rp-99-45.pdf

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Part III. Administrative, Procedural, and Miscellaneous
26 CFR 601.201: Rulings and determination letters.
(Also, Part I, § 412.)
Rev. Proc. 99-45
Section 1. Purpose and Scope
This revenue procedure modifies Rev. Proc. 95-51, 1995-2 C.B. 431, which provides
approval to change the funding method (including the asset valuation method) used for a
defined benefit pension plan. This revenue procedure modifies Rev. Proc. 95-51 to provide
approval for a change in funding method in connection with certain mergers; to clarify that the
prohibition of a change in method where there is a negative unfunded liability applies only in
certain circumstances with respect to a change in funding method involving a spread gain
method; to provide that the comparison of the results of new valuation software to the results
of old valuation software may be made on the basis of the prior year; and to provide, in
certain situations, that the requirement that the plan administrator approve of the change in
funding method will be satisfied if the plan administrator is made aware of the change.
Section 2. Background
.01Section 412(c)(5)(A) of the Internal Revenue Code (“the Code”), as amended,
and section 302(c)(5)(A) of the Employee Retirement Income Security Act of 1974 (ERISA),
Pub. L. 93-406, 1974-3 C.B. 1, 40, as amended, 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.
.02Section 1.412(c)(2)-1 of the Income Tax Regulations generally provides that a
change in the actuarial valuation method used to value the assets of a plan is a change in
funding method that requires approval under § 412(c)(5) of the Code.
.03Rev. Proc. 95-51 provides approval for certain changes in funding method.
Section 3 of Rev. Proc. 95-51 provides approval for changes to certain specific methods
including certain asset valuation methods. Section 4 of Rev. Proc. 95-51 provides various
special approvals for changes. Section 5 of Rev. Proc. 95-51 provides rules relating to the
establishment and maintenance of amortization bases upon changing methods. Section 6 of
Rev. Proc. 95-51 provides restrictions under the revenue procedure.
.04Rev. Proc. 98-10, 1998-2 I.R.B. 35, modified Rev. Proc. 95-51 to provide
approval for additional changes in asset valuation method and for certain changes in
valuation software. Rev. Proc. 98-10 also clarified and modified other provisions of Rev.
Proc. 95-51.

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Section 3. Additional Approvals under Rev. Proc. 95-51
.01Section 4 of Rev. Proc. 95-51 (Special Approvals) is modified to add a new section
4.06 as follows:
.06 Approval for De Minimis Mergers
(1) Approval is granted for a change in method in connection with a merger
described in paragraph (2) where the procedures set forth in paragraphs (3)
through (5) below are followed.
(2) The merger involves the merger of a smaller plan (within the meaning of
§ 1.414(l)-1(h)(1)) and a larger plan (within the meaning of § 1.414(l)-1(h)(1)).
For purposes of this paragraph (2), the rules of §§ 1.414(l)-1(h)(2), 1.414(l)-
1(h)(3), and 1.414(l)-1(h)(4) apply in determining whether a merger is de
minimis.
(3) For the period from the beginning of the plan year of the smaller plan to the
date of the merger, the charges and credits to the funding standard account for
the smaller plan are determined without regard to the merger. If that period is
less than a full 12-month plan year, the charges and credits to the funding
standard account for the smaller plan for this period are ratably adjusted using
the principles of Rev. Rul. 79-237, 1979-2 C.B. 190, in the same manner as if
the date of the merger was the date of plan termination of the smaller plan. The
deductible limit under § 404 for contributions to the smaller plan is determined
by treating the period from the beginning of the plan year to the date of merger
as a short plan year and following the procedure set forth in section 5 of Rev.
Proc. 87-27, 1987-1 C.B. 769. Schedule B of Form 5500 is filed for the smaller
plan for the period from the beginning of the plan year of the smaller plan to the
date of the merger. Any contributions made for the smaller plan after the date
of the merger, but not later than 8 ½ months after the date of the merger, are
credited to the funding standard account of the smaller plan for this period. For
purposes of applying § 4971(b) (but not § 4971(a)) with respect to the smaller
plan, any funding deficiency that existed for the smaller plan is considered
corrected as of the date of merger.
(4) If the valuation date for the larger plan for the plan year in which the merger
occurs precedes the date of the merger, the charges and credits to the funding
standard account for the larger plan for that plan year are determined without
regard to the merger. Consequently, Schedule B of Form 5500 for the plan
year of the larger plan in which the merger occurs is filed without regard to the
merger in such a case. Similarly, the deductible limit determined under § 404
with respect to the plan year of the larger plan in which the merger occurs is
determined without regard to the merger.

