Do you think you can take over a DB plan from a previous firm and terminate the plan in the same year? Section 6.01(5) of Rev. Proc. 2000-40 seems to not allow it, but that doesn't make a whole lot of sense to me as to why. Thoughts?

I'll check your reference as well, but... Common sense to me is:

Plan sponsor decides to terminate plan.
Plan sponsor does not like to do business with prior administration firm.
Plan sponsor has new TPA do the administration.

Assuming new TPA does it correctly, what's the problem?

After re-reading the Rev Proc. it appears to prohibit a change in funding method in the year of takeover, unless 4.02 applies to a fully funded terminating plan. Thus, the new actuary has to comply with the old funding method and compare results with the prior valuation to see that the new actuary is within 2% (or 5% depending on software changes as well).

You also get the chance to apply for a change in funding method by application, without the automatic approvals.

Neither prevents the new actuary from taking over the admin. They just make the job more restrictive.

First, I will say I am not looking at an application for a change in funding method as a solution.

Next, I have always considered the takeover of a plan from a prior firm as a change in funding method based on the reading of 4.03 of Rev. Proc. 2000-40. The summarization of that section is that the approval is granted if the method used by the new actuary is substantially the same as the method used by the old actuary and if certain computations are within 5% of the prior actuary's amounts. I am not sure how you get around not defining a takeover as a change in funding method. You are still using the same method as the prior actuary.

If it is a funding method change, then 6.01(5) restricts that change in the year of termination, thus my dilemma.

Now I suppose you could argue that if you matched EXACTLY the prior actuary's numbers, then there is no change in the funding method because you don't have to address 4.03(4). However, you most likely would have to then consider a change in software approval of 4.04.

Can you re-do the prior year, changing the method?

I go back to the common sense argument:

A change in funding method because you changed actuaries is unavoidable.
A change in funding method because of computer systems is unavoidable.
A change in type of funding method, eg Individual Aggregate or Unit Credit is not permitted unless you can use the fully funded in year of termination method.

My bottom line: just do it using the prior actuary's method.

Pax, I don't understand why you would want to redo the prior year.

SoCal, I agree that common sense should apply here, but since that isn't always the criteria, these types of questions arise. Are you saying that even though there is a change in funding method here, don't worry about it?

Blinky,
Example, assume PY is CY, and you acquire the client on April 1, 2004, to do the 2004 valuation. If you can re-do the 2003, change the method under the Rev. Proc. Then change again for 2004 under 4.02, assuming it qualifies.

Blinky: Yes - your professional judgement on the proper services needed to the client are the best criteria. When you takeover the plan, either stay with the prior funding method or go with the automatic approval for fully funded plans on termination if you can. Even though you are the new actuary, using the new computer system, take the position that you did not change funding methods, and be prepared to argue that as the common sense approach if audited.

Pax: This works if the prior Sch B has not been filed, so it might work.

I always wanted to bring this up for a discussion.
I was puzzled when I saw this in Rev. Proc 2000-40. It doesn't make sense to me but I would like to know the rational behind such, what to me is, a rediculous promulgation. From which planet did the drafters of this hail from?

Why would going from Lotus to Excel be a change in funding method? Do these softwares produce different results for the same calculations?

Similarly, does going from one vendor of commercial valuation software to another vendor produce different results for the same calculations?

Is it a change of funding method if:
1. One upgrades from Excel 2000 to Excel XP?

2. One upgrades the computer with a Intel Pantium II chip to a computer with a Pantium 4 chip or worst yet to one with a an AMD chip? After all the chips have inbuilt software!!

3. Going to the new version of the software of the same vendor - which happens frequently for many reasons - law changes being one of them.

and so on.....

It won't be bad, if it was a matter of just checking the box on line 5i of Sch B & Line 7 of Sch R but one is supposed to redo the prior year valuation to see if one gets the results within 2% margin!!

Was this put in by lobbying pressure from the software vendors to discourage people from changing softwares!?

I think you might be out of luck on that too. Because this is a Takeover plan, it fails the requirement 4.04(7)?

Additionally, you have a Takeover and a change of software situation. Is this situation covered by the Rev Proc? If not, one has to apply for an individual approval under Rev Proc 2000-41 with a user fee of $540 (last time I looked at it)!?

Imagine the reaction of a small plan sponsor when he is asked to fork out $540!! And there is no guarantee that the approval will be granted.
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I have couple of questions on Takeover situations.

Is a TPA, a "business organisation providing actuarial services" if the TPA hires an outside actuary to do the work?
If so, what if there is no change of TPA but the TPA hires another actuary? Is that a change in fuding method?

What if an in-house actuary leaves an actuarial services provider and the firm hires a replacement actuary? What if within the same firm a different actuary is assigned to work on a plan?
Do these cause a change method? If so, then these situations are not covered by the Rev Proc and one must apply for an individaul approval?

Flosfur, I think that the change in software requirement is not to the extreme you mention in your first post. See 4.04(1), which states that if the computations are the same, then no software change occurs. Upgrading the computer's processor certainly wouldn't alter the calculations.



Although I see that it's not crystal clear, when you have a takeover change in funding method, then you don't also need to have approval for a change in software. It's part of the package deal.



Seems like a change to me because there was a change to the actuary and the organization providing actuarial services.



These are clearly not changes because there is no change in the business organization.

And going from Lotus 1-2-3 to Excel would alter your calculations!?


I would be more concerned about switching of an actuary within an organization which happens because one actuary won't certify to something to which another actuary in the same firm will - sure it is a question of differring opinion but fishy...

Also, the likelihood of a replacement actuary producing different results is much much higher than switching from Lotos to Exce is much much higher!!!

Why should it be unavoidable? (I know the Rev Proc says so). If I takeover a case and can reproduce the prior actuary's #s, why should it be a change of funding method merely because it is a takeover case!!? Heaven's to Betsy, IRS, please call it anything but a change in funding method!!

Similarly, why should changing one's computer system be a change in funding method?

Just venting ...

Flosfur - I agree. The IRS puts us in the position that it is a change, when it really isn't. I was making the point (redundant, but so what?) that the takeover and termination of a plan by the new actuary is just a routine fact of life, so get on with it. If it is a change in funding method because the IRS sees a new firm, new software, or such, it is unavoidable because the old actuarial firm did not have a guaranteed contract to do the actuarial work.

What I believe is that the IRS does not like a change in funding method in the year of termination when it might dramaticly change the plan cost (either up or down) to avoid funding deficits or to get higher deductions. In this Proc. they added enough rules to make normal practice more difficult, that's all.