Rev. Rul. 81-12
1981-1 C.B. 228, 1981-2 I.R.B. 10.
Internal Revenue Service
Revenue Ruling
VESTING; ACCRUED BENEFITS REDUCTION; CHANGE IN ACTUARIAL FACTORS
Published: January 12, 1981
26 CFR 1.411(d)-3: Other special rules
Vesting; accrued benefits reduction; change in actuarial factors. In the case of a variable standard for computing actuarial equivalence, only an amendment to the basis of variation specified in a plan constitutes a potential change in participants' accrued benefits within the meaning of section 411(d)(6) of the Code, while a variation contemplated by the standard is not subject to that section. Methods are described that may be used to avoid a decrease in accrued benefits if the basis of computation of actuarial factors is changed.
Advice has been requested as to (1) what constitutes a change in actuarial factors indirectly affecting, within the meaning of section 1.411(d)-(3)(b) of the Income Tax Regulations, an accrued benefit, and (2) how, in the case of a plan amendment changing actuarial factors so that it indirectly affects an accrued benefit, the requirements of section 411(d)(6) of the Internal Revenue Code may be satisfied.
Section 411(d)(6) of the Code provides that a plan will fail to satisfy the minimum vesting requirements if the accrued benefit of any participant is decreased by a plan amendment, other than an amendment described by section 412(c)(8).
Section 1.411(d)-3(b) of the regulations states that for purposes of determining whether or not any participant's accrued benefit is decreased, all the provisions of a plan affecting directly or indirectly the computation of the accrued benefit which are amended with the same adoption and effective dates shall be treated as one plan amendment. That section further states that plan provisions indirectly affecting a participant's accrued benefit include actuarial factors for determining optional or early retirement benefits.
Rev. Rul. 79-90, 1979-1 C.B. 155, provides that for a plan to provide definitely determinable benefits, the actuarial basis used to determine a participant's optional or early retirement benefits must be specified in the plan. That ruling also provides for the use of either fixed or variable standards specified in the plan for computing actuarial equivalence. For either standard, only an amendment to the basis specified in the plan is subject to section 411(d)(6) of the Code, because only such an amendment constitutes a potential change in accrued benefit. Thus, in the case of a variable standard, any variation in accordance with the plan standard is not subject to section 411(d)(6). However, any amendment to either standard for computing actuarial equivalence, or an amendment substituting a fixed standard for a variable standard, is subject to section 411(d)(6).
Section 411(d)(6) of the Code and section 1.411(d)-3(b) of the regulations do not preclude a change in the actuarial basis. They do, however, preclude a change from decreasing a participant's accrued benefit. If the actuarial basis is being changed by a plan amendment and, as a result, any participant's accrued benefit may decrease, there are several acceptable methods that may be specified in the plan to prevent a decrease in an accrued benefit and a violation of section 411(d)(6).
One acceptable method is to provide that the actuarial equivalent of the accrued benefit on or after the date of the change is determined as the sum of (1) the actuarial equivalent of the accrued benefit as of the date of change computed on the old basis and (2) the actuarial equivalent, computed on the new basis, of the excess of (a) the total accrued benefit over (b) the accrued benefit as of the date of change.
Another acceptable method is to provide that the actuarial equivalent of the accrued benefit on or after the date of the change is determined as the greater of (1) the actuarial equivalent of the accrued benefit as of the date of change computed on the old basis or (2) the actuarial equivalent of the total accrued benefit computed on the new basis.
The text of the revenue ruling may be illustrated with the following examples:
EXAMPLE (1)
A plan providing for optional or early benefits on an actuarially equivalent basis provides that actuarial equivalence is determined on the basis of a mortality table specified in the plan and a 4% interest assumption. On December 31, 1978, the plan is amended to increase the interest rate from 4% to 5%.
This amendment is subject to section 411(d)(6) of the Code. The plan must provide some method to preclude a decrease in the optional and early retirement benefits.
The plan may provide that the optional or early retirement benefit for a person separating from service after December 31, 1978, is determined as the sum of (1) the actuarial equivalent using the 4% assumption of the accrued benefit as of December 31, 1978, and (2) the actuarial equivalent using the 5% assumption of the increase in accrued benefits since December 31, 1978.
Alternatively, the plan may provide that the optional or early retirement benefit for a person separating from service after December 31, 1978, is determined as the greater of (1) the actuarial equivalent, using the 4% assumption, of the accrued benefit as of December 31, 1978, or (2) the actuarial equivalent, using the 5% assumption, of the total accrued benefit as of the date of
separation.
EXAMPLE (2)
A plan providing for optional or early retirement benefits on an actuarially equivalent basis provides that actuarial equivalence is determined on the basis of a mortality table specified in the plan and an interest rate equal to 50% of the prime rate of a specified unrelated bank as of the date of separation. On December 31, 1978, the prime rate increases from 8% to 10% so that the interest rate used to compute actuarial equivalence changes from 4% to 5%.
Because the basis of determining actuarial equivalence (50% of the prime rate of a specified unrelated bank) did not change, the mere change in the calculation rate is not subject to section 411(d)(6) of the Code.
Rev. Rul. 81-12, 1981-1 C.B. 228, 1981-2 I.R.B. 10.