2006 Enrolled Actuaries Meeting Session 303 Mergers and Spinoffs: Applying Rules under 414lC

1. 2006 Enrolled Actuaries MeetingSession 303Mergers and Spinoffs: Applying Rules under 414(l)(C) Good morning to you and welcome to Session 105, entitled funding after mergers and spinoffs. Let’s take care of some housekeeping matters and then we’ll get right into the session itself. Let me first introduce my colleague in this presentation, Robert Dougan. Robert is a Fellow of the Society of Actuaries and a consulting actuary for AON Corporation. I’m Tom Swain and am also a Fellow of the Society of Actuaries and a consulting actuary for Bryan, Pendleton, Swats & McAllister, LLC. Let me point out the handouts. Robert and I both agreed early on that a key value of these sessions is the handout. The handout is organized by type of merger or spinoff. At the front is also a listing of useful references. The handout is also footnoted to point you to the specific primary source. The handout is over 50 pages. Unless you suffer from insomnia, we suggest you not attempt to read it straight through. We intended for this to be a helpful secondary or tertiary reference. Final point about the handout. You should have picked up a revised and refined version of the handout from the back of the room. This version eliminates some typos and inaccuracies that unfortunately were in the draft submitted back in January. The CD that you get from the EA meeting will have the original draft; if you want an electronic copy of this updated draft, just leave your business card and I’ll have my assistant e-mail this revised draft to you. Good morning to you and welcome to Session 105, entitled funding after mergers and spinoffs. Let’s take care of some housekeeping matters and then we’ll get right into the session itself. Let me first introduce my colleague in this presentation, Robert Dougan. Robert is a Fellow of the Society of Actuaries and a consulting actuary for AON Corporation. I’m Tom Swain and am also a Fellow of the Society of Actuaries and a consulting actuary for Bryan, Pendleton, Swats & McAllister, LLC. Let me point out the handouts. Robert and I both agreed early on that a key value of these sessions is the handout. The handout is organized by type of merger or spinoff. At the front is also a listing of useful references. The handout is also footnoted to point you to the specific primary source. The handout is over 50 pages. Unless you suffer from insomnia, we suggest you not attempt to read it straight through. We intended for this to be a helpful secondary or tertiary reference. Final point about the handout. You should have picked up a revised and refined version of the handout from the back of the room. This version eliminates some typos and inaccuracies that unfortunately were in the draft submitted back in January. The CD that you get from the EA meeting will have the original draft; if you want an electronic copy of this updated draft, just leave your business card and I’ll have my assistant e-mail this revised draft to you.

2. 1 Agenda Applying the rules of 414(l) Funding rules after mergers and spinoffs IRS Perspective Let’s get into the session. In our presentation today, I’ll be handling the topic of mergers, and Robert will be tackling spinoffs. I’ll lay some groundwork for the topic by quickly defining what constitutes a merger, go over some retirements, circumstances, and mechanics of mergers, then focus more closely on funding issues. Robert’s going to do the same for plan spinoffs.Let’s get into the session. In our presentation today, I’ll be handling the topic of mergers, and Robert will be tackling spinoffs. I’ll lay some groundwork for the topic by quickly defining what constitutes a merger, go over some retirements, circumstances, and mechanics of mergers, then focus more closely on funding issues. Robert’s going to do the same for plan spinoffs.

3. Mergers and Spinoffs: Applying Rules under 414(l) Lonie A. Hassel Groom Law Group, Chtd. 2006 Enrolled Actuaries Meeting March 27, 2006

4. 3 Section 414(l) Legal Requirements Agency Enforcement Applying the Rules

5. 4 414(l) Requirements In the case of merger, consolidation, or transfer of assets or liabilities to another plan – Each participant in the plan would (if the plan then terminated) receive a benefit immediately after the merger, consolidation, or transfer which is equal to or greater than the benefit he would have been entitled to receive immediately before the merger, consolidation, or transfer (if the plan had then terminated)

6. 5 Internal Revenue Service Benefit determinations based on “reasonable actuarial assumptions” PBGC termination assumptions are “safe harbor,” but not required Current liability rate may be reasonable interest rate for this purpose

