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IRS issues final and proposed rules for hybrid pension plans

November 25th, 2014 No comments

The IRS has published a final rule covering tax-qualified cash balance (hybrid) pension plans, providing guidance on the key issue of “market rate of return.” Sponsors of hybrid plans have waited for four years for this guidance since the agency delayed the effective date of an October 2010 final rule following practitioners’ concerns that the IRS had incorrectly interpreted the statutory definition. In general, the final rule applies to plan years that begin on or after Jan. 1, 2016.

The IRS also published a companion proposed rule to facilitate the transition for plan sponsors to adopt requirements, allowing for an election to apply the proposed rule to amendments adopted earlier than Jan. 1, 2016. The IRS seeks comments on the proposal by Dec. 18, 2014.

This Client Action Bulletin discusses final and proposed rules for hybrid pension plans.

Regulatory roundup

November 24th, 2014 No comments

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

PBGC annual report shows improvement in single-employer program and deterioration in multiemployer program
The Pension Benefit Guaranty Corporation (PBGC) has released its Annual Report, which showed that PBGC’s deficit increased to about $62 billion in fiscal year 2014, largely due to the declining condition of a few multiemployer plans. The financial condition of the single-employer program improved with a deficit of about $19.3 billion, down from $27.4 billion in the previous year.

The increase in PBGC’s deficit in the report is consistent with the estimates included in the FY 2013 Projections Report that was released in June. The projections report found that the insolvencies of a minority of multiemployer plans have become both more likely and more imminent.

To read the entire report, click here.

IRS updates rollover chart
The IRS has updated its “Rollover Chart” for 2014. It’s a one-page summary in the form of a table, listing the eight kinds of plans and IRAs that can make rollover-eligible distributions, and the corresponding eight kinds of plans and IRAs into which those distributions can (or cannot) be rolled over. The chart was updated November 17, 2014, to reflect revised rollover rules.

To view the chart, click here.

Joint Committee on Taxation publishes analysis of the Tax Reform Act of 2014
The Joint Committee on Taxation (JCT) has released a Discussion Draft prepared by the Chairman of the House Committee on Ways and Means. This document provides a technical explanation, estimated revenue effects, distributional analysis, and macroeconomic analysis of the Tax Reform Act of 2014. Thea draft proposes to reform the Internal Revenue Code. Provisions related to pension and retirement begin on page 101, and include:

• Changes to rules for individual retirement arrangements.
• Repeal of exception to 10-percent penalty for first-time home purchases and elimination of first-time home purchase as a qualified distribution from a Roth IRA.
• Termination of new simplified employee pensions.
• Termination for new SIMPLE 401(k) plans.
• Modification of required distribution rules for pension plans.
• Reduction in age for allowable in-service distributions.
• Modification of rules governing hardship distributions.
• Extended rollover period for the rollover of plan loan offset amounts in certain cases.
• Coordination of contribution limitations for 403(b) plans and governmental 457(b) plans.
• Application of 10-percent early distribution tax to governmental 457 plans; and Inflation adjustments for employer-sponsored retirement plan dollar limitations on benefits and contributions.

To read the entire draft, click here.

Regulatory roundup

November 17th, 2014 No comments

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

Federal Reserve research on actuarial liabilities and funding status of pensions in the U.S. financial accounts
Last year, in its September 2013 release, the Financial Accounts of the United States (formerly known as Flow of Funds accounts) changed the treatment of defined benefit (DB) pensions from a cash accounting basis to an accrual accounting basis. Under accrual accounting, pension plans’ liabilities are set equal to the present value of future DB benefits that plan participants have accumulated to date, which are calculated using standard actuarial methods.

As a result of this change, the Financial Accounts now provide a measure of the funding status of private and public DB pension plans. The accounting change also had other important effects on the balance sheets – and corresponding financial flows – of the private and public pensions sectors, the nonfinancial business sector, the government sector, and the household sector. A new FEDS Notes paper discusses the accounting changes and their main effects in the Financial Accounts, including the new measures of funding status of private and public DB pension plans.

To read the entire paper, click here.

Cycle D filing deadline looms

November 14th, 2014 No comments

The deadline for trustees of multiemployer pension (defined benefit) plans and annuity (defined contribution) plans to submit determination letter requests to the Internal Revenue Service (IRS) is fast approaching. Under the second go-round of the IRS’s five-year staggered determination letter filing cycle, all multiemployer plans must file by January 31, 2015, under Cycle D if they wish to have the IRS formally opine on the tax-qualified status of their retirement plans. This filing requires the restatement of the plan to incorporate amendments required over the past five years, since the Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART) went into effect. The deadline applies to all multiemployer plans, including off-calendar-year plans that filed under Cycle E in the first iteration of the five-year program.

While there are fewer amendments to be incorporated into this restatement than the first time around and the process is more familiar, attention to the process should begin as soon as possible, if it hasn’t already started, with plan counsel and consultants participating as needed.

