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).
In October 2017, the U.S. Department of the Treasury and the Internal Revenue Service (IRS) released final regulations prescribing new mortality tables that apply to single-employer defined benefit pension plans for the purpose of calculating the actuarial liabilities for minimum funding requirements, benefit restrictions, and Pension Benefit Guaranty Corporation (PBGC) variable-rate premiums. As with the prior regulations, the new regulations give plan sponsors the option to use either the standard mortality tables developed by the IRS, or to develop plan-specific mortality tables.
The new regulations significantly revised the rules regarding plan-specific substitute mortality tables. Under the prior rules, a plan was required to have fully credible mortality experience in order to use substitute mortality tables. The new rules allow for the use of substitute mortality tables for plans with smaller populations that do not have fully credible mortality experience. As a result, Treasury and the IRS expect that significantly more plan sponsors will request approval to use substitute mortality tables.
Using substitute mortality tables should theoretically improve the fit between expected and actual mortality rates, thereby producing smaller experience gains and losses over time. In addition, for plans employing a workforce that exhibits heavier mortality than the standard tables, using substitute mortality tables could potentially lower both minimum required contributions and PBGC variable-rate premiums.
For these reasons, plan sponsors may want to consider the use of substitute mortality tables. A written request must be submitted by the plan sponsor at least seven months before the first day of the first plan year for which the substitute mortality tables are to apply.
Note that the regulations do not allow plan sponsors to use plan-specific tables for determining minimum lump-sum values; standard IRS tables continue to be used for this purpose.
The Treasury Department and the Internal Revenue Service (IRS) released a final rule updating the mortality assumptions that single-employer defined benefit (DB) pension plans must use to calculate the actuarial liabilities for minimum funding requirements, benefit restrictions, and the Pension Benefit Guaranty Corporation (PBGC) variable-rate premiums. The updated mortality tables are also used to calculate lump-sum distributions to plan participants in DB plans that offer such one-time payments. The final rule generally is applicable for plan years beginning on or after January 1, 2018, but also provides a limited one-year transition period (to January 1, 2019), in certain circumstances.
The IRS concurrently released Notice 2017-60, with two mortality tables. The first is a sex-distinct table for the above-mentioned one-year 2018 transition period. The second is a unisex table (blended as 50% female mortality rates and 50% male mortality rates) that must be used for the calculation of certain optional forms of payments, such as lump-sum distributions, beginning with the 2018 plan years. Also released was Revenue Procedure 2017-55, providing instructions to obtain IRS approval of plan-specific mortality tables.
Although the final rule is aimed at single-employer DB plans, its mortality assumptions are also used to determine “current liability” for multiemployer pension plans and cooperative and small employer charity (CSEC) plans. This Client Action Bulletin provides more perspective on the final rule.