7. 6 Pension Benefit Guaranty Corporation Does not enforce section 414(l), but could intervene in a spinoff or merger under its “Early Warning Program” Under Early Warning Program, PBGC monitors Plan sponsors that have below investment grade credit rating with plan that has more than $25 million in current liability Plans that have more than $25 million in current liability and more than $5 million in unfunded current liability

8. 7 Pension Benefit Guaranty Corporation Early Warning Program may target the following events that could involve a spinoff or merger – Break up of a controlled group Transfer of significantly underfunded pension liabilities in connection with sale of business Leveraged buy-out Major divestiture of assets and retention of significantly underfunded pension liabilities

9. 8 Pension Benefit Guaranty Corporation Under Early Warning Program, PBGC has challenged transactions in which part of a plan is spun off to a financially weaker controlled group PBGC has sought the use of safe harbor assumptions to maximize assets in the plan transferred to weaker controlled group

10. 9 Pension Benefit Guaranty Corporation Spinoff may be a reportable event – 20% active participant reduction Change in contributing sponsor or controlled group Transfer of 3% or more of benefit liabilities Notice generally required within 30 days after the event Notice required 30 days before event for non-public companies with defined benefit plans less than 90% funded for vested benefits and with more than $50 million in unfunded vested benefits

11. 10 Department of Labor May address spinoffs indirectly through its authority to enforce fiduciary rules under sections 404 and 406 of ERISA Courts have concluded that decision to spin off is not a fiduciary decision governed by fiduciary rules Implementing a spinoff decision may involve fiduciary actions, but generally, compliance with section 414(l) has been found to meet fiduciary requirements Failure to use safe harbor assumptions is not, standing alone, a breach of fiduciary duty

12. 11 Allocating Excess AssetsSame Controlled Group Transfer of assets from an overfunded plan to another plan in the same controlled group requires transfer of “applicable percentage” of excess assets Applicable percentage is derived from a fraction Numerator is excess of plan’s full funding liability over plan’s termination liability Denominator is sum of all excess amounts for all plans involved in transfer

13. 12 Allocating Excess AssetsSame Controlled Group Applicable percentage formula does not work because termination liability generally exceeds full funding liability Plans therefore use “reasonable” method for allocating excess assets, such as pro rata

14. 13 Allocating Excess AssetsDifferent Controlled Group Transfer of assets from an overfunded plan to another plan in a different controlled group does not require transfer of excess assets May trigger lawsuit by plan participants, however Where excess is not attributable to employee contributions, courts have concluded that section 414(l) and parallel ERISA section 208 do not require transfer of excess assets in spinoff to a different controlled group

15. 14 Allocating Excess AssetsDifferent Controlled Group Participants have sought a share of earnings on assets pending transfer to new plan Participants have challenged investment vehicle for assets pending transfer to new plan

16. 15 Allocating Assets and Liabilities in Underfunded Plan After the transfer, the funded level of each participant’s benefit on a termination basis must be the same as or better than the funded level of the participant’s benefit on a termination basis before the transfer Benefits on a termination basis are benefits determined under priority categories in section 4044 of ERISA

17. 16 Allocating Assets and Liabilities in Underfunded Plan Priority categories are – Benefits derived from voluntary participant contributions Benefits derived from mandatory participant contributions Benefits payable to participant who was or could have retired three years before the termination/transfer date Guaranteed benefits Nonforfeitable benefits (vested benefits not guaranteed by PBGC, e.g., benefits subject to phase-in) All other accrued benefits

18. 17 Allocating Assets and Liabilities in Underfunded Plan Because assets are allocated first to benefits of retirees, one plan could be less well-funded on an aggregate basis after the spinoff if a disproportionate number of retiree liabilities are spun off to another plan

19. 18 Full Funding Upon Termination Is plan requirement of full funding upon termination triggered by spinoff? Requires careful examination of plan documents Could have substantial effect on spinoff

20. 19 Undoing a Spinoff May require additional funding if spun off plan was merged into better funded plan Spin off of less well funded plan would violate section 414(l) requirement to maintained funded level on a termination basis If merger is subject to contingencies, consider maintaining free standing spinoff plan until contingencies are met, then merging

21. Funding Rules after Mergers and Spinoffs Tom Swain, F.S.A. Bryan, Pendleton, Swats & McAllister, LLC 2006 Enrolled Actuaries Meeting March 27, 2006

