Funding Method Guidance Among IRS Projects Near Finish Line

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By David McAfee

Jan. 22 — The Internal Revenue Service is “really close” to issuing guidance specifying new automatic approvals for changes in pension plan funding method, a move made necessary by the Pension Protection Act of 2006, an IRS official said.

Kyle N. Brown, special counsel in the Office of Chief Counsel in the IRS's Tax Exempt & Government Entities Division, said the agency has long-standing pre-PPA guidance on certain funding method changes allowed to be made automatically. But the PPA, he said, “completely changed virtually all the funding rules.”

“This is a project that has taken longer than, I think, many of us would have really liked. We have been working on this one for a pretty fair amount of time,” Brown said Jan. 21 at a pensions conference in Los Angeles. “The good news is we are close. We are now really close. I would really hope that, sometime in the not too distant future, you're going to see a new revenue procedure detailing automatic approval of change in funding methods.”

Brown added that, in this context, “funding method” means “just about anything that goes into the funding calculation.”

“If we don't have automatic approval for the change in funding method, then you have to come in and get our approval for the change in funding method,” Brown told Bloomberg BNA after the conference session.

During the conference session, Brown discussed progress being made on various IRS regulatory projects involving employee benefits, including ones on nondiscrimination rules for closed pension plans, de-risking lump-sum offers to retirees already getting benefits and mortality tables.

Nondiscrimination Rules

On nondiscrimination, the IRS is crafting rules that would allow large employers to continue closed defined benefit plans and maintain retirement expectations for certain employees. Once closed, these plans will eventually fail the nondiscrimination test without “serious machinations,” Brown said.

“Basically through 2016 we indicated that, as long as you close the plan prior to a specified date, you're viewed as passing the new comparability test,” Brown told attendees at the conference. “The regs we're trying to put out, instead of doing something like that based on the closure date that occurred at some point in the past, would be an ongoing set of rules.”

The IRS issued guidance in late 2013 easing nondiscrimination rules for some closed plans through 2015 (240 PBD, 12/16/13). It followed up in 2015 with a one-year extension of that relief (54 PBD, 3/20/15).

The problem, Brown said, is that having a defined benefit plan covering a closed group of employees and a defined contribution plan for everyone else leaves room for abuse.

“If you want to be able to get certain kind of special testing favors for that population, that is a situation where it doesn't take a whole lot of creativity to imagine what we would all call potentially abusive situations,” Brown said. “So trying to craft a set of rules that work for the plans that have legitimately decided to transition from a DB to a DC and preserve the retirement expectations of their workers, and not allow the abusive situations, was in interesting challenge.”

The new guidance, Brown said, is “very close.”

“Whatever is your idea of close, it's closer than that,” Brown said. “I would expect to see that very, very soon.”

De-Risking Regulations

The IRS is also working on de-risking regulations that would “severely restrict” the ability to offer one type of risk transfer, a lump-sum distribution offer to plan participants already getting benefits, Brown said.

The rules would build on guidance the IRS put out in 2015 (132 PBD, 7/10/15).

Brown said such lump-sum transactions transfer risk to participants. “The participant now has the longevity risk of potentially outliving their savings,” he said. “That is the risk transfer type of transaction that we're looking to put a halt to.”

Brown said that the previously issued notice regarding the future rules will allow the agency to use a retroactive effective date.

But, Brown, told attendees, “Because we put out this position, I don't want anyone to think this is a foregone conclusion. We are absolutely going through the comment period, we are going to have a public hearing.”

Brown said the de-risking regulations are in a “fairly advanced stage of development,” but that those involving closed plans are further along.

Mortality Table Guidance

Brown said the IRS is also working on a project involving mortality table guidance, which he said is “an incredibly hot topic” among those who do defined benefit retirement plan work. The new mortality table, he said, was a “fantastically controversial new table” that raised a number of standards.

He said budget legislation passed toward the end of 2015 made the guidance “a bigger challenge to get out by the time you folks need it.”

The Bipartisan Budget Act, signed into law by President Barack Obama on Nov. 2, included a section giving pension plans the option of substituting their own mortality tables for ones prescribed by the Treasury Department (212 PBD 212, 11/3/15).

The legislation indicated “that under existing guidance, folks are allowed to use alternative mortality tables basically only when they have very significant evidence that shows that they have fully credible alternative mortality tables,” Brown said.

The agency is spending a significant amount of time on the mortality table project, which will include guidance on how to make partial credibility adjustments.

“Those two projects, the new mortality table and partial credibility, are now being combined into a single project,” Brown said. “And we understand the tremendous significance of that project to sponsors. We are going gangbusters on it, but I could not say that's at an advanced stage of development.”

Other Projects

The IRS is also working on a number of other issues, including a project affecting governmental plans, regulations related to the Multiemployer Pension Reform Act of 2014 and the discontinuation of the IRS “Gray Book.” Planning and development of the book, which reflects the opinions of IRS officials on actuarial issues, took more than two months of man-hours that the agency no longer can afford, Brown said.

The agency has also recently issued an internal analysis regarding the issue of cash balance plans with whipsaw calculations, but it has not been made public yet.

“I think we have resolved this issue, but until the disclosure regime is worked out, I can’t tell you what we did,” Brown said. “If you have one of those plans, keep looking at the IRS Reading Room. We have issued something on this and it should be out soon.”

The conference was sponsored by the American Retirement Association's ASPPA College of Pension Actuaries.

To contact the reporter on this story: David McAfee in Los Angeles at

To contact the editor responsible for this story: Phil Kushin at