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On October 5, 2017, the IRS published (1) final regulations/mortality tables for determining the present value of benefits under defined benefit plans for funding, Pension Benefit Guaranty Corporation premiums and lump sum valuations, (2) a revenue procedure for sponsor requests for the use of plan-specific substitute mortality tables and (3) a notice providing updated static mortality tables for 2018.
The regulations generally track IRS’s December 2016 proposal, but they do include some important transition rules not in the proposal. In this article we begin with the headlines and then provide a brief review of the new rules.
As we discussed in our article IRS proposes new mortality tables for DB plan valuations, the two most significant issues with respect to IRS December 2016 proposal were:
The use of the Society of Actuaries’ Mortality Improvement Scale MP–2016. Oversimplifying, a mortality improvement scale adjusts the base mortality table for improvements in mortality since the base table was developed. MP-2016 provides for a long-term mortality improvement rate of a “[f]lat 1.0% rate to age 85; decreasing linearly to 0.85% at age 95; then decreasing linearly to 0.0% at age 115.” Critics argued that that projected mortality improvement rate was too high. To get a feel for the significance of this issue, if the new mortality tables/improvement scale as a whole will increase liabilities under an average plan by about 4 %, backing off of the proposed mortality improvement scale (with its “flat 1.0% rate to age 85” improvement assumption) to something like, e.g., Social Security’s 0.72% long-term rate would result in an increase of (very roughly) between 2%-3%.
January 1, 2018, effective date. Some argued that there would not be time – given how late it is in 2017 – for sponsors to implement the new rules. In this regard, one of the objections was that a January 1, 2018, effective date would not leave time for the approval and implementation of substitute tables.
The biggest news in the final regulation package is transition relief, with respect to both of these issues, for 2018. Generally (and oversimplifying somewhat), plans are required to adopt the new mortality tables and to use the MP-2016 mortality improvement scale (either in generational tables or to update static tables) beginning in 2018 and succeeding years. But for 2018 only:
Mortality tables determined in accordance with regulations previously in effect may be used for funding (and, apparently, PBGC variable-rate premium) purposes so long as the plan sponsor “(1) concludes that the use of mortality tables determined in accordance with the final regulations for the plan year would be administratively impracticable or would result in an adverse business impact that is greater than de minimis, and (2) informs the actuary of the intent to apply this option.” The new, MP-2016-updated tables must, however, be used for purposes of calculating lump sums. To implement this transition rule, IRS published Notice 2017-60, providing static tables updated through 2018.
The requirement, under the final regulation, that a sponsor apply for approval of a substitute mortality tables at least 7 months before the plan year begins is satisfied if the application is submitted by February 28, 2018.
Also new in the final regulations:
Special rules for multiple employer plans.
The ability to determine credibility of experience (to qualify a substitute mortality table) based combined data for both genders (from which gender-specific tables would then be constructed).
Special rules for continued approval (under the new rules) of substitute tables approved under the old rules.
The final regulation modifies IRS’s 2008 regulation, which generally provided rules for, among other things, base mortality tables, reflection of mortality improvement and the use of substitute mortality tables.
The new tables are derived from the RP–2014 Mortality Tables published by the Society of Actuaries in 2014, which include significant mortality improvements and consequently generally increase the value of traditional DB plan benefits. The new tables/improvement scale will generally have only a modest effect on most hybrid/cash balance plans.
The proposal would (like the 2008 regulation) allow the use of either generational or annually updated static mortality tables. For updates, IRS will generally use the SOA MP–2016 Mortality Improvement Scale, although, in this regard, IRS indicated that it expects the SOA to update MP-2016 regularly and that it would generally modify ERISA funding/PBGC premium/lump sum valuation rules to track those updates. The preamble of the final regulation is worth quoting at length on this point:
Treasury and the IRS understand that RPEC [the Society of Actuaries Retirement Plans Experience Committee] expects to issue updated mortality improvement rates that reflect new data for mortality improvement trends for the general population on an annual basis. As noted by the commenters, while the rate of mortality improvement has fluctuated significantly on a year-to-year basis, there has been a significant reduction in the rate of improvement over the past few years compared to the rate of improvement for the past 25 years. RPEC has indicated the intent to continually review the methodology used in its mortality improvement model in an effort to improve the overall effectiveness of the model, especially with respect to year-over-year stability and forecast accuracy, and it has identified the assumed long-term rate of mortality improvement and graduation techniques as two of the items included in this review. In establishing the mortality improvement rates to be used …, Treasury and the IRS will continue to take into account RPEC’s updates (including any modifications to RPEC’s methodology), as well as other sources of data or analyses regarding mortality improvement.
The proposal reflects the provisions of the Bipartisan Budget Act of 2015 (BBA 2015), which made it easier for sponsors to use customized, “substitute mortality tables,” and in this regard, the proposal generally looks workable.
As noted, the regulations are generally effective for 2018 plan years, subject to the transition rules noted above.
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For sponsors concerned about the implementation of new (and “more costly”) mortality tables, including the SOA’s MP-2016 mortality improvement scale, for the 2018 plan year the final regulations provide some relief. But that relief is only temporary and does not apply to lump sum calculations.