The Treasury Department and the Internal Revenue Service (IRS) released a proposed rule on December 29, 2016, to update the mortality assumptions that tax-qualified defined benefit (DB) 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%):
|45 (deferred to 65*)
|55 (deferred to 65*)
|65 (in pay status)
|75 (in pay status)
|*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.