22. 21 DB Plan Merger/Spinoff Definitions “Single Plan” means all of the assets are available to pay all of the benefits “Single Plan” can have : Multiple benefit structures Multiple trust funds and investment managers Multiple plan documents and SPDs Multiple plan sponsors (“multiple-employer” plan, if not same controlled group) Availability of assets is the only test See: Reg. 1.414(l)-1(b)(1),(2) [Read slide] For a merger, the simple definition is that two or more plans are coming together to form one plan. The definition in the regulations specifies a single litmus test, and that is that a single plan means that all of the assets are available to pay all of the benefits. I’m sure you’ve seen as I have, or actually merged plans where the plans are merged, but the benefit structures that were contained in the plans prior to merger were just “jammed together” in one document. That’s still one plan. The plan can have multiple trust funds, multiple investment managers, multiple plan documents and spd’s, and have multiple plan sponsors and still be considered a single plan. So, the availability of assets to pay benefits is the only test, and the ultimate test under the law and regulations, as to what constitutes a single plan. See: Reg. 1.414(l)-1(b)(1),(2) [Read slide] For a merger, the simple definition is that two or more plans are coming together to form one plan. The definition in the regulations specifies a single litmus test, and that is that a single plan means that all of the assets are available to pay all of the benefits. I’m sure you’ve seen as I have, or actually merged plans where the plans are merged, but the benefit structures that were contained in the plans prior to merger were just “jammed together” in one document. That’s still one plan. The plan can have multiple trust funds, multiple investment managers, multiple plan documents and spd’s, and have multiple plan sponsors and still be considered a single plan. So, the availability of assets to pay benefits is the only test, and the ultimate test under the law and regulations, as to what constitutes a single plan.

23. 22 DB Plan Merger/Spinoff Definitions Merger: Combination of 2 or more plans into one surviving “single plan” Spinoff: Splitting of one plan into two or more new “single plans” Asset/Liability transfer: same number of plans after transfer—no creation or absorption of plans Treated as spin-off followed by merger See: Reg. 1.414(l)-1(o); IRC 414(l)(2). The merger is a combination of 2 or more plans into one surviving “single plan”. The IRS ahs traditionally not distinguished between “merger” and “consolidation” but the PBGC premium regulations do distinguish on this point. [Need to amplify] Spinoff involves the splitting of one plan into two or more new single plans. An asset/liability transfer is distinguished from either the merger or the spinoff in that there is no new plan creation or absorption. The number of plans stays the same both before and after the merger. The transfer and receipt of assets and liabilities between the two plans must have the same effective date, otherwise a separate spinoff and merger may be created.See: Reg. 1.414(l)-1(o); IRC 414(l)(2). The merger is a combination of 2 or more plans into one surviving “single plan”. The IRS ahs traditionally not distinguished between “merger” and “consolidation” but the PBGC premium regulations do distinguish on this point. [Need to amplify] Spinoff involves the splitting of one plan into two or more new single plans. An asset/liability transfer is distinguished from either the merger or the spinoff in that there is no new plan creation or absorption. The number of plans stays the same both before and after the merger. The transfer and receipt of assets and liabilities between the two plans must have the same effective date, otherwise a separate spinoff and merger may be created.

24. 23 Mechanics of Plan Mergers Selection of “Surviving Plan” a/k/a “Ongoing Plan” Documentation Board resolution(s) by plan sponsor(s) Amendments to Plan and Trust Agreement Your first decision in a merger situation is to select the “Surviving Plan” also known as the ongoing plan. Factors that may drive the choice of the surviving plan are: -- corporate structure -- Labor relations issues -- Most desirable funding method ongoing to be used with automatic approval You’ll document the plan merger typically by board resolutions for each plan authorizing the merger and designating the plan that will be the ongoing plan. There may be other amendments to the plan and trust agreement that are required at that time based on the actual details of your merger. Your first decision in a merger situation is to select the “Surviving Plan” also known as the ongoing plan. Factors that may drive the choice of the surviving plan are: -- corporate structure -- Labor relations issues -- Most desirable funding method ongoing to be used with automatic approval You’ll document the plan merger typically by board resolutions for each plan authorizing the merger and designating the plan that will be the ongoing plan. There may be other amendments to the plan and trust agreement that are required at that time based on the actual details of your merger.

