October 10, 2017

Treasury’s Final Pension Mortality Regulations Are Effective for 2018 Lump-Sum Payments; Delay to 2019 Possible for Funding

On October 3, 2017, the Department of the Treasury and the Internal Revenue Service (IRS) released final regulations, and a related Notice (Notice 2017-60), adopting new mortality tables and mortality improvement scales. Single-employer defined benefit plans must use these tables for purposes of determining a plan’s funding requirements, Pension Benefit Guaranty Corporation (PBGC) variable rate premiums and the amount of lump-sum payments.

The final mortality tables and improvement scales are identical to the tables in the proposed regulations issued December 29, 2016 (see Sibson’s January 11, 2017 hot topic). As discussed in more detail below, while the new mortality tables are generally applicable for plan years beginning on or after January 1, 2018, some plans with off-calendar years will have to apply the new tables as of January 1, 2018, with regard to lump-sum calculations. For purposes of funding and variable rate premiums some plan sponsors will be able to delay the effective date of the new tables to January 1, 2019.

For most plans, the new tables will increase liabilities and normal costs by several percentage points. The increase in funding resulting from the new tables will depend on the demographic characteristics of the plan population.

Lump-Sum Effective Date

Pursuant to Notice 2017-60, for purposes of present value calculations under Section 417(e) of the Internal Revenue Code (IRC), the new mortality tables apply for annuity starting dates occurring in “stability periods” beginning in calendar year 2018. The stability period is the period for which the §417(e) “lookback” interest rate applies, and can be one calendar month, one plan or calendar quarter, or one plan or calendar year. Under the lump-sum effective date rule, for a plan with a July 1–June 30 plan year and a calendar-year stability period, the new mortality tables are effective with the January 1, 2018 stability period.

Funding/PBGC Premium Effective Date

Generally, for purposes of funding and PBGC variable rate premiums, a sponsor must use the new mortality tables for plan years beginning on or after January 1, 2018. However, a sponsor may delay the effective date to plan years beginning on or after January 1, 2019, if the sponsor concludes that use of mortality tables determined in accordance with the final regulations for the 2018 plan year would be administratively impracticable, or would result in a greater than de minimis adverse business impact. If the plan sponsor reaches one of those conclusions, it must then inform the plan’s actuary of its intent to apply the delay (which also would apply for any applicable benefit restrictions under IRC §436).

However, a one-year delay in the adoption of the new mortality tables may be of limited value for plans that typically pay benefits in lump-sum form based on IRC §417(e). That is because, with regard to funding for benefits expected to be paid as a lump sum, the funding rules require the use of the new mortality tables.

Plan-Specific Mortality Tables

Under the prior regulations, and with IRS approval, large plans have been able to substitute their own mortality experience for the IRS mortality tables for funding purposes. The Bipartisan Budget Act of 2015 amended the underlying statutory rules to make substitute mortality tables available to more plans. Revenue Procedure 2017-55, which the IRS also issued on October 3, 2017, sets forth the submission procedures required for IRS approval. The requirement that applications be submitted at least seven months before the beginning of the plan year is waived for 2018 plan years if the application is submitted by February 28, 2018 and the plan sponsor agrees to a 90-day extension of the 180-day review period.

Special rules apply for plans that have existing substitute mortality tables.

Technical Note

The new tables are the RP-2014 mortality tables. They are derived based on no collar distinction using base rates as of 2006, projected forward using the MP-2016 improvement scale.

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