13 October 2017 IRS issues final regulations addressing pension plan mortality assumptions The Department of the Treasury and Internal Revenue Service recently issued final regulations (TD 9826) under Section 430 addressing the mortality assumptions that must be used for purposes of calculating a defined benefit pension plan's funded status and for calculating certain pension benefits. This alert addresses the provisions of the final regulations. Section 430(h)(3) sets forth the mortality assumptions used to determine a pension plan's minimum funding requirements and the pension plan's funding target and funding target normal cost. Section 430 permits the "generationally" generated mortality assumptions, which means that the mortality assumptions take into account dynamically reflected improvements that result in future years' having a different assumed mortality based on improvement from the prior year. Alternatively, the mortality assumptions can be applied in a "static" manner with the result that a single mortality assumption is used for all years as a proxy for the more robust generational tables. Finally, Section 430(h)(3)(C) permits a pension plan sponsor to conduct an experience study and use its own mortality experience to determine minimum funding requirements if the study reflected a "credible" number of deaths (previously defined as 1,000 deaths over the period for which it was studied). Section 430(h)(3)(B) requires a revision to these assumptions every 10 years based on the latest available independent studies of pension plan mortality. The last significant revision to the pension plan mortality assumptions was effective in 2008. Since then, the Society of Actuaries (SOA) has published updated mortality tables. In 2014, SOA published the "RP-2014" mortality tables based on their study of pension plan mortality. In conjunction with that study, they published "MP-2014," a mortality improvement projection scale based on their study of mortality improvement in the United States. RP-2014 and MP-2014 were intended to be applied together in projecting mortality for a pension plan population. In 2015 and 2016, the SOA published updated mortality improvement scales — MP-2015 and MP-2016, respectively, which were also intended to be used in conjunction with RP-2014. In December 2016, the IRS published proposed regulations that would incorporate RP-2014 and MP-2016 into the assumptions used to determine the pension plan minimum funding requirements. In addition, the proposed regulations permitted a sponsor to apply a formula to determine a level of "partial credibility" that allowed the sponsor to blend its experience with that of RP-2014. The final regulations generally follow the proposed regulations and are effective for plan years beginning in 2018. 2. The use of alternative custom mortality tables under Section 430(h)(3)(C) for plan-specific populations with "credible" information 3. Mortality to be used in the calculation of lump sums and certain other forms of payment under Section 417(e)(3) Unlike the proposed regulations, the final regulations provide an election under Treas. Reg. Section 1.430(h)(3)-1(f)(2) that permits a plan to delay the application of the new mortality assumption for one year provided that the plan sponsor "(i) concludes that the use of mortality tables determined in accordance with this section for the plan year would be administratively impracticable or would result in an adverse business impact that is greater than de minimis; and (ii) informs the actuary of the intent to apply the option. De minimis is not defined. Mortality under this election is outlined in Notice 2017-60." The IRS has indicated it may update the mortality tables annually based on the latest available information. The SOA likely will publish an MP-2017 improvement scale later this month that could be incorporated in 2019. The final regulations also provide an option, not included in the proposed regulations, that permits a sponsor to blend the experience of its populations of males and females in determining the level of credibility. Revenue Procedure 2017-55 outlines the process for a sponsor to seek IRS approval to use its own mortality experience under the new regulations. A sponsor must seek this approval seven months in advance of the plan year for which it would apply, and the IRS will have 180 days to respond. However, transition relief is provided by permitting sponsors to seek approval for the 2018 plan year as late as 28 February 2018, provided the sponsor agrees to an extended 270-day approval period. The final regulations affirm that RP-2014 and MP-2016 will form the basis for minimum lump sum payments (and other accelerated forms of payment) made in plan years beginning in 2018. The election to delay application of updated mortality table does not delay the effective date under Section 417(e)(3). The estimated increase in minimum lump sums due to the change in mortality assumption is between 3% and 5%. These regulations, including the election under Treas. Reg. Section 1.430(h)(3)-1(f)(2), will also affect the calculations used to determine Pension Benefit Guaranty Corporation (PBGC) premiums. Therefore a plan sponsor should consider those effects when assessing whether to make that election. Plan sponsors should prepare for increases in minimum funding requirements, lump sum payments and PBGC premiums beginning in the 2018 plan year. In addition, plan sponsors should consider whether increases in 2018 funding requirements and PBGC premiums constitute an adverse business impact that is greater than de minimis and whether the use of their population's mortality experience would reduce such costs.
Document ID: 2017-1708 | |||||||||
