On October 3, 2017, the US Department of Treasury (Treasury) and Internal Revenue Service (IRS) released final regulations updating the mortality tables to be used for defined benefit pension plan funding, as well as the valuation of lump sum and other accelerated distribution options, for 2018. The update is required by the Pension Protection Act of 2006, which requires the mortality tables to be updated at least every ten years.
The IRS also released Notice 2017-60, which contains rules for plan sponsors to delay the use of the new tables for one year under certain conditions, and Revenue Procedure 2017-55, which includes procedures for plan sponsors to elect plan-specific substitute mortality tables.
Updated Mortality Tables
Defined benefit pension plans apply mandated mortality tables to calculate the life expectancy of plan participants on the basis of age, sex and other factors. The plan’s mortality table is used to determine minimum funding requirements, which affect Pension Benefit Guaranty Corporation (PBGC) variable rate premium costs, and the minimum amount of lump sum and other accelerated distribution options.
In October 2014, the Society of Actuaries released the RP-2014 Mortality Tables Report and the Mortality Improvement Scale MP-2014 Report, which contained new mortality assumptions recommended for valuing private-sector pension liabilities. Last year, Treasury and IRS issued proposed regulations that would update the mortality tables for single-employer defined benefit plans. Now final, the regulations generally update the mortality assumptions based on the proposed regulations for plan years beginning on or after January 1, 2018. The IRS expects to continue to take updated mortality improvement rates into account in years after 2018 and states that it is likely new rates will be published each year.
The new mortality tables reflect lower mortality rates than the existing table, which is expected to increase funding liabilities for many plans. Actuaries anticipate that plan funding obligations are expected to increase 3 to 5 percent based on these factors, though plan sponsors should be aware that the new mortality assumptions may already be reflected in accounting results.
Potential One-Year Delay in Application of New Mortality Tables for Minimum Funding Only
The IRS will permit plan sponsors who do not use plan-specific mortality tables for minimum funding purposes (discussed below) to opt to use existing static mortality tables for valuation dates occurring during 2018 for purposes of the minimum funding requirements for single-employer defined benefit plans. The one-year delay does not apply for use of the mortality tables to determine the present value of certain accelerated forms of payments subject to minimum present value calculations, such as lump sum distributions.
To delay use of the new tables for one year, a plan sponsor must conclude that for 2018 use of the new tables would be administratively impracticable or would result in an adverse business impact that is greater than de minimis, and inform the plan’s actuary of the intent to use this option. The Notice and regulations do not clearly explain what qualifies as “administratively impracticable” or “de minimis,” so plan sponsors should carefully analyze the availability of this option before proceeding. The Notice and regulations do not require an application or agency approval process, so plan sponsors should also consider how to document this decision.
Option for Plan-Specific Substitute Mortality Tables
Revenue Procedure 2017-55 also details procedures for a plan sponsor to utilize a substitute mortality table based on its own participant population, if the plan sponsor seeks approval from the IRS. To use a plan-specific substitute mortality table, a plan’s participant population must have a credible mortality experience. Old regulations provided that the standard for full credibility was 1,000 deaths for each gender within a two- to five-year period. The new regulations create a formula that takes into account the dispersion of benefits within the plan (i.e., individuals with higher benefit amounts would have a greater weight in the computation of the mortality rate for a particular age). Under certain circumstances, the proposed regulations would permit a plan that has only partially credible mortality information to use a plan-specific substitute mortality table created using a weighted average formula based on the standard mortality table. Such plan would have to have a minimum of 100 deaths for each gender within a two- to five-year period.
Use of the plan-specific substitute mortality tables must be approved by the IRS in advance. A request for approval generally must be submitted at least seven months before the first day of the first plan year for which the substitute mortality tables are to apply, though a transition rule exists for plan sponsors to apply by February 28, 2018, to use substitute mortality tables for plan years beginning in 2018. Plan sponsors must use the substitute mortality tables for any plan that is maintained by the plan sponsor or a member of the plan sponsor’s controlled group for a plan year.
Considerations for Plan Sponsors
The new mortality tables will likely increase pension funding liabilities, PBGC variable rate premiums and the value of lump sum distributions for many plan sponsors. Plan sponsors should strongly consider whether the potential one-year delay in application of the new mortality tables for funding purposes is an option. In addition, large plan sponsors may want to engage their actuaries to determine the viability of a plan-specific mortality table, either for 2018 or future years. If viable, plan sponsors should consult with counsel to seek advance approval of plan-specific tables under the new procedures. Plan sponsors should also review plan language referring to mortality tables to ensure that such language continues to accurately reflect the plan’s administrative practices.