On April 28, 2022, the IRS published proposed regulations/mortality tables for determining the present value of benefits under defined benefit plans for purposes of determining the plan’s ERISA minimum funding requirements, Pension Benefit Guaranty Corporation variable-rate premiums, and lump-sum valuations. The proposed new mortality tables would change the calculation of plan liabilities for those purposes – depending on plan demographics, they may marginally decrease or increase liabilities (relative to a liability determination under current rules).
In this article we review the proposal, beginning with some background.
Current regulations provide (1) for the use of mortality tables derived from the RP–2006 Mortality Tables published by the Society of Actuaries in 2014, (2) for the use of either generational or annually updated static mortality tables, and (3) for the use of the SOA Mortality Improvement Scale. As the SOA has updated its Mortality Improvement Scale (generally, annually) IRS has (with a lag) adopted those updates (most recently, in Notice 2020-85, it adopted updates for 2022 valuations).
(We note that there is some confusion over the name/effective date of RP-2006. RP-2006 had previously been called “RP-2014.” But, according to the SOA, “[i]n 2018, RPEC [the Retirement Plans Experience Committee] released the RP-2006 Mortality Tables (SOA 2018), which removed the mortality improvement for the years 2007–2014 from the RP-2014 tables, moving their effective date back to the study’s central year, 2006.”)
Adoption of new Pri-2012 Mortality Tables
Under its April 28, 2022, proposal, IRS would amend current regulations to adopt as the new base mortality tables the Society of Actuaries’ Pri-2012 Mortality Tables. The new tables are (relative to RP-2006) based on a significantly expanded dataset (50% more “life-years of exposure” and 50% more deaths). These new Pri-2012 tables (with a “central year” of 2012) reflect, among other things, (marginally) shorter life expectancies for males than the earlier (RP-2006) tables.
Other key features of the proposal include:
Updated mortality improvement scale: The proposal would, for 2023 valuations, adopt the SOA MP-2021 mortality improvement scale, which generally shows some improvement in mortality over the period 2012-2021.
Static tables allowed only for small plans: Current rules allow for the use of either generational mortality tables or static tables updated annually. Under the proposal, only small plans (500 or fewer participants) would be allowed to continue to use static tables.
COVID-19 not reflected in mortality data: Generally, the proposal only reflects experience through 2019 and thus does not reflect COVID-19-related mortality data. With regard to the impact of COVID-19 on mortality assumptions/regulations IRS states:
If the impact of COVID-19 on mortality experience is viewed as only a short-term phenomenon, the mere fact that the model in the [Mortality Improvement] MP–2021 Report (upon which these proposed regulations are based) did not reflect the actual mortality experience for 2020 through 2022 does not mean that the mortality rates in these proposed regulations are inappropriate because it is not clear to what extent the increased mortality associated with COVID-19 will continue for 2023 and later years. However, to the extent there is a long-term higher mortality rate from COVID– 19, the Treasury Department and the IRS expect that RPEC will reflect the long-term impact of COVID–19 in future mortality improvement scales, which could be specified for use in future guidance.
As under current rules, there is no provision for a “collar adjustment” (for white collar vs. blue collar employees) for plan mortality assumptions. And rules for the use of “plan-specific” mortality tables are not changed by the proposal.
IRS publishes 2023 tables under current rules
At the same time that it proposed the amendment to current regulations, IRS, in Notice 2022-22, published updated mortality tables for 2023. In a related Employee Plans News item, IRS stated:
- If the proposed amendment is finalized in time for 2023 valuations, then “the mortality tables provided in Notice 2022-22 will apply for purposes of calculating minimum required contributions only for a plan with a plan year that begins in 2022 and that has a valuation date in 2023.”
- The table published in Notice 2022-22 used to determine lump-sum valuations “will apply for 2023 even if the new regulations are finalized with a 2023 effective date.”
Net effect/significance for plan sponsors
The changes proposed by IRS would (if finalized in time) be effective for 2023 valuations. They may, for some sponsors and depending on plan demographics, reduce plan liabilities for 2023 (vs. a valuation under current rules). It is also conceivable that they may increase those liabilities.
These changes would affect the valuation of plan liabilities for:
- Minimum funding. As we have discussed in past articles, as a result of interest rate relief, ERISA minimum funding requirements have been significantly reduced. But for those plans that remain subject to an ERISA minimum funding requirement, the new rules will affect the calculation of plan liabilities and thus ERISA minimum funding.
- Pension Benefit Guaranty Corporation variable-rate premiums. PBGC variable-rate premiums are (subject to a headcount cap) a percentage (4.8% for 2022) of a plan’s unfunded vested benefits (UVBs). Adoption of the new rules for 2023 liability valuations will also affect the calculation of variable-rate premiums for affected sponsors.
- Lump sum calculations would continue to be made under current rules for 2023 (per the Employee Plans News item noted above).
DB plan sponsors will want to discuss with their actuaries the effect of the proposed new rules on their plan valuations.
* * *
We will continue to follow this issue.