25. 24 Mechanics of Plan Mergers Reporting and disclosure Notice to IRS — Form 5310A, due 30 days before effective date Notice to PBGC — Notice of reportable event Notice to participants New SPD or SMM, particularly for participants in disappearing plan Notice to collective bargaining representatives Notice to other regulators Form 5500 for disappearing and surviving plans PBGC premium filings for disappearing and surviving plans See: IRC 6058(b); ERISA 4043; PBGC Reg. 4043.28 You have to give notice to the IRS using form 5310A. It’s due 30 days before the effective date of the merger. If you miss the filing deadline, this does not affect the transaction, but it will cost you some filing penalties; $25 per day. You’ll need to consider whether notice to the PBGC is required. You’ll need to notify participants, bargaining representatives and notify other regulatory agencies. [read rest of the slide] If the merger occurs on any day other than the first day of a plan year, the disappearing plan must pay the full premium for the plan year. If the merger occurs on the first day, the plans are combined for premium payment purposes. See: IRC 6058(b); ERISA 4043; PBGC Reg. 4043.28 You have to give notice to the IRS using form 5310A. It’s due 30 days before the effective date of the merger. If you miss the filing deadline, this does not affect the transaction, but it will cost you some filing penalties; $25 per day. You’ll need to consider whether notice to the PBGC is required. You’ll need to notify participants, bargaining representatives and notify other regulatory agencies. [read rest of the slide] If the merger occurs on any day other than the first day of a plan year, the disappearing plan must pay the full premium for the plan year. If the merger occurs on the first day, the plans are combined for premium payment purposes.

26. 25 Mergers: Focus on Funding Issues Rev. Proc. 2000-40 General concepts Types of Mergers covered Areas without guidance Examples Now, let’s focus on funding issues by looking at the guidance provided by Rev. Procedure 2000-40. We’ll look at the general concepts documented by this revenue procedure, the types of mergers that are covered, and the areas for which we do not have definitive guidance. Throughout, we will be looking at some examples to illustrate the concepts.Now, let’s focus on funding issues by looking at the guidance provided by Rev. Procedure 2000-40. We’ll look at the general concepts documented by this revenue procedure, the types of mergers that are covered, and the areas for which we do not have definitive guidance. Throughout, we will be looking at some examples to illustrate the concepts.

27. 26 Mergers: General Concepts Rev. Proc. 2000-40—Automatic approval of funding method change for merged plans under specific circumstances Rev. Proc. 2000-41—File for IRS approval of funding method change for merged plans if circumstances not covered by Rev. Proc. 2000-40. May be difficult to get approval for alternative method if merger fits one of the scenarios outlined in Rev. Proc. 2000-40 See Rev. Proc. 2000-40, Secs. 4.05 – 4.08 [Read slide]See Rev. Proc. 2000-40, Secs. 4.05 – 4.08 [Read slide]

28. 27 Mergers: General Concepts Automatic approval subject to general conditions: Not after Schedule B filed (or due date passed), without reflecting merger & method change Plan administrator must agree (check box on Form 5500, Schedule R) No minimum funding waiver requested or being amortized No extension of amortization periods requested or in effect Not under audit, pending audit or appeal No plan termination These general conditions are contained in Rev. Proc. 2000-40, Sec. 6.01 [read slide]These general conditions are contained in Rev. Proc. 2000-40, Sec. 6.01 [read slide]

29. 28 Mergers: General Concepts Method change on merger not subject to some restrictions applicable to change in actuarial valuation method for ongoing plan: Automatic approval available to change asset/funding method for merger, even if changed in previous four years Can’t use automatic approval for subsequent change until five years later Automatic approval available, even if negative normal costs, negative unfunded liability, or frozen benefits Treat in same way as in ongoing plan Rev. Proc. 2000-40, Sections 4.05 through 4.08 discuss the special approvals that can supersede some of the general restrictions on funding method changes with automatic approval. [read slide]Rev. Proc. 2000-40, Sections 4.05 through 4.08 discuss the special approvals that can supersede some of the general restrictions on funding method changes with automatic approval. [read slide]

