On October 3, 2017, the Internal Revenue Service (IRS) released Notice 2017-60, finally acknowledging that new mortality assumptions would be required for 2018 in