The recent issuance by the Society of Actuaries of a new mortality table for possible use in valuing pension liabilities has some plan sponsors thinking they should consider terminating their frozen pension plans by the end of 2015. The plan termination consideration is due to speculation that the Internal Revenue Service (IRS) may require the use of the new mortality table for calculating lump-sum distributions of pension benefits beginning in 2016, which would increase lump-sum amounts. There are many other considerations beyond the possible timing of the new mortality table that a plan sponsor should take into account before deciding to terminate a frozen pension plan by the end of 2015, which are summarized below.
In support of 2015 plan termination:
1. Avoidance of scheduled increases to Premium Benefit Guaranty Corporation (PBGC) premium rates after 2015.
2. No prospective concerns about trying to annually manage pension cost volatility.
3. Elimination of annual administration costs.
4. If a lump-sum distribution is offered, active participants have the opportunity to have immediate access to the value of their frozen benefits.
Disadvantages of 2015 plan termination:
1. Lump-sum and annuity purchase liability interest rates are currently very low, which results in higher plan termination liabilities.
2. A large one-time pension settlement accounting loss may be incurred on the company’s financial statements.
3. A very large pension contribution may be necessary to fully fund plan termination liabilities, which in part is due to the low interest rate environment.
4. A plan termination is a time-consuming process with various steps required, including trying to locate missing participants.
5. Recent funding relief legislation may result in lower minimum required contributions over the next several years.
In order to accomplish a plan termination by the end of 2015, a plan sponsor will need to make a decision to terminate early in 2015 to account for the entire plan termination process. The decision process should include discussing with the plan’s legal counsel whether or not it is advisable to distribute plan assets following PBGC approval but prior to IRS approval of the plan termination.