30. 29 Mergers: General Planning Issues Classification of merger and transition period expected Selecting the surviving plan/funding method Selecting the asset valuation method Timing of plan amendments Credit balances Deduction limits and contributions Contribution deadlines Filing deadlines Quarterly contribution requirements Contributions made after the merger

31. 30 Rev. Proc. 2000-40 Mergers De Minimis Mergers Beginning of Year Mid-Year Simple Mergers More Complex Mergers Transition Period of less than 12 months Transition Period of more than 12 months Rev. Proc. 2000-40 tells us about the automatic approvals that are available for a change in funding method under these circumstances [read slide] Rev. Proc. 2000-40 tells us about the automatic approvals that are available for a change in funding method under these circumstances [read slide]

32. 31 De Minimis Merger Merger of smaller plan is considered de minimis Definition: Small Plan (liabilities less than 3% of Large Plan’s assets) merges with Large Plan Surviving plan ignores smaller plan funding standard account post-merger Automatic approval if no changes to surviving plan methods Value assets and liabilities of smaller plan with larger plan Treat addition of smaller plan as an actuarial gain or loss [read slide][read slide]

33. 32 Mid-Year De Minimis Merger Reg. 1.414(l)-1(h); Rev. Proc. 2000-40, Sec. 4.05 Graphic depiction of a mid-year de minimis merger Mention credit balance is lost for disappearing plan. Contributions may be credited to either plan if made after the merger date and within 8-1/2 months of the merger date.Reg. 1.414(l)-1(h); Rev. Proc. 2000-40, Sec. 4.05 Graphic depiction of a mid-year de minimis merger Mention credit balance is lost for disappearing plan. Contributions may be credited to either plan if made after the merger date and within 8-1/2 months of the merger date.

34. 33 Mid-Year De Minimis Merger Disappearing Plan Small plan has short plan year running from beginning of plan year to date of merger Prorate funding standard account entries to reflect duration of short plan year, under Rev. Rul. 79-237 Ignore funding standard account charges for small plan for remainder of plan year Contributions made within 8 1/2 months after date of merger can be credited to short plan year for smaller plan Any deficiency in smaller plan results in 10% excise tax for underfunded plans, but not 100% tax [read slide][read slide]

35. 34 Requirements Same plan years Valuation dates first or last day of plan year Merger occurs first or last day of plan year Funding method for each plan must be “standard” method under Rev. Proc. 2000-40 Neither plan has a funding deficiency Simple Merger See: Rev. Proc. 2000-40, Sec. 4.06See: Rev. Proc. 2000-40, Sec. 4.06

36. 35 Simple Merger Minimum/maximum contributions unchanged prior to merger: Full-funding limit for merged plan does not “cancel” funding requirements or maximum contribution levels for plan merged in at end of year Contributions made after end of plan year (but before 8 1/2 months after end of plan year) can be credited to either plan [read slide][read slide]

37. 36 Simple Merger Asset valuation method If both use exactly the same method, continue after merger Otherwise, can change to ANY method described in Rev. Proc. 2000-40 Funding valuation (“cost”) method Use ongoing plan’s method Plan administrator designates ongoing plan Combine credit balances [read slide][read slide]

38. 37 Simple Merger Amortization bases Maintain bases according to general rules of Rev. Proc 2000-40 For spread-gain methods: Re-set unfunded liability For immediate gain methods: Establish gain/loss base for each plan BEFORE changes due to merger, change in assumptions, or plan amendments Establish base for funding method change, reflecting changes in assumptions and methods Method change base amortized over 10 years [read slide] Re-set unfunded liabilitiy and amortize as a change in funding method for 10 years. [read slide][read slide] Re-set unfunded liabilitiy and amortize as a change in funding method for 10 years. [read slide]

39. 38 Simple Merger Funding Example [review slide][review slide]

40. 39 Merger—Transition period up to 12 months Valuation date first day of plan year Period between first day of plan year A and last day of plan year B is up to 12 months See: Rev. Proc. 2000-40,Sec. 4.07 You don’t re-measure items at the merger date. See: Rev. Proc. 2000-40,Sec. 4.07 You don’t re-measure items at the merger date.

