Last fall, the Internal Revenue Service (IRS) issued regulations requiring an update to new mortality tables for valuing monthly annuities for minimum funding requirement purposes. The requirement went into effect beginning with the 2018 plan year, unless the new tables would cause “more than a minimal adverse business impact” or “more than a minimal administrative burden.” In that case, the new tables would be required beginning with the 2019 plan year. Plan sponsors also have the option to create their own mortality tables (see the blog “Plan-specific substitute mortality tables” for more information on this option).
The new tables are estimated to increase a typical plan’s liabilities by about 2% to 5%. The tables chosen for minimum funding would also be used for determining other plan measures such as benefit restrictions, Pension Benefit Guaranty Corporation (PBGC) variable premiums, the PBGC 4010 filing test, the quarterly contribution exemption test, the funding credit usage test, and the at-risk plan test.
The IRS has not issued any formal guidance on what constitutes meeting the above criteria required for deferring the new tables until the 2019 plan year. Therefore, plan sponsors are left to make their own judgments based on their individual facts and circumstances. A decision to delay the new tables until the 2019 plan year will likely need to be disclosed on the 2018 plan year Form 5500 filing, so plan sponsors will want to carefully document their reasons for maintaining the older mortality tables for an additional year.
Notwithstanding a decision to defer using the new mortality tables for valuing annuities until the 2019 plan year, plans that offer and value a lump-sum option for minimum funding purposes will still be required to use the new tables for valuing lump sums for the 2018 plan year (see the blog “Updated mortality tables for DB plan lump-sum payments starting in 2018” for more details on lump-sum mortality table requirements).