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(5) For the actuarial valuation of the larger plan as of the valuation date
coincident with or next following the date of the merger, the funding method
(including asset valuation method) used is that for the larger plan, and the
funding method (including asset valuation method) used for the smaller plan is
disregarded. The charges and credits to the funding standard account for the
larger plan are determined by treating the net effect of the change in assets and
liabilities due to the merger in the same manner as any other gain or loss
experienced by the larger plan. Consequently, any amortization bases, credit
balances, or funding deficiencies with respect to the smaller plan are
disregarded for purposes of applying § 412 and § 4971 with respect to the
larger plan.
.02Section 4 of Rev. Proc. 95-51 (Special Approvals) is modified to add a new section
4.07 as follows:
.07 Approval for Mergers Other Than De Minimis Mergers
(1) Approval is granted for a change in method that results from a merger of
one plan with another plan in a given plan year where all the conditions set forth
in paragraphs (2) through (6) are satisfied, and the procedures set forth in
paragraphs (7) through (13) are followed.
(2) The merger is not a de minimis merger within the meaning of § 1.414(l)-1(h).
(3) The funding method (without regard to the asset valuation method) used for
each of the plans is a method described in section 3.
(4) Both plans have the same plan year and a valuation date that is either the
first or last day of the plan year.
(5) The date of the merger is either the first day of the plan year or the last day
of the plan year of the two plans.
(6) In a case in which the date of the merger is the first day of the plan year,
neither plan has a funding deficiency for the prior plan year. In a case in which
the date of the merger is the last day of the plan year, neither plan has a
funding deficiency for the plan year of the merger (after taking into account
contributions made after the date of the merger as provided in paragraph (13)
below).
(7) If the date of the merger is the first day of the plan year, the minimum
funding standard of § 412 and the deductible limit of § 404 are
determined for the merged plan for the entire plan year in which the
merger occurs in the manner provided in paragraphs (8), (9), (10), (11),

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and (12) below. Consequently, for the plan year in which the merger
occurs, only one Schedule B of Form 5500 is filed for the merged plan in
such a case.
(8) If the same asset valuation method (in all respects) is used for each
of the two plans, the asset valuation method of the merged plan is that
method. If the same asset valuation method (in all respects) is not used
for each of the two plans (for example, the smoothing period is three
years for one of the plans, and five years for the other plan), the asset
valuation method used for the merged plan must be an asset valuation
method described in section 3.
(9) If the funding method (without regard to the asset valuation method) used
for each of the two plans is the same, that funding method is continued for the
plan after the merger. If the funding method (without regard to the asset
valuation method) used for each of the two plans is not the same, then the
funding method used for the ongoing plan is continued after the merger. For
this purpose, the ongoing plan is the plan as designated by the plan
administrator (within the meaning of § 414(g)), whose name and plan number
will continue to be reported on Schedule B of Form 5500 for years after the
merger. The funding method used for the plan which is not the ongoing plan is
disregarded.
(10) An experience gain or loss is determined separately for each of the two
plans, for the period prior to the date of the merger, without regard to the
merger and any associated change in funding method. The preceding
sentence applies only to the extent that an experience gain or loss would have
been determined under the methods used for the plans prior to the merger.
(11) All amortization bases that were maintained for the two plans continue to
be maintained for the merged plan to the extent they would be maintained under
the funding method used for the merged plan. The credit balances, if any, of
each of the two plans from the prior year are carried forward to the current plan
year, and combined.
(12) If an unfunded liability is determined under the funding method used for the
ongoing plan, it must be determined after any change in actuarial assumptions
and methods (including a change in asset valuation method pursuant to
paragraph (8)). In the case of such a funding method that is a spread gain
method, the unfunded liability is redetermined in the same manner that the
unfunded liability was originally determined for the ongoing plan. Therefore, the
amortization base established pursuant to the rules of section 5.01(2) will reflect
any change of actuarial assumptions and methods. For purposes of this
paragraph, a spread gain method is any method that does not directly calculate
an accrued liability. See Rev. Rul. 81-13, 1981-1 C.B. 229, for whether a

