Rev. Proc. 80-50

Section 1. Purpose

This revenue procedure provides approval for certain defined benefit pension plans to change the funding method for plan years described in Section 7.

Sec. 2. Background

Section 412(c)(5) of the Internal Revenue Code, as amended, and section 302(c)(5) of the Employee Retirement Income Security Act of 1974 (ERISA), Pub. L. 93-406, 1974-3 C.B. 1, 40, state that if the funding method of a plan is changed, the new funding method shall become effective only if the change is approved by the Secretary.

Sec. 3. Approval for Specified Changes

Except as restricted by Section 6 of this revenue procedure, approval is granted to the following:

.01 Approval 1 -- A change to either of the three Aggregate Methods described in sections 3.01(1), 3.01(2) or 3.01(3).

(1) The normal cost is computed in the aggregate as the normal cost accrual rate multiplied by compensation. The normal cost accrual rate is (A) the present value of future benefits less adjusted assets divided by (B) the present value of future compensation.

(2) The normal cost is computed in the aggregate as the normal cost per participant multiplied by the number of participants who are currently employed by employers maintaining the plan. The normal cost per participant is (A) the present value of future benefits less adjusted assets divided by (B) the sum of the present value of an annuity of $1 per year payable from the attained age to retirement age for each participant who is currently employed.

(3) The normal cost is computed in the aggregate as (A) the present value of future benefits less adjusted assets divided by (B) a temporary annuity factor. The temporary annuity factor is the present value of future individual level premium normal costs divided by the current year's individual level premium normal cost. For purposes of this subsection, the individual level premium normal cost for each participant is the sum of the level amounts to fund each increment of projected benefit from the attained age at which the increment occurs to the anticipated retirement age.

(4) In methods (1), (2), and (3), for purposes of section 412 of the Code, the assets are adjusted by subtracting any credit balance in the funding standard account or adding any funding deficiency. For purposes of section 404, the assets are adjusted by subtracting any undeducted contributions. Also, all existing amortization bases under sections 404 or 412 shall be considered fully amortized.

.02 Approval 2 -- A change to an Individual Aggregate Method that satisfies paragraphs (1), (2), (3), (4) and (5) of this subsection.

(1) The normal cost is the sum of individual normal costs for each participant for whom a normal cost is determined. The normal cost for a participant is (A) the present value of future benefits less allocated adjusted assets, divided by (B) a temporary annuity factor from attained age to the anticipated retirement age. (The temporary annuity factor may also be determined as the present value of future compensation for the participant divided by current compensation.)

(2) For purposes of section 412 of the Code, prior to the allocation of assets each year the assets are adjusted by subtracting any credit balance in the funding standard account or adding any funding deficiency. For purposes of section 404, any undeducted contributions are subtracted from the assets. Also, if the plan retains the liabilities for any participant or beneficiary for whom a normal cost is not computed, the assets are adjusted by subtracting the present value of such liabilities.

(3) In the first year the method is used, the adjusted assets are allocated on the basis of the present value of accrued benefits, the present value of future benefits, or the accrued liability under a funding method of the immediate gain type.

(4) After the first year the method is used, adjusted assets are allocated in the proportion that the sum of the allocated assets plus calculated normal cost of the prior year for each participant for whom a normal cost is computed bears to the total for all such participants.

(5) In the first year the method is used, all unamortized bases under sections 404 and 412 of the Code will be considered fully amortized.

.03 Approval 3 -- A change to a method described in paragraphs (1) or (2) if the requirements in paragraphs (3), (4), and (5) are also satisfied.

(1) The normal cost is computed in the aggregate as the normal cost accrual rate multiplied by compensation. The normal cost accrual rate is (A) the present value of future benefits less assets less unfunded liability divided by (B) the present value of future compensation.

(2) The normal cost is computed in the aggregate as the normal cost per participant multiplied by the number of participants who are currently employed by employers maintaining the plan. The normal cost per participant is (A) the present value of future benefits less assets less the unfunded liability divided by (B) the sum of the present value of an annuity of $1 per year payable from the attained age to retirement age for each participant who is currently employed.

(3) As of the date of change, the unfunded liability under the new method is determined under an acceptable funding method of the immediate gain type.

For years subsequent to the plan year of the change in method, the unfunded liability for any year equals

(A) the unfunded liability for the prior plan year plus the normal cost for the prior plan year, minus

(B) the actual contributions for the the prior plan year

where the amounts in (A) and (B) are adjusted with interest to the date as of which the unfunded liability is determined.

