(a) Introduction. This section prescribes effective dates for rules relating to reasonable funding methods, under section 412(c)(3) and §1.412(c)(3)-1. Also, this section sets forth rules concerning adjustments to a plan's funding standard account that are necessitated by a change in funding method, and a provision setting forth procedural requirements for use of an optional phase-in of required changes.

(b) Effective date—(1) General rule. Except as otherwise provided by subparagraph (2) of this paragraph, §1.412(c)(3)-1 applies to any valuation of a plan's liabilities (within the meaning of section 412(c)(9)) as of a date after April 30, 1981.

(2) Exception. If a collective bargaining agreement which determines contributions to a plan is in effect on April 30, 1981, then §1.412(c)(3)-1 applies to any valuation of that plan's liabilities as of a date after the earlier of the date on which the last such collective bargaining agreement expires or April 30, 1984.

(3) Transitional rule. The reasonableness of a funding method used in making a valuation of a plan's liability as of a date before the effective date determined under subparagraph (1) or (2) of this paragraph is determined on the basis of such published guidance as was available on the date as of which the valuation was made.

(c) Change of funding method without approval—(1) In general. A plan that is required to change its funding method to comply with §1.412(c)(3)-1 is not required to submit the change of funding method for approval as otherwise required by section 412(c)(5). However, this change must be described on Form 5500, Schedule B for the plan year with respect to which the change is first effective.

(2) Amortization base. An amortization base must be established in the plan year of the change in method equal to the change in the unfunded liability due to the change (where both unfunded liabilities are based on the same actuarial assumptions). Such a base must be amortized over 30 years in determining the charges or credits to the funding standard account, unless the Commissioner upon application permits amortization over a shorter period.

(d) Phase-in of additional funding required by new method—(1) In general. A plan that is required to change its funding method to comply with §1.412(c)(3)-1 may elect to charge and credit the funding standard account as provided in this paragraph. An election under this paragraph shall be irrevocable.

(2) Credit in year of change. In the plan year of the change in method the funding standard account may be credited with an amount not in excess of 0.8 multiplied by the excess (if any) of—

(i) The normal cost under the new method plus the amortization charge (or minus the amortization credit) computed as described in §1.412(c)(3)-2(c)(2), over

(ii) The normal cost under the prior method, for the plan year of the change in method.

(3) Credits in the next three years. In the three years following the year of the change the funding standard account may be credited with an amount not in excess of 0.6, 0.4, and 0.2 respectively in the first, second, and third years, multiplied by either of the following amounts, computed as of the last day of the year of credit—

(i) The excess described in §1.412(c)(3)-2(d)(2) multiplied by a fraction (not greater than 1), the numerator of which is the number of participants in the year of the credit and the denominator of which is the number of participants in the year of the change, or, at the option of the plan,

(ii) The excess (if any) in the year of credit of—

(A) The net charge to the funding standard account based on the new method, over

(B) The net charge to the funding standing account based on the prior method.

(4) Computational rules. For purposes of the calculation described in §1.412(c)(3)-2(d)(3)(ii), the net charge is the excess of charges under section 412(b)(2) (A) and (B) over the credits under section 412(b)(3)(B) (including the charge or credit described in §1.412(c)(3)-2(c)) which would be required using the actuarial assumptions and plan benefit structure in effect on the last day of the plan year of change.

(5) Fifteen-year amortization of credits. The funding standard account shall be charged with 15-year amortization of each credit described in §1.412(c)(3)-2(d) (2) and (3) beginning in the year following each such credit.

(6) Manner of election. An election under this paragraph shall be made by the claiming of the credits described in §1.412(c)(3)-2(d) (2) and (3) on Schedule B to Form 5500 and by filing such other information as may be required by the Commissioner.

(e) Effect on shortfall method. The charges and credits described in this section apply in the shortfall method to the annual computation charge described in §1.412(c)(1)-2(d). The amounts described in §1.412(c)(3)-2(d) shall be determined before the application of the shortfall method.

(Sec. 3(31) of the Employee Retirement Income Security Act of 1974 (88 Stat. 837; 29 U.S.C. 1002) and sec. 7805 of the Internal Revenue Code of 1954 (68A Stat. 917; 26 U.S.C. 7805))

[T.D. 7746, 45 FR 86432, Dec. 31, 1980]