In preparing the filing, trustees must be sure to address any issues that were raised in the prior filing, make sure all necessary amendments have been included, collect all needed documentation (such as copies of relevant collective bargaining agreements), have the appropriate forms and notices prepared (including the Notice to Interested Parties, which must be distributed and posted on time), and, if necessary because of the presence of nonunion participants, have the required nondiscrimination testing performed.

Plan counsel should also determine if there have been any issues with the adoption of amendments or plan administration that might require a filing under the Voluntary Correction Program.

Please contact your Milliman consultant for further information and details on this process.

Revised mortality assumptions issued for pension plans

November 6th, 2014 No comments

The Society of Actuaries (SOA) issued two final reports that update the mortality assumptions that private defined benefit retirement plans in the U.S. use in the actuarial valuations that determine a plan sponsor’s pension obligations. Affected pension plan sponsors should expect the value of the actuarial obligations to increase, but the rate of increase will depend on the specific demographic characteristics of the plan participants and the types of benefits provided.

The RP-2014 Mortality Tables Report (“RP-2014”) replaces the RP-2000 Mortality Tables Report (“RP-2000”), using the incidence of deaths in private plans over the 2004 through 2008 period. The SOA’s companion Mortality Improvement Scale MP-2014 Report (“MP-2014”) adds a second, complex variable to the RP-2014 tables for “future mortality improvements.” “Improvement” refers to the concept that mortality rates have generally decreased from year to year and this pattern is expected to continue in the future. The new MP-2014 improvement scale varies by both age and year. The SOA concluded that its best estimate for long-term mortality improvement in the U.S. is an ultimate annual rate of 1% through age 85 and slowly diminishing for higher ages.

The SOA committee that developed the tables recommends consideration of their use, effective immediately, for measuring private pension plan obligations. Their use also will affect the measurement of plan obligations associated with private employer postretirement health and life insurance plans.

Implications of the SOA’s reports include:

• The calculations to comply with the accounting standards for retirement plans (Financial Accounting Standards Board Topic 715) may be affected as early as for fiscal year-end 2014.
• Calculations to comply with IRS’s single-employer pension plan funding rules under the 2006 Pension Protection Act will not be affected until the Treasury Department formally adopts – possibly not until 2017 – a replacement for the current statutory tables (based on the RP-2000 Mortality Table). Minimum required cash contributions and, where applicable, lump-sum payments, will likely increase when the Treasury adopts a replacement mortality table.
• Although the SOA’s analysis acknowledged statistically significant structural differences in the underlying mortality rates produced for public and private plans, and therefore eliminated from the final RP-2014 report the data from “three extremely large public plans,” the SOA still states that “it would not necessarily be inappropriate or inconsistent for actuaries to consider…the RP-2014 tables as suitable mortality benchmarks for a specific public plan.”
• Public and multiemployer pension plans are not required to adopt these new tables. However, as these plans’ actuaries review the mortality assumption they currently use, they may find that information presented in the new tables may influence the plans’ assumptions as RP-2014 and MP-2014 become widely accepted. If the plans’ mortality assumptions are reviewed on a regular basis, the timing of the next review is not likely to be affected.

Actuarial calculations using the two-variable approach embodied in the RP-2014 and MP-2014 tables will be more complex when compared to current typical calculations using the RP-2000 table. And although pension obligations could increase, the effects will differ. For example, the obligations associated with a cash balance plan will likely only modestly change, while certain postretirement health insurance obligations may be the most dramatically affected.

Please contact your Milliman consultant for more details on how your defined benefit pension plan will be affected by the SOA’s new mortality table and mortality improvement scale.

Year-end compliance issues for single-employer retirement plans

November 5th, 2014 No comments

By year-end 2014, sponsors of calendar-year single-employer retirement plans must act on necessary and discretionary amendments and perform a range of administrative procedures to ensure compliance with statutory and regulatory requirements. This Client Action Bulletin looks at key areas that such employers and sponsors of defined benefit (DB) or defined contribution (DC) plans should address by Dec. 31, 2014.

Regulatory roundup

November 3rd, 2014 No comments

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

IRS posts submission procedures for individually designed plans 5-year remedial amendment cycle
The IRS has published a web page outlining submission procedures for plan sponsors with individually-designed plans and EINs ending in 4 or 9.

For more information, click here.

GAO publishes report on pension valuation
The Government Accountability Office (GAO) has released a report entitled “Pension plan valuation – Views on using multiple measures to offer a more complete financial picture.” In this report the GAO discusses how defined benefit plans use interest rates to “discount,” or determine the current value, of estimated future benefits.

Experts in the United States have disagreed on both the approach that should be taken by plans to determine a discount rate and the appropriate rate to be used. Different discount rates can create large differences in the valuation of a plan’s obligations, which in turn can lead various stakeholders to draw different conclusions about a plan’s health, the value of a plan’s benefits, and the contributions required to fund them.

