Regulatory roundup

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

Final regulations prescribing mortality tables for pension plans
The IRS released final regulations prescribing mortality tables to be used by most defined benefit (DB) pension plans. The tables specify the probability of survival year-by-year for an individual based on age, gender, and other factors. This information is used (together with other actuarial assumptions) to calculate the present value of a stream of expected future benefit payments for purposes of determining the minimum funding requirements for a defined benefit plan.

To learn more, click here.

Guidance released on mortality table to determine minimum lump sums
The IRS released Notice 2017-60 and Revenue Procedure 2017-55. Notice 2017-60 sets forth: (1) the mortality table to be used to determine minimum lump sums for distributions during stability periods beginning in the 2018 calendar year, and (2) updated mortality tables for 2018 determined under prior regulations. The updated mortality tables determined under prior regulations apply to certain plans with end-of-year valuation dates, and certain plans for which a transition option under new regulations is used for the 2018 plan year.

Revenue Procedure 2017-55 provides procedures for obtaining approval to use plan-specific mortality tables for pension funding purposes in lieu of the standard mortality tables that are generally required to be used.

To download Notice 2017-60, click here.

To download Revenue Procedure 2017-55, click here.

Knowing participants’ profiles is becoming increasingly important

The debate about a new pension system is becoming more and more complicated because of issues including solidarity, labor market flexibility, indexation security and uncertainty about the level of pension income. These subjects are complicated. The question regarding whether pension income from retirement date is high enough in relation to income received in active employment or more relevant to the spending pattern is not often mentioned in this context. The questions about how long pension is to be paid out (life-long) and how much premium participants are willing to pay for their retirement is rarely discussed.

We suspect that one of the reasons that we find these questions so difficult to answer is because we do not really know about the (ex) participants (workers, retirees and former participants with vested pensions). As a consequence, the pension debate becomes an abstract compensation and benefits discussion focused on a complicated financing component.

Having relevant knowledge about our stakeholders could provide significant benefits. If we know and understand our participants well, then

• Pensions – even without specific customization – could be fitted to stakeholders more appropriately.
• Choosing the most appropriate financing (in terms of risk, duration and reservation) could be ensured.

Getting knowledge and information about our pension stakeholders can be accomplished in various ways. This may include:

• The pension stakeholders ask the right questions at the right level of knowledge-estimated by using available data (such as salary level and job title)-and in understandable language
• Combining knowledge of our pension stakeholders with external data to gain more insight and to better understand their needs.

A good example is the correlation between education level and life expectancy of participants. The Dutch Central Bureau of Statistics (CBS) regularly publishes that the life expectancy of a Dutch man with a highly qualified education at the academic level is much higher than that of a man who has enjoyed a maximum of elementary school education. Milliman calculated that the remaining life expectancy at the age of 68 for the more highly educated group was more than two years greater than for the other group.

In practice, it appears that data about the training of individual participants is often not available to pension funds. If this information were adequately collected and stored in the near future, then additional analyses could be performed using this data. This contributes to the necessary knowledge and insight into the needs of our pension stakeholders. As a result, not only the expected duration of benefits can be determined, but also by combining this data with other available data, we could estimate the individual’s income needs. The combination of data and analysis of connections between data can create even greater insight. For example, it makes a big difference whether a participant in a retirement scheme has a physically demanding occupation or a light one, whether he travels regularly or stays at home reading, and whether he maintains a healthy lifestyle or just the opposite.

Collecting knowledge about our participants and analyzing already available knowledge or information (big data) could ensure that we design better pension schemes and that their funding takes place in the most appropriate way.

Let’s start with that today. More knowledge and insight into participant profiles helps both the employer and the performer get better “demonstrable in control” information regarding their pension commitments, provisions, and HRM policies.

Disaster relief for employee benefit plans

The IRS, the Department of Labor (DoL), and the Pension Benefit Guaranty Corporation (PBGC) have released guidance to ease some of the rules applicable to benefit plan sponsors and participants affected by Hurricanes Harvey, Irma, and Maria. The new pieces of guidance provide relief separate from the IRS’s normal tax-related disaster relief (e.g., IRS Revenue Ruling 2003-12, which permits employers to provide tax-free cash or benefits to help employees in a presidentially declared disaster; or IRS announcements postponing tax return filing or payment deadlines for individuals and businesses). In general, the new relief is similar to that provided in 2012 under Hurricane Sandy (see Client Action Bulletin 12-10).

This Client Action Bulletin provides an overview of the federal agencies’ employee benefit plan-related guidance to date, along with a summary chart. Although the guidance offers relief to those directly in the covered disaster areas, it also applies some relief to retirement plans with participants in other parts of the country with relatives in the disaster areas.

