Determination 1121037: IRS modified funding conditions for a pension plan’s amortization extension

Plain-English summary

The IRS conditionally approved a request to modify the terms of an earlier ruling that allowed a pension plan to amortize unfunded liabilities over an extended period. It reduced the required funded-ratio floors for specified valuation dates, set new annual increases that lead to a 100% funded ratio by October 1, 2029, and added a requirement to request another ruling after certain plan amendments. The approval was effective October 1, 2009, and the extension would be null and void retroactive to October 1, 2002 if any prior or amended condition was not satisfied. The IRS said it would consider later modification requests for unforeseen circumstances, subject to another ruling request and user fee.

Ruling snapshot

• Question: Could the plan modify the conditions attached to its prior extension for amortizing unfunded liabilities?
• Outcome: Approved.
• Key authorities: IRC §§ 412 and 6110; ERISA §§ 302(b)(2)(B) and 302(c)(7).

Full text (IRS public release)

Significant Index No. 412.00-00

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

MAR 02 2011

T.EP:RA:A2

201121037

Re:

Dear

This letter constitutes notice that conditional approval has been granted for your request
for a modification of the Internal Revenue Service's (“Service”) prior ruling approving a
7-year extension for amortizing the Plan’s unfunded liabilities for the plan year
beginning October 1, 2002. The unfunded liabilities are described in Code Section
412(b) and Section 302(b)(2)(B) of the Employee Retirement Security Act of 1974
(“ERISA”), prior to amendment by the Pension Protection Act of 2006 (“PPA ‘06”). The
conditions of this approval are outlined in this letter. Your authorized representative
accepted these conditions in a letter dated February 25, 2011.

The prior amortization extension was granted subject to the following conditions:

(1) That the Plan maintain a credit balance that is at least as large as the
accumulation (at the plan’s valuation rate) of the amortized (at the Plan’s
valuation rate over a period of 15 years) differences between the amortization
payments of the extended bases (amortized at the section 6621(b) rate) and the
amortized payments of such bases had such bases been extended and
amortized at the Plan’s valuation rate;

(2) That the Plan’s funded ratio, calculated by dividing the Plan’s market value of
assets by its actuarial accrued liability (computed using the unit credit method
and the Plan’s assumptions as of October 1, 2002) remain:

a. no less than 67% for each valuation date from October 1, 2002 through
October 1, 2005, inclusive;

b. no less than 70% for each valuation date from October 1, 2006 through
October 1, 2008, inclusive;

c. no less than 75% for each valuation date from October 1, 2009 through
October 1, 2011, inclusive; and

d. for each valuation date subsequent to October 1, 2011, no less than 1%
per annum greater than the floor funded ratio as of the previous valuation
date; and

(3) For each Plan Year that the extension remains in effect, beginning with the Plan
Year beginning October 1, 2005, the Plan provides the Service with a copy of its
actuarial valuation report.

The prior ruling letter provided that the approval would be retroactively null and void if
any of these conditions were not met. However, the ruling indicated that the Service
would consider modifications of these conditions, especially in the event that
unforeseen circumstances beyond the control of the Plan might cause the actual
experience of the Plan to fail the funded ratio condition. An example of such
unforeseen circumstance would be market fluctuations which affect the value of the
Plan’s assets. This unforeseen circumstance happened during the plan years ending
September 30, 2008, and September 30, 2009, with a general decline in asset values
worldwide.

This approval (a) modifies conditions 2(c) and 2(d) above, (b) adds 2(e) through 2(g)
and, (c) adds a new condition 4, effective October 1, 2009, as follows. No other
conditions are modified.

2) The Plan's funded ratio, calculated by dividing the Plan’s market value of assets by
its actuarial accrued liability (computed using the unit credit method and the Plan
assumptions as of October 1, 2009) is;

i
c. no less than 64% for each valuation date from October 1, 2009, through
October 1, 2010, inclusive;

d. no less than 67% for each valuation date from October 1, 2011 through
October 1, 2013, inclusive;

e. no less than 68% for each valuation date from October 1, 2014 through
October 1, 2016, inclusive;

f. no less than 70% for each valuation date from October 1, 2017 through
October 1, 2019, inclusive;

g. for each valuation date subsequent to October 1, 2019, no less than 3%
greater than the required funded ratio of the previous valuation date, until a
funded ratio of 100% is achieved as of October 1, 2029. (For example,
because the floor funded ratio as of October 1, 2019, is 70%, the funded ratio
must be at least 73% as of October 1, 2020, and 76% as of October 1, 2021).

4) Within 30 days after any amendment is made that is subject to section 412(c)(7) of
the Code and section 302(c)(7) of ERISA as discussed below, or after any action is

[illegible]

[illegible]

taken that has the effect of such an amendment, the plan sponsor must request a
ruling approving the Plan’s prospective amortization of unfunded liabilities and pay
the applicable user fee.

If any one of the prior and amended conditions is not satisfied, the approval to extend the
amortization periods of the unfunded liabilities would be null and void, retroactive to
October 1, 2002. However, the Service will consider modifications of these conditions,
especially in the event that unforeseen circumstances beyond the control of the Plan
may cause the actual experience of the Plan to fail the funded ratio conditions. An
example of such unforeseen circumstance would be market fluctuations which affect the
value of the Plan’s assets. Of course, any request for a modification would be
considered another ruling request and would be subject to an additional user fee.

Please note that the address has changed for filing copies of the actuarial valuation
report to the following:

IRS — EP Classification
10 Metro Tech Center
625 Fulton Street
Brooklyn, NY 11201

Your attention is called to section 412(c)(7) of the Code and section 302(c)(7) of ERISA
which describe the consequences that would result in the event the Plan is amended to
increase benefits, change the rate in the accrual of benefits or to change the rate of
vesting, while the amortization extension remains in place. Please note that any
amendment that increases liabilities for a profit sharing plan or any other retirement plans
(whether qualified or unqualified) maintained by the Trustees for the Plan (or a sponsor
that consists of substantially the same persons as the Trustees for the Plan) and
covering participants of the Plan to which this ruling applies, would be considered an
amendment for purposes of section 412(c)(7) of the Code and section 302(c)(7) of
ERISA. Similarly, the establishment of a new profit sharing plan or any other retirement
plan (whether qualified or unqualified) maintained by the Trustees for the Plan (or a
sponsor that consists of substantially the same persons as the Trustees for the Plan) and
covering participants of the Plan to which this ruling applies, would be considered an
amendment for purposes of section 412(c)(7) of the Code and section 302(c)(7) of
ERISA.

This ruling is directed only to the taxpayer that requested it. Section 6110(k)(3) of the
Code provides that it may not be used or cited by others as precedent.

We have sent a copy of this letter to
[illegible]
to the [illegible] and to your
authorized representatives pursuant to a power of attorney on file in this office.

201121037

If you require further assistance in this matter, please contact

Sincerely yours,

[illegible]

David M. Ziegler, Manager
Employee Plans Actuarial Group 2