As requested, GAO examined different approaches used to determine the discount rate. This report addresses:

• The significance of differences in approaches used to determine discount rates among public and private plans.
• Purposes for measuring the value of a plan’s future benefits and key considerations for determining discount rate policy.
• Approaches selected countries have taken to choose discount rates.

To read the entire report, click here.

PBGC announces maximum guarantee benefit for 2015
The Pension Benefit Guaranty Corporation (PBGC) has announced that the annual maximum guaranteed benefit for a 65-year-old retiree in a single-employer pension plan will increase to $60,136 for 2015, up from $59,318 in 2014. A table showing amounts for other ages is here.

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COLAs for retirement, Social Security, and health benefits for 2015

October 31st, 2014 No comments

With the release of the September 2014 Consumer Price Index (CPI) by the Bureau of Labor Statistics, the Social Security Administration (SSA) and the IRS have announced cost-of-living adjusted figures for Social Security and retirement plan benefits, respectively, for 2015. The 2015 adjusted figures for high-deductible health plans (HDHPs) and health savings accounts (HSAs) included in this Client Action Bulletin were released by the IRS earlier this year and are provided here for convenience.

Regulatory roundup

October 27th, 2014 No comments

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

IRS announces pension plan limits for 2015
The Internal Revenue Service (IRS) has announced cost-of-living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2015. Many of the pension plan limitations will change for 2015 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged because the increase in the index did not meet the statutory thresholds that trigger their adjustment.

For additional information, click here.

IRS issues guidance on target date funds for qualified defined contribution plans
The IRS has issued Notice 2014-66, providing a special rule that enables qualified defined contribution plans to provide lifetime income by offering, as investment options, a series of target date funds (TDFs) that include deferred annuities among their assets, even if some of the TDFs within the series are available only to older participants.

This special rule provides that, if certain conditions are satisfied, a series of TDFs in a defined contribution plan is treated as a single right or feature for purposes of the nondiscrimination requirements of § 401(a)(4) of the Internal Revenue Code. This permits the TDFs to satisfy those nondiscrimination requirements as they apply to rights or features even if one or more of the TDFs considered on its own would not satisfy those requirements.

Notice 2014-66 will be published in Internal Revenue Bulletin 2014-46 on Nov. 10, 2014.

In an accompanying letter, the Department of Labor (DOL) has confirmed that target date funds serving as default investment alternatives may include annuities among their fixed income investments. The letter also describes how ERISA fiduciary standards can be satisfied when a plan sponsor appoints an investment manager that selects the annuity contracts and annuity provider to pay the lifetime income.

To read Notice 2014-66, click here.
To read the DOL’s letter, click here.

IRS posts summary of new single distribution rule for 401(a) qualified, 403(b) and 457(b) governmental retirement plans
Beginning January 1, 2015, when participants choose to direct their retirement plan distribution to go to multiple destinations, the amounts will be treated as a single distribution for allocating pre-tax and after-tax basis (Notice 2014-54 and proposed rules issued September 19, 2014).

For additional information, click here.

PBGC posts 2015 premium rates
The Pension Benefit Guaranty Corporation (PBGC) posted the 2015 premium rates. The per-participant flat premium rate for plan years beginning in 2015 is $57 for single-employer plans (up from a 2014 rate of $49) and $13 for multiemployer plans (up from a 2014 rate of $12).

For plan years beginning in 2015, the variable-rate premium (VRP) for single-employer plans is $24 per $1,000 of unfunded vested benefits (UVBs), up from a 2014 rate of $14. This $10 increase was provided in The Bipartisan Budget Act of 2013. The VRP rate is also subject to indexing, but due to statutory rounding rules, indexing had no effect on the 2015 VRP rate.

For 2015, the VRP is capped at $418 times the number of participants (up from a 2014 cap of $412). Plans sponsored by small employers (generally fewer than 25 employees) may be subject to an even lower cap. Multiemployer plans do not pay a VRP.

The Bipartisan Budget Act of 2013 calls for the VRP rate to increase another $5 starting with 2016 (on top of indexing).

To view the PBGC premiums rates, click here.

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Multiemployer Alert: The new ASOP 27 – what is the impact on multiemployer plan funding?

October 23rd, 2014 No comments

The Actuarial Standards Board (ASB) has approved a revised version of Actuarial Standards of Practice (ASOP) No. 27, Selection of Economic Assumptions for Measuring Pension Obligations. The new standard is effective for any actuarial work product with a measurement date on or after September 30, 2014.

For a calendar year plan, this means the new standard will first apply to the 2015 actuarial valuation. Economic assumptions covered by ASOP 27 include the investment return, discount rate, inflation, postemployment benefit increases, compensation increases, and any other related assumptions. The greatest impact of the revised ASOP may appear in the development of multiemployer pension plan liabilities through its effect on the actuary’s selection of the investment return assumption. This Milliman Multiemployer Alert provides more perspective.