(4) The new amortization base resulting from the change in funding method is the difference between

(A) the unfunded liability under the new method as determined under 3.03(3), and

(B) the net sum of the outstanding balance of all amortization bases (including the gain or loss base for the immediately preceding period), treating credit bases as negative bases, less the credit balance (or plus the funding deficiency) in the funding standard account.

(5) The amortization period for the new amortization base for purposes of sections 302 of ERISA and 412 of the Code is as follows:

(A) If the plan was in existence on January 1, 1974, any decrease in unfunded liability will be amortized over 40 years reduced by the number of prior plan years to which section 302 has applied, and any increase will be amortized over 30 years.

(B) If the plan was not in existence on January 1, 1974, any increase will be amortized over 30 years reduced by the number of prior plan years to which section 302 has applied, and any decrease will be amortized over 30 years.

Sec. 4. Approval for Takeover Plans

.01 Approval is granted by this subsection for a change in funding method where all the conditions set forth in subsections .02 through .05 are satisfied.

.02 There has been both a change in the enrolled actuary for the plan and a change in the business organization providing actuarial services to the plan.

.03 The method used by the new actuary is substantially the same as the method used by the prior actuary, and is consistent with the information contained in the prior actuarial valuation reports or prior Schedule B's of Form 5500. Also, the method used by the new actuary must be applied to the prior year (using the assumptions of the prior actuary) and the net charge in the funding standard account produced must not differ by more than five percent from the net charges computed by the prior actuary for that year.

.04 The new enrolled actuary signs and attaches a statement to Schedule B of Form 5500 that the procedures and formula currently being used may produce different results from the prior procedures and formula, but that information is not available to reproduce the prior method exactly.

.05 The change in costs due to the change in method is treated in the same manner as an experience gain or loss, unless the actuarial assumptions are being changed, in which case the change in method is treated as part of the change in assumptions.

Sec. 5. Change in Year of Termination

.01 For a plan year beginning before a plan terminates, the funding method may be changed to a method that satisfies subsection .02 provided that the conditions set forth in subsection .03 are satisfied. As part of the change in method, the valuation date may be changed, if desired, to the date of termination, or the asset valuation method may be changed to fair market value.

.02 A method is described in this subsection if the normal cost for the plan year is the present value of the benefits accruing in the plan year under the method, and the accrued liability is the present value of the benefits accrued under the method as of the valuation date.

.03 The conditions in this subsection are satisfied if:

(1) as of the date of termination as approved by the Pension Benefit Guaranty Corporation (PBGC), the fair market value of the assets of the plan is not less than the present value of all accrued benefits (whether or not vested). The actuarial assumptions used for determining such present value must be acceptable to PBGC for use under section 4044 of ERISA, supra, at 194; and

(2) a timely notice of intention to terminate was filed with the PBGC.

Sec. 6. Restrictions

.01 This revenue procedure does not apply unless an actuarial valuation is made for the plan year for which a change in method is effective, and such valuation is used for purposes of section 302 of ERISA for such plan year.

.02 This revenue procedure does not apply unless the plan administrator or plan sponsor signs and attaches a statement to Schedule B of Form 5500 for the plan year for which a change is effective stating that the plan administrator or plan sponsor agrees to the change in funding method which is being made as approved by this revenue procedure.

.03 This revenue procedure does not apply if:

(1) The funding method (including the asset valuation method) is being changed in any manner other than that described above.

(2) A waiver of the minimum funding standards has been granted for the plan or the amortization charge described in section 412(b)(2)(C) of the Code is applicable in the plan year of the change.

(3) Except as described in Section 5, the change is made for a plan year in which the plan is terminated.

.04 The approvals under sections 3.01(1), 3.02(1), and 3.03(1) do not apply if the temporary annuity factor is weighted by compensation but the plan benefits are not based on compensation.

.05 Section 4 does not apply to any plan for any plan year beginning on or after the date final regulations under section 6059 of the Code are adopted.

.06 This revenue procedure does not apply for any plan year if Schedule B of Form 5500 has been filed or if the date (without extension) by which it must be filed has passed.

Sec. 7. Effective Date

This revenue procedure is effective for changes in funding methods made with respect to plan years commencing on or after July 1, 1979, and before January 1, 1986.