Formula updates and new options improve retirement benefits

One defined benefit (DB) plan sponsor decided to change how the plan calculated participant benefits from a final average pay formula to a cash balance formula. The change produced two groups of employees with significantly different levels of retirement benefits. Milliman was able to help the sponsor improve the amount of benefits provided to employees as well as give them the ability to receive income in retirement on a flexible basis for employees individual needs. Milliman actuary Vicki Mazzie provides some perspective in this article.

Regulatory roundup

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

PBGC issues Hurricane Maria disaster relief
In Disaster Relief Announcements 17-14 and 17-15, the Pension Benefit Guaranty Corporation (PBGC) is waiving certain penalties and extending certain deadlines in response to Hurricane Maria in the U.S. Virgin Islands and Puerto Rico.

For more information, read Disaster Relief Announcement 17-14 and Disaster Relief Announcement 17-15.

Congress approves bill with hurricane tax relief for retirement plan withdrawals
The U.S. House of Representatives approved the “Disaster Tax Relief and Airport and Airway Extension Act” as amended and approved by the Senate, sending H.R.3823 to the president. The temporary tax relief provisions cover Hurricanes Harvey, Irma, and Maria. The provisions allow hurricane victims to withdraw funds from retirement accounts without penalties and provide for employer tax credits of up to $6,000 for wages paid to an employee from the central disaster area.

PBGC publishes new insurance coverage webpage
The PBGC posted a new web page for employers and practitioners summarizing which pension plans are covered by the PBGC insurance program and which are not. For the vast majority of plans, it’s fairly obvious whether PBGC coverage applies, but because of complicated rules in the law that is not always the case. This is especially true for small plans that cover only professional individuals (e.g., attorneys, architects), plans based in Puerto Rico, and plans affiliated with churches. The web page provides an overview of the rules and highlights the types of plans that should consider requesting a coverage determination.

To visit the web page, click here.

PBGC seeks approval of modified information collection in single-employer plan termination regulations
The PBGC intends to request that the Office of Management and Budget (OMB) extend approval with modifications of its regulations on termination of single-employer plans and missing participants, and implementing forms and instructions.

To learn more, click here.

Hurricane Irma victims: Hardship and loan relief available

Good news: the Internal Revenue Service (IRS) announced that 401(k) plans and similar defined contribution (DC) employer-sponsored retirement plans can make loans and hardship distributions to victims of Hurricane Irma and members of their families. Similar relief was provided to victims of Hurricane Harvey. Plans will be allowed to make loans and hardship distributions before they are formally amended to provide for these features. This relief applies to 401(a), 403(a), 403(b), and certain 457(b) plans. Defined benefit (DB) plans and money purchase plans cannot make hardship distributions unless they contain either employee contributions that are separately accounted for or rollover amounts.

Loans and hardship distributions will provide the financial resources needed to those suffering in the wake of the hurricanes. Announcement 2017-13 states that both current and former employees are able to take loans or hardship distributions if their principal residences on September 4, 2017, were located in the Florida counties identified for individual assistance by the Federal Emergency Management Agency (FEMA) because of the devastation caused by Hurricane Irma, or whose places of employment were located in one of these counties on that applicable date, or whose lineal ascendant or descendant, dependent, or spouse had principal residences or places of employment in these counties on that date.

Plans can ignore the reasons that normally apply to hardship distributions, thus allowing the funds to be used, for example, for food and shelter. If a qualified plan requires certain documentation before a distribution is made, the plan can relax this requirement and still be considered qualified. The amount available for a hardship distribution is still limited to the maximum amount available under the IRS Code. In addition, there are no post-distribution contribution restrictions required as there normally are in plans, if the distribution is being made for hurricane relief. Employees still have to pay income taxes on hardship distributions and may have to pay the 10% early penalty tax. Loans, if not repaid, but rather defaulted, become taxable income to the participant.

There is a window of time in which employees can take advantage of this relief. The distributions must be taken from a qualified plan on or after September 4, 2017, but no later than January 31, 2018. Employers need to amend their retirement plans to provide for loans or hardship distributions generally by December 31, 2018.

Why this relief is important does not need debating, but the significant impact it may have on retirement plans and employee retirement accounts remains to be seen. It is challenging for employees to save money and, with an unforeseeable emergency in front of them, employees will turn to where they have most if not all of their savings. Employees may also stop saving for the future indefinitely because of their need for current income to survive now. All of this can’t help but compromise their future retirements.