Preparing a pension plan termination

The process of terminating a defined benefit (DB) plan is lengthy, time consuming, and costly. An actuary, trust custodian, attorney, trustee, and investment advisor can assist with many of the duties. In this DB Digest article, Milliman’s Stephanie Sorenson discusses the multiple tasks that plan administrators must accomplish in preparation for a plan termination.

Here’s an excerpt:

Data
It is important to review and validate the participant data. Quality data is critical to the termination process. Insurer quotes will reflect the accuracy, actual or perceived, of the data provided to them.

Also the Pension Benefit Guaranty Corporation (PBGC) requires that the plan sponsor maintain the participant and plan data for six years after plan termination (the date on which PBGC Form 501 is filed). The data should be gathered during the plan termination process and remain accessible during the six-year period.

Does the data have valid identification numbers for all participants? Does the data contain valid dates of birth, hire, participation, and termination? If not, review employment records and update.

Does the data include addresses for all participants and beneficiaries? Are the addresses valid? Do any participants reside outside the United States? Many notices are required to be sent during the termination process. An address and death search for all inactive participants may be prudent.
Verifying addresses prior to termination can save time and frustration.

Have all of the accrued benefits been calculated and certified? If yes, does the data include the information that was used to calculate the stored accrued benefit? During the termination process, a Notice of Plan Benefits will need to be supplied to all participants. This notice is required to provide the personal data used to calculate the participant’s accrued benefit along with a statement requesting that the participant correct any information they believe to be incorrect. If the plan has frozen accrued benefits but the calculation data is not available, the best available data must be provided to the participant on the Notice of Plan Benefits along with a statement giving the participant the opportunity to provide the missing data.

If benefits are not calculated and certified, does the data contain all of the information necessary to calculate the benefits? Final benefits will need to be calculated, not estimated, for all participants.

Data is fluid and constantly changes. Participants move, die, quit, get married/divorced, and retire during the termination process. Ensuring and maintaining accurate data is key to preparing for a plan termination.

Retirement plans: Key dates and deadlines for 2017

Milliman has published 2017 retirement plan calendars for single-employer defined benefit (DB) plans, multiemployer DB plans, and defined contribution (DC) plans. Each calendar provides key administrative dates and deadlines.

2017 single-employer DB calendar
2017 multiemployer DB calendar
2017 DC plans calendar

Along with downloading each calendar, be sure to follow us at Twitter.com/millimaneb where we tweet upcoming dates and deadlines for plan sponsors.

Regulatory roundup

More retirement-related regulatory news for plan sponsors, including links to detailed information.

Guidance for remedial amendment period for 403(b) plan
The Internal Revenue Service (IRS) issued Revenue Procedure 2017-18 providing that the last day of the remedial amendment period for § 403(b) plans, for purposes of section 21 of Rev. Proc. 2013-22, 2013-18 I.R.B. 985.

According to the guidance, the last day of the remedial amendment period described in section 2 of this revenue procedure and in section 21 of Rev. Proc. 2013-22 is March 31, 2020. A plan that does not satisfy the requirements of § 403(b) in form on any day during the remedial amendment period (that is, the period beginning on the later of January 1, 2010, or the plan’s effective date, and ending on March 31, 2020) will be considered to have satisfied those requirements if, on or before March 31, 2020, all provisions of the plan that are necessary to satisfy § 403(b) have been adopted and made effective in form and operation from the beginning of the remedial amendment period.

To read the revenue procedure, click here.

Final Rule to adjust for inflation civil monetary penalties
The Department of Labor (DoL) published a final rule to adjust for inflation the civil monetary penalties assessed or enforced in its regulations, pursuant to the Federal Civil Penalties Inflation Adjustment Act of 1990 as amended by the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 (Inflation Adjustment Act).

The Inflation Adjustment Act requires the DOL to annually adjust its civil money penalty levels for inflation no later than January 15 of each year. The Inflation Adjustment Act provides that agencies shall adjust civil monetary penalties notwithstanding Section 553 of the Administrative Procedure Act (APA). Additionally, the Inflation Adjustment Act provides a cost-of-living formula for adjustment of the civil penalties. Accordingly, this final rule sets forth the Department’s 2017 annual adjustments for inflation to its civil monetary penalties, effective

To read the final rule, click here.

Summary and audit indicators – 403(b) Universal Availability Requirement
The IRS has updated it webpage 403(b) Universal Availability Requirement. A common error occurs when employees, working less than full-time, are automatically excluded from making elective deferrals under the 403(b) plan. A plan that wants to apply the statutory exclusion for part-time employment must determine eligibility for the 403(b) elective deferrals based on whether the employee is reasonably expected to normally work less than 20 hours per week and has actually never worked more than 1,000 hours in the applicable 12-month period.

To visit the webpage, click here.