41. 40 Merger—Transition period up to 12 months Other Requirements Same general conditions as simple merger, except that valuation date for both plans must be beginning of plan year Divide funding standard account entries for disappearing plan between: Short plan year — period between beginning of plan year and date of merger Interim period — period between date of merger and end of plan year, ongoing plan Both plans must have a valuation date that is the beginning of their respective plan years. Divide according to the principles of Revenue Ruling 79-237. For the short plan year, you’ll prorate charges and credits based on the period between the beginning of the plan year and the date of the merger. For the interim period, you’ll once again prorate for the period between the date of the merger and the end of the plan year of the disappearing plan, and add this to the charges and credits of the ongoing plan. Both plans must have a valuation date that is the beginning of their respective plan years. Divide according to the principles of Revenue Ruling 79-237. For the short plan year, you’ll prorate charges and credits based on the period between the beginning of the plan year and the date of the merger. For the interim period, you’ll once again prorate for the period between the date of the merger and the end of the plan year of the disappearing plan, and add this to the charges and credits of the ongoing plan.

42. 41 Merger—Transition period up to 12 months Division of funding standard account entries for disappearing plan: Entries should be prorated to reflect portion of the year covered by each period Entries for interim period should reflect interest during short plan year

43. 42 Merger—Transition period up to 12 months Combine entries for interim period with funding standard account entries for ongoing plan (use credit balance as of end of short plan year) Other Schedule B entries based on ongoing plan without merger Assumptions, methods do not have to conform to ongoing plan until next valuation Contributions made within appropriate timeframes can be credited to either plan

44. 43 Merger—Transition period up to 12 months Example — Plan A merges into Plan B as of 9/30/2003 Plan A — Plan year 7/1 – 6/30, PUC method — 8% assumed interest Plan B — Calendar year plan, PUC method — 8% assumed interest Both plans use three-year average assets Transition period — 7/1/2003 to 12/31/2003

45. 44 Merger—Transition period up to 12 months Plan A Funding standard account:

46. 45 Merger—Transition period up to 12 months

47. 46 Merger—Transition period up to 12 months

48. 47 Merger—Transition period up to 12 months Procedure for maximum tax-deductible contribution is analogous to minimum: Limit for short plan year determined without regard to merger Add pro-rata contribution for interim period to maximum determined for ongoing plan

49. 48 Merger—Transition period over 12 months Valuation date first day of plan year Period between first day of plan year A and last day of plan year B is over 12 months

50. 49 Rev. Proc. 2000-40—No Guidance Issues How to handle other FSA entries — use consistent principles (and see past Gray Books!) Quarterly contributions Additional interest charge for late quarterly contributions Additional funding charge Full-funding limit Accumulated reconciliation account Volatility rule and gateway percentages

51. 50 Spinoffs: Focus on Funding Issues General concepts Planning Issues Types of Spinoffs

52. 51 Spinoffs: General Concepts Spunoff plans divide the funding standard account, amortization bases, etc., of previous single plan No change in funding method is ordinarily required because spunoff plans retain funding method of previous single plan For de minimis spinoff, spunoff plan is treated as a new plan which can use any reasonable funding method — IRS approval not needed! Rev. Rul. 81-212 gives a basic “recipe” for splitting funding standard account Rev. Rul. 86-47 addresses additional situations of plans with surplus assets which the formulas in Rev. Rul. 81-212 do not address

53. 52 Spinoffs: General Planning Issues Classification of spinoff and transition period expected Timing of plan changes Credit balances Deductible limits and contributions Contribution deadlines Filing deadlines Quarterly contribution requirements Valuations Contributions made after the spinoff

54. 53 Types of Spinoffs De Minimis Beginning of Year Mid-Year Simple Spinoff Mid-Year Spinoff

55. 54 De Minimis Spinoff Requirements Spinoff of smaller plan is considered de minimis Small Plan (assets less than 3% of Large Plan’s assets) spins off from Large Plan Spunoff assets equal present value of accrued benefits spun off (whether or not vested) Ongoing plan ignores smaller plan funding standard account post-spinoff

