IRS Revenue Procedures 2017-56 and 2017-57 Provide Guidance on Approval for Funding Method Changes for Defined Benefit Plans | Practical Law

IRS Revenue Procedures 2017-56 and 2017-57 Provide Guidance on Approval for Funding Method Changes for Defined Benefit Plans | Practical Law

The Internal Revenue Service (IRS) issued Revenue Procedures (Rev. Procs.)2017-56 and 2017-57. Rev. Proc. 2017-56 provides automatic approval for certain funding method changes for single-employer defined benefit pension plans subject to the minimum funding requirements of Code Section 430. Rev. Proc. 2017-57 provides the procedures for obtaining IRS approval for defined benefit plan funding method changes not covered in Rev. Proc. 2017-56.

IRS Revenue Procedures 2017-56 and 2017-57 Provide Guidance on Approval for Funding Method Changes for Defined Benefit Plans

by Practical Law Employee Benefits & Executive Compensation
Published on 12 Oct 2017 • USA (National/Federal)
The Internal Revenue Service (IRS) issued Revenue Procedures (Rev. Procs.) 2017-56 and 2017-57. Rev. Proc. 2017-56 provides automatic approval for certain funding method changes for single-employer defined benefit pension plans subject to the minimum funding requirements of Code Section 430. Rev. Proc. 2017-57 provides the procedures for obtaining IRS approval for defined benefit plan funding method changes not covered in Rev. Proc. 2017-56.
On October 10, 2017, the IRS issued:

Revenue Procedure 2017-56

Rev. Proc. 2017-56 provides automatic approval for several specified changes in the funding method used for single-employer defined benefit plans for calculations described under Code Section 430 (26 U.S.C. § 430). Rev. Proc. 2017-56 updates Rev. Proc. 2000-40 to take into account the provisions of Code Section 430, which was enacted as part of the Pension Protection Act of 2006 (PPA). To learn more about Code Section 430, see Practice Note, Minimum Funding Standards for Defined Benefit Plans: Minimum Funding Standards Under Code Section 430.
A defined benefit plan funding method is a recognized actuarial technique for establishing the amount and incidence of the annual actuarial cost of pension plan benefits and expenses.
Section 3 of Rev. Proc. 2017-56 provides automatic approval for:
  • Three asset valuation method changes.
  • Two valuation date changes.
  • One type of change in the treatment of benefits funded through insurance contracts.
Section 4 of Rev. Proc. 2017-56 provides automatic approval for a change in funding method:
  • In special situations in which there is a change in the plan's:
    • actuary;
    • actuarial software; or
    • data elements used in the actuarial valuation.
  • For fully funded terminating plans.
Section 5 of Rev. Proc. 2017-56 provides automatic approval for a change in funding method in connection with a plan merger.
Section 6 of Rev. Proc. 2017-56 lists numerous restrictions on the use of automatic approvals, including specific restrictions for each type of approval.
The automatic approvals under Rev. Proc. 2017-56 are granted under Code Section 412(d)(1) and Section 302(d)(1) of the Employee Retirement Income Security Act of 1974 (ERISA) (29 U.S.C. § 1082(d)(1)).
Rev. Proc. 2017-56 is effective for plan years beginning on or after January 1, 2018. However, taxpayers may elect to apply this Rev. Proc. for earlier plan years.

Revenue Procedure 2017-57

Rev. Proc. 2017-57 provides the procedures for obtaining approval of the IRS:
  • For a change in the funding method used for a defined benefit plan, as provided by Code Section 412(d)(1) and ERISA Section 302(d)(1) (29 U.S.C. § 1082(d)(1)).
  • To revoke an election relating to interest rates under Code Sections 430(h)(2)(D)(ii) or 430(h)(2)(E) (26 U.S.C. §§ 430(h)(2)(D)(ii) or 430(h)(2)(E)) and the corresponding sections of ERISA.
Any change in funding method must be approved by the IRS (26 U.S.C. § 412(d)(1); ERISA Section 302(d)(1) (29 U.S.C. § 1082(d)(1))). Rev. Proc. 2017-57 applies to any defined benefit plan that is subject to Code Section 412 or ERISA Section 302.
A plan funding method is used for a plan year if it is used to determine the minimum required contribution for the plan year indicated in the Schedule SB (Single-Employer Defined Benefit Plan Actuarial Information) or the Schedule MB (Multiemployer Defined Benefit Plan and Certain Money Purchase Plan Actuarial Information), that is submitted with a plan's Form 5500.
A plan's funding method includes not only the overall actuarial cost method used by the plan but also each specific method of computation used in applying the overall method.
A change in funding method includes any change in:
  • A plan's current method of computing the minimum funding requirement under Code Section 412.
  • The selection of data elements that are used in the valuation.
Rev. Proc. 2017-57 provides examples of:
  • Changes in funding method for single-employer plans and multiemployer plans.
  • Changes in actuarial assumptions, rather than changes in funding method.
  • Interest rate elections (for which IRS approval is not required), as well as revocations of interest rate elections for single-employer plans subject to the requirements of Code Section 430 (for which IRS approval is required and may be requested under the procedures provided in Section 6 of Rev. Proc. 2017-57).
The IRS will approve a change in funding method only if the proposed method is permitted under applicable funding rules and the transition to the proposed method is acceptable.
Section 4 of Rev. Proc. 2017-57 provides application procedures that a plan administrator, plan sponsor, or the authorized representative of either, must follow to obtain approval for a change in plan funding method.
Section 5 of Rev. Proc. 2017-57 provides procedures for seeking a "class ruling" from the IRS, in which approval is sought for a change in funding method for a group of at least 40 plans.
Rev. Proc. 2017-57 supersedes Rev. Proc. 2000-41, and references to Rev. Proc. 2000-41 in Rev. Proc. 2017-4 are replaced with references to Rev. Proc. 2017-57 (to learn more about Rev. Proc. 2017-4, see Legal Update, IRS Revenue Procedure 2017-4 Revises Determination Letter Procedures).
Rev. Proc. 2017-57 is effective for requests for a change in funding method submitted on or after January 1, 2018. However, taxpayers may elect to apply it for earlier requests.

Practical Implications

Administrators and sponsors of defined benefit plans should be aware of when the IRS will approve changes to plan funding methods, as well as the procedures they have to follow to obtain approval. Rev. Procs. 2017-56 and 2017-57 provide that information and account for the changes instituted by the PPA.
The IRS has been active recently in providing guidance on defined benefit plan funding. On October 3, 2017, the IRS issued final regulations, Rev. Proc. 2017-55, and Notice 2017-60, which affect mortality tables for determining minimum funding requirements and lump-sum distributions for most defined benefit pension plans (see Legal Update, IRS Final Regulations, Revenue Procedure 2017-55, and Notice 2017-60 Prescribe Mortality Tables for Defined Benefit Plans and Provide Related Guidance).