Section 4. Clarifications and

Modifications of Rev. Proc. 95–51

.01 Section 3.11 of Rev. Proc. 95–51 is clarified to read as follows:

.11 Approval 11. Approval is granted for a change in asset valuation method to the average value as defined in § 1.412(c)(2)–1(b)(7) (which does not have a phase-in), or to any alternative for

mulation that is algebraically equivalent to this average value. The asset value determined under the method will be adjusted to be no greater than 120% and no less than 80% of the fair market value defined in § 1.412(c)(2)–1(c).

For example, under § 1.412(c)(2)– 1(b)(7), if the averaging period is five years, the average value is based on the fair market value of assets in the current year and the adjusted values of assets for the prior four years as provided in § 1.412(c)(2)–1(b)(8). An alternative formulation which is algebraically equivalent to this method is one in which the average value of assets is equal to the fair market value on the valuation date, minus decreasing fractions (4/5, 3/5, 2/5 and 1/5, in this example) of the appreciation and depreciation of the assets in each of the four preceding years. The stated averaging period may not exceed five (5) plan years. .02 Section 3.11 of Rev. Proc. 95-51 is clarified to read as follows:

.12 Approval 12. Approval is granted for a change in asset valuation method to the average value (as defined in § 1.412(c)(2)–1(b)(7)), modified to use the phase-in described below, or to any alternative formulation that is algebraically equivalent to this average value. The asset value determined under the method will be adjusted to be no greater than 120% and no less than 80% of the fair market value defined in § 1.412(c)(2)–1(c).

In the first year this method is used, the average value is calculated as in Approval 11, except that the adjusted values for all but the most recent prior year are replaced by the adjusted value for the most recent prior year. In the second year, the average is calculated as in Approval 11, except that the values for all but the most recent two prior years are replaced by the adjusted value for the second most recent prior year. This process is continued until values for all prior years in the averaging period are phased in. The stated averaging period may not exceed five (5) plan years. .03 Section 4.02(1) of Rev. Proc. 95-51 is modified to read as follows:

(1) If a plan uses an individual aggregate funding method and an individual normal cost becomes negative for a participant, approval is granted to re-allocate excess assets to other participants in proportion to the present value of accrued

benefits, or in proportion to the accrued liability determined under the immediate gain funding method described in § 3.01, § 3.08 (only if the normal cost for a participant is determined as a level percent of compensation under the plan’s method), or § 3.09 (only if the normal cost for a participant is determined as a level dollar amount under the plan’s method) or in proportion to the allocated adjusted assets prior to the reallocation. For this purpose, excess assets are defined as the excess, if any, of the assets currently allocated to the participant over the present value of the participant’s future benefits. .04 Section 4.04(3) of Rev. Proc. 95–51 is modified to read as follows:

(3) 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 Schedules B 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 absolute value of each resulting difference in normal cost, accrued liability (if directly computed under the method) and actuarial value of assets, that is attributable to the change in cost method, does not exceed five percent (5%) of the respective amounts calculated by the prior actuary for that year. .05 Section 5.01(2) (Creation of a Funding Method Change Base) of Rev. Proc. 95-51 is modified to read as follows: Except in the case of a change to a funding method described in § 3.02, § 3.03, § 3.04, or § 3.05, all existing bases shall be maintained and an amortization base shall be established equal to the difference between the unfunded accrued liability under the new method and an amount equal to (A) the net sum of the outstanding balances of all amortization bases (including, when the preceding method was an immediate gain method, the gain or loss base for the immediately preceding period), treating credit bases as negative bases, less (B) the credit balance (or plus the funding deficiency), if any, in the funding standard account, less (C) the sum of (i) any existing accumulation of additional funding charges for prior plan years due to § 412(l), (ii) any existing accumulation of additional interest charges due to late or unpaid quarterly install

January 12, 1998 36 1998–2 I.R.B.

ments for prior plan years and (iii) any existing accumulation of additional interest charges due to the amortization of prior funding waivers (which sum can be found on the Schedule B, for example, in 1997 on Line 9q(4)), all adjusted for interest at the valuation rate to the valuation date in the plan year for which the change is made. If this difference is a positive or negative number, the resulting base will be a charge base or a credit base, respectively. In the case of a change to a funding method described in § 3.02, § 3.03, § 3.04, or § 3.05, (a) the bases described in paragraph (1) must be maintained, and (b) all amortization bases other than those described in paragraph (1) shall be considered fully amortized. .06 Section 5.01 of Rev. Proc. 95–51 is modified by adding the following:

(5) If the funding method is being changed in accordance with the approval provided in § 4.01 (Approval to Anticipate Scheduled Benefit Increases), no base is established due solely to the change in method. The entire increase in unfunded liability resulting from anticipation of benefit increases scheduled to take effect during the term of the collective bargaining agreement currently applicable to the plan is treated as resulting from a plan amendment and the base established in the funding standard account is amortized over a 30-year period. .07 Section 6.01(2) of Rev. Proc. 95–51 (Administrator Approval) 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. However, in the case of a change in funding method described in § 4.01 (Approval to Anticipate Scheduled Benefit Increases), the plan administrator or authorized representative does not need to agree to the request. .08 Section 6.02(3)(c) of Rev. Proc. 95–51 (Four-year limitation on changes) is clarified and modified to read as follows:

(c) The funding method is being changed in a way not described in (a) or (b), and a funding method change (other than a change for which approval is provided by § 4 of this revenue procedure, or a change described in (a) or (b)) was made in any of the four (4) preceding plan years.