the prior valuation.

.03 Additional amortization bases may also be required due to the change in assumptions, funding method, or plan benefits.

SEC. 9. LIMIT ADJUSTMENT FOR EXPERIENCE GAINS AND LOSSES

.01 Under section 1.404(a)-14(f) of the regulations, the deductible limit for section 404(a)(1)(A)(iii) of the Code is increased or decreased by the limit adjustment for an experience loss or gain that is determined under an immediate gain type funding method. This limit adjustment is determined according to sections 1.404(a)-14(b) and (g) of the regulations.

.02 Although the deductible limit applies for an employer's taxable year, the deductible limit is determined on the basis of a plan year. The first plan year in which a limit adjustment is included for a gain or loss is the same plan year described in section 4.03 of this ruling, which is the first plan year in which the annual charge or credit is made to the funding standard account.

SEC. 10. EXAMPLES

.01 In both examples, assume the plan year is the calendar year, the valuation date for each year is September 1, and the valuation rate is five percent using compound interest. Also assume that the plans use an immediate gain type funding method, the normal cost is calculated for the plan year that includes the valuation date, and all normal cost charges and ammortization charges and credits are assumed payable as of September 1.

.02 Example 1

(1) As of September 1, 1979, the accrued liability under Plan A was $180,000. This accrued liability was determined as the present value of all future benefits minus the present value of future normal costs, where the future normal costs included the normal cost assumed payable as of September 1, 1979.

(2) As of September 1, 1979, the actuarial value of the assets was $80,000. This amount included contributions made in 1979 that were credited to the FSA as of December 31, 1978. Thus, the actual unfunded liability as of September 1, 1979 was $100,000.

(3) The experience gain or loss as of September 1, 1980, is the difference between the expected and actual unfunded liabilities as of that date. Assume that the actual unfunded liability as of September 1, 1980, is $90,000.

The expected unfunded liability as of September 1, 1980, is calculated as:

     (a) Actual Unfunded Liability (as of 9/1/79, the

(5) An amortization of this experience gain must be credited to the funding standard account in accordance with section 4 of this revenue ruling. Because the normal cost computed in the September 1, 1980, valuation is for the 1980 plan year, the first annual credit to amortize the gain must also be in the funding standard account for the 1980 plan year. Furthermore, because all amortization credits and charges for this plan are made as of September 1 of the plan year, the first credit to amortize the gain is calculated as payable on September 1, 1980. The subsequent credits are as of September 1 for 1981 through 1994.

(6) As of September 1, 1980, the present value of all the credits must equal $2,126. Thus the annual credit is equal to $2,126 divided by 10.899 (the present value of any annuity certain for 15 years, with payments on the first day of each year, at the five percent valuation rate), or $195.

.03 Example 2 (1) The funding standard account for the plan year beginning January 1, 1979, required the inclusion of a special full funding limitation credit under section 412(c)(6) of the Code. Therefore, the funding standard account for the plan year beginning January 1, 1980, has no amortization bases and no charges or credits resulting from amortization.

(2) There is a credit balance of $1,000 as of December 31, 1979 due to contributions made for the plan year beginning January 1, 1979 in excess of the full funding limitation. In the valuation performed as of September 1, 1980, the actual unfunded liability was determined to be $5,000 and there has been an experience loss. In accordance with the rules in section 7 of this ruling, the amount of the loss is (1) $5,000, the amount of the actual unfunded liability plus (2) $1,033, the $1,000 credit balance as of 12/31/79, with interest on the credit balance to the 9/1/80 valuation date. A base of $6,033 is established to be amortized over 15 years starting in the plan year beginning January 1, 1980.

SEC. 11. EFFECT ON OTHER REVENUE RULINGS

Rev. Ruls. 57-549, 57-550, 59-153 and 67-116, are obsoleted.

SEC. 12. EFFECTIVE DATE

Generally, this revenue ruling is effective for plan years to which section 412 of the Code applies. However, section 7 is effective only for plan years to which section 1.412(c)(3)-1 of the regulations applies.