Benefits and Compensation

New IRS Mortality Tables for 2018 Bring Host of Concerns for DB Plan Sponsors

The new mortality tables required for use by final regulations released on October 5 by the Internal Revenue Service (IRS) were expected, but bring into sharper focus a host of concerns for the single-employer defined benefit (DB) retirement plans that must eventually incorporate them.

Defined benefit retirement plan

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The IRS on October 3 released Notice 2017-60 to outline rules in the regulations governing 2018 base mortality rates and mortality improvement tables that are to be used for minimum funding calculations and determining minimum lump sums and other types of accelerated payouts.

The improvement scale is to be updated regularly in future years. The new tables generally recognize increased longevity of plan participants and their beneficiaries, a fact that could boost plan liabilities by 5 percent on average in the 2018 plan year, depending on individual plan demographics, design, and other variances of the mortality tables a plan is using.

These tables are used along with other actuarial information to calculate the present value of a stream of forecast future benefit payments for the purpose of determining a DB plan’s minimum funding requirements.

Tables from Society of Actuaries

The new regulations mandate the use of updated base mortality and updated mortality improvement assumptions published by the Society of Actuaries Retirement Plan Experience Committee (RPEC) in its RP-2014 mortality and MP-2016 mortality improvement publications. New tables based on RPEC’s calculations are required for minimum funding determinations and valuations dates beginning in 2018, unless a plan sponsor opts for a one-time delay in using the tables for 1 year.

Plans with valuation dates not on the first day of the plan year will be subject to the new tables for plan years before 2018 if the valuation date falls in the 2018 calendar year.

The use of updated mortality rates for figuring lump sums and other forms of accelerated payment will apply to distributions with annuity starting dates that land during that calendar year.

Release of the new mortality tables now adopted by the IRS for 2018 was delayed after significant pension-industry questions were raised about draft rules for mortality tables provided at the end of 2016.

The initial impact of the new mortality rates will be most visible in the following ways, according to an October 4 client bulletin from Watkins Ross, a Michigan-based consulting, actuarial, and administration firm that provides employer- and union-sponsored retirement benefit plan services:

  • An increase in minimum funding requirements;
  • Higher Pension Benefit Guaranty Corp. (PBGC) premiums;
  • A rise in lump-sum values, and
  • A decrease in plan funded percentages.

The new tables selected by the IRS use a single, modified, unisex dataset that does not take into account white- and blue-collar life expectancy differences, and are based on pay-related benefits. Plans with primarily white-collar populations with longer average longevity may understate their liabilities, according to some actuarial firms that have reviewed the new tables, while medium and small plans that have generally lower life expectancy among participants may be locked in to rates that, on average, overstate their plan liabilities.

How to Delay Use

In order to delay use of the new tables for 1 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 it must notify the plan’s actuary of its intent to use the prior mortality tables.

“An initial reading of the notice and regulations does not clearly explain what qualifies as de minimis, but sponsors likely will want to choose to delay use of the new tables if possible,” said Pittsburgh-based compensation and benefits consulting firm Cowden Associates in an October 4 client memo. Cowden said opting to delay applying the new tables may substantially reduce 2018 PBGC premiums for plans.

The firm also advised that sponsors of large DB plans may benefit from generating their own mortality assumptions, even if their plan experience (with participant death rates) did not warrant doing so in the past.

IRS Revenue Procedure 2017-55, issued at the same time as Notice 2017-60, sets forth the procedure to be used by a DB plan sponsor subject to federal tax code Section 430 funding requirements that wants to request IRS approval for substitute mortality tables.

Jane Meacham is the editor of BLR’s retirement plan compliance publications. She has nearly 30 years’ experience as a writer/editor of financial services news.