56. 55 De Minimis Spinoff Ongoing plan treats spinoff of smaller plan as an actuarial gain or loss This is not considered a change in funding method, so no IRS approval needed if no changes to ongoing plan methods Value assets and liabilities, apply funding rules to smaller plan as if it is a brand new plan with no prior history As a new plan, smaller plan may adopt any reasonable funding method (including asset method) – not tied to previous plan

57. 56 De Minimis Mid-Year Spinoff Reg. 1.414(l)-1(h); Rev. Proc. 2000-40, Sec. 4.05Reg. 1.414(l)-1(h); Rev. Proc. 2000-40, Sec. 4.05

58. 57 De Minimis Mid-Year Spinoff Small Plan Value assets and liabilities, apply funding rules to smaller plan as if it is a brand new plan with no prior history Small plan has short plan year running from date of spinoff to end of first plan year Prorate funding standard account entries to reflect duration of short plan year, under Rev. Rul. 79-237 Ongoing (Large) Plan For first valuation of larger plan on or after spinoff date, the difference between assets and liabilities is a gain or loss. No change in funding or asset valuation method.

59. 58 Requirements Valuation date is first day of plan year Spinoff occurs first day of current plan year or last day of prior plan year Simple Spinoff

60. 59 Simple Spinoff Funding Standard Account Allocation Amortization bases, credit balance, etc., may be allocated based on reasonable methods. See Rev. Rul. 81-212 or Rev. Rul. 86-47. Asset valuation method and funding valuation (“cost”) method can remain the same as previous plan; no IRS approval needed since no change is being made Rev. Proc. 2000-40, section 6.02(7), denies automatic approval for most method changes “in connection with a spin-off” Presumably could apply for approval of a change under Rev. Proc. 2000-41 if desired

61. 60 Simple Spinoff Unfunded Liability Unfunded is split between ongoing plan and new plan based on other allocations If one plan results in a negative unfunded, that is set to zero; other plan receives all amortization bases and must establish a new base to keep the equation of balance in balance

62. 61 Simple Spinoff Rev. Rul. 81-212

63. 62 Simple Spinoff Rev. Rul. 86-47

64. 63 Mid-Plan Year Spinoff Valuation date first day of plan year Spinoff occurs during the plan year of the continuing plan

65. 2006 EA Meeting Session 303 Mergers and Spinoffs IRS PerspectiveCarol Zimmerman, F.S.A. March 27, 2006

66. 65 When do plan sponsors have to file for a merger? Deficiency in either plan Valuation date not on the first or last day of the plan year Funding method not automatically approved Not on the list of approved methods Plan administrator does not want to use the default method

67. 66 What do we look for? Be sure funding standard account entries are split appropriately in mid-year merger Total charges for the split plan year should be the same as the whole Be careful with calculations involving actuarial value of assets

68. 67 What do we look for? Check to be sure that bases are carried over appropriately Bases retained in accordance with Rev. Proc 2000-40 Experience bases added prior to merger if appropriate for funding method Bases reamortized if interest rate changed Bases, amortization charges and credits rolled forward appropriately – especially where partial plan years are involved

69. 68 What do we look for? Follow Rev. Proc. 2000-40 to the extent possible Check to be sure that balancing equation works before and after the merger

70. 69 Other considerations Be sure funding method is reasonable Dollars-times-service benefits should not be funded as a percentage of future compensation even if that was the method for the surviving plan Frozen plans should be valued using the unit credit method

71. 70 Other considerations Think about alternative approaches – example: Merge plan using FIL as percentage of pay with plan using FIL as level dollar amount Merged plan uses FIL as a level dollar amount 2000-40 calls for re-establishment of UAL, change in funding method base includes accumulated gains and losses

72. 71 Other considerations Think about alternative approaches – (continued) Could calculate change in funding method base as the change in UAL for conforming plan and continue to fund gains/losses through normal cost Does not qualify for automatic approval

73. 72 Spinoffs Interest rates, other assumptions Default: PBGC assumptions, 4044 allocation Anything else must be justified on the basis of annuity purchase pricing May be special features in plan that make group annuity more or less expensive, or that would give more weight to certain categories of participants

74. 73 Spinoffs Mid-year considerations – similar to merger Total of funding standard account entries should be the same on a full-year basis as they were before the spin-off Don’t forget to address the issue of excess assets

75. 74 Questions?