New mortality assumptions proposed for defined benefit retirement plans

The Treasury Department and the IRS released a proposed rule on December 29, 2016, to update the mortality assumptions that tax-qualified defined benefit pension plans use to calculate the contributions required under the minimum funding standards of Internal Revenue Code section 430. The proposed effective date is for plan years beginning on or after January 1, 2018; no immediate action by plan sponsors is necessary with regard to the proposed tables, which are expected to increase the plan’s actuarial liabilities and annual benefit accrual costs (i.e., “target liability” and “target normal cost,” respectively).

Once finalized, the mortality tables will also be used to develop pension obligations for reporting to the Pension Benefit Guaranty Corporation (PBGC), and Treasury and the IRS will publish a blended version of the tables to be used to calculate “non-level” optional forms of pension payments (e.g., lump-sum distributions) under tax code section 417(e).

The proposed rule adopts base mortality tables derived from the most recent study of the Society of Actuaries’ (SOA) Retirement Plans Experience Committee, with 2006 being the central year of the mortality experience, and mortality improvement rates from the SOA’s most recent mortality improvement study (“MP-2016”). The proposed rule offers three choices for selecting mortality tables: “static” tables, “generational” tables, and “plan-specific substitute” tables.

The table below illustrates the increases in actuarial liabilities for sample lives (comparing 2017 vs. 2018 “static” tables at an interest rate of 4%):

Age Male Female
45 (deferred to 65*) 2.8% 6.2%
55 (deferred to 65*) 2.8% 5.9%
65 (in pay status) 3.5% 4.6%
75 (in pay status) 7.2% 4.8%
*The pension benefit commences at age 65.

Plan sponsors should not draw any conclusions of the financial impact on actuarial liabilities or possible increases in cash contributions for a specific pension plan. The benefit formulas, plan demographics, status (“frozen,” “partially frozen,” “open”), and other complex variables are unique to a given plan and must be carefully evaluated.

The IRS seeks public comments on the proposed rule by March 29 and will hold a public hearing in April for plan participants, plan sponsors, pension actuaries, and other interested parties to express their views before issuing a final rule.

For additional information about the proposed revised mortality tables, please contact your Milliman consultant.

Pension funded status comes almost full circle at 2016 year-end

Wadia_ZorastMilliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In December, the funded status for these pension plans improved by $13 billion due to robust investment returns of 1.17%, and the funded ratio increased from 80.3% to 81.0% to close out the year. Overall, interest rate declines characterized 2016, with the end of August marking the lowest discount rate (at 3.32%) in the PFI’s 16-year history. Since that point and coincident with the conclusion of the U.S. presidential election, interest rates have steadily increased.

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Last year was a rollercoaster of a year, but we’re ending up nearly where we started – with a funded ratio of 81.0%. Going into 2017, rumors of potential multiple interest rate hikes by the Federal Reserve have plan sponsors and pension practitioners closely watching market activity. If interest rates continue to climb, the funded ratio could make some major gains.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.59% by the end of 2017 and 5.19% by the end of 2018) and asset gains (11.2% annual returns), the funded ratio would climb to 93% by the end of 2017 and 106% by the end of 2018. Under a pessimistic forecast (3.39% discount rate at the end of 2017 and 2.79% by the end of 2018 and 3.2% annual returns), the funded ratio would decline to 74% by the end of 2017 and 68% by the end of 2018.

Regulatory roundup

More retirement-related regulatory news for plan sponsors, including links to detailed information.

2017 revenue procedures updates
The IRS published various revenue procedures, revised for 2017, for issuing letters, rulings, determination letters, and technical advice on specific issues related to employee benefits in its Internal Revenue Bulletin.

To read the bulletin, click here.

PBGC posts 2017 premium filing instructions
The Comprehensive Premium Filing Instructions for 2017 Plan Years have been approved by OMB and are now available on the PBGC’s website.

To read the filing instructions, click here.

PBGC issues RFI for approving certain alternative methods for computing withdrawal liability
The Pension Benefit Guaranty Corporation (PBGC) is requesting information from the public to inform PBGC on issues arising from arrangements between employers and multiemployer plans involving an alternative “two-pool” withdrawal liability method.

PBGC seeks information from the general public and all interested stakeholders, including multiemployer plan participants and beneficiaries, organizations serving or representing retirees and other such individuals, multiemployer plan sponsors and professional advisors, contributing employers, unions, and other interested parties about these arrangements, including the various forms these arrangements may take, the terms and conditions that apply to new and existing contributing employers who enter into such arrangements, and the benefits and risks these arrangements may present to multiemployer plans and their participants, employers, the multiemployer pension insurance program, and other stakeholders in the multiemployer system.

For more information, click here.

FAQ update on pre-approved plan adopting employers
The IRS has updated a series of frequently asked questions providing guidance to employers adopting pre-approved retirement plans.

To learn more, click here.