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funding method directly calculates an accrued liability.
(13) If the date of the merger is the last day of the plan year, the minimum
funding standard under § 412 and the deductible limit under § 404 for each of
the plans for the plan year in which the merger occurs are determined without
regard to the merger. Consequently, separate Schedules B of Form 5500 are
filed for the plans for the plan year in which the merger occurs without regard to
the merger in such a case. Any contribution for the plan year that is made to
the trust after the date of the merger may be credited on either of the Schedules
B provided that the contribution is made for such plan within the period
described in § 412(c)(10). For the plan year following the plan year in which
the merger occurs, the minimum funding standard and the deductible limit are
determined for the plan after the merger by following the procedures set forth in
paragraphs (8), (9), (10), (11) and (12) above as if the merger occurred on the
first day of such following plan year.
Section 4. Clarification and Modification of Rev. Proc. 95-51
.01Section 4.05(5) of Rev. Proc. 95-51 (Approval for Change in Valuation Software) is
modified to read as follows:
(5) The net charge to the funding standard account for the year (or for the prior
year) determined using the new software does not differ from the net charge to
the funding standard determined using the old software (all other factors being
held constant) by more two percent (2%).
.02Section 6.01(2) of Rev. Proc. 95-51 is modified to read as follows:
(2) This revenue procedure does not apply unless the plan
administrator (within the meaning of § 414(g)) or an authorized representative of
the plan sponsor indicates as part of the series Form 5500 for the plan year for
which the change is effective that the plan administrator or plan sponsor agrees
to the change in funding method. In the case of a special approval for a
change in funding method described in § 4, other than the approval described in
§ 4.03 (Approval for Change in Funding Method for Fully Funded Terminated
Plans), the requirement that the plan administrator or authorized representative
of the plan sponsor agree to the change will be satisfied if the plan administrator
or an authorized representative of the plan sponsor is made aware of the
change before the Schedule B is filed.
.03Section 6.02(6) of Rev. Proc. 95-51 (Non-Applicability if Negative Normal Cost or
Negative Unfunded Liability Results From the Change) is modified to read as follows:

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Approval to change to a method described in section 3 does not apply if, after the
change in method, a negative normal cost exists. Also, approval to change to a
method described in section 3 does not apply if, after the change in method, a
negative unfunded liability exists, and the method (a) is a spread gain method, and (b)
uses an unfunded liability in determining the normal cost. For purposes of the
preceding sentence, a spread gain method is any method that does not directly
calculate an accrued liability. See Rev. Rul. 81-13 for whether a funding method
directly calculates an accrued liability.
.04Section 6.02(7) of Rev. Proc. 95-51 (Non-Applicability if Change in Method is Being
Made Pursuant to a Spin-off or Merger) is modified to read as follows:
Approval to change to a method described in section 3 does not apply if the funding
method for a plan year is being changed in connection with a plan spin-off or merger,
unless the change is made as provided in § 4.06 or § 4.07.
Section 5. Effective Date
This revenue procedure is effective for plan years commencing on or after January 1,
1999.
Section 6. Effect on Other Revenue Procedures
Rev. Proc. 95-51, as clarified and modified by Rev. Proc. 98-10, is modified.
Section 7. Drafting Information
The principal author of this revenue procedure is James E. Holland, Jr. of the
Employee Plans Division. For further information regarding this revenue procedure, call (202)
622-6076 between 2:30 and 3:30 Eastern time (not a toll free number) Monday through
Thursday. Mr. Holland's number is (202) 622-6730 (also not a toll free number).