IRS provides guidance on changing plan years to delay effect of MAP-21 PBGC premium increases

In the latest issue of Employee Plans News, the IRS has provided guidance to practitioners and plan sponsors who have asked if and how single-employer defined benefit pension plan sponsors may change a plan year to delay the effect of PBGC premium increases mandated by The Moving Ahead for Progress in the 21st Century Act (MAP-21).

MAP-21 changed many items for single-employer defined benefit plans, including giving significant funding relief by allowing plans to use a 25-year average interest rate. At the same time, MAP-21 increased the annual PBGC premium each year beginning in 2013. Sponsors have asked if a change in plan year for the purpose of delaying these PBGC premium increases is eligible for automatic approval under Rev. Proc. 87-27.

Automatic IRS approval

Under Rev. Proc. 87-27, an automatic IRS approval for a change in plan year isn’t granted if the change would “…delay the time when the plan would otherwise have been required to conform to the requirements of any statute, regulation or published position of the Service.” “Any statute” includes a statute changing PBGC premiums, not only those changing provisions of the Internal Revenue Code. Because of this, the IRS notes automatic approval is not available for a change in plan year if it delays the effect of PBGC premium increases. This is true even if the delay is merely a side effect of the change and not the plan sponsor’s primary reason for changing the plan year.

Sponsors have suggested that a change in plan year is eligible for automatic approval because the MAP-21 effective date has passed and future increases in PBGC rates are just phase-ins. However, according to the IRS, automatic approval under Rev. Proc. 87-27 is not permitted for any change in plan year that delays the effect of a statute, regardless of whether that delay is only for one year or for a number of years in the future, such as the phase-in of PBGC premium increases.

Form 5308

If a change in plan year is not eligible for automatic approval, plan sponsors may file for approval using IRS Form 5308, Request for Change in Plan/Trust Year. However, when the IRS reviews requests for approval to change the plan year, the Service looks for a business reason for making the change – not a change just to achieve a certain result. For example, the IRS said that if the plan sponsor wants to align a plan year with its fiscal year, or collect data on a calendar year rather than a fiscal year basis, they would consider granting approval for the change (taking the plan’s facts and circumstances into account) even if the change in plan year also has the effect of delaying an effective date.

However, the IRS cautions plan sponsors thinking of changing a plan year to keep in mind the implications of this decision. In most cases, changing the plan year means making other changes such as moving the plan’s annual actuarial valuation date (which may require system changes and changes to internal procedures for collecting data) and shifting timetables for coordinating with the plan’s actuary, auditor, trustee, and other providers.

Changing a plan year also increases the risk that the plan sponsor may miss a key deadline (for example, for contributions, notices, and reporting) because these deadlines change when the plan year changes, the IRS noted.

Source: IRS Employee Plans News, Issue 2013-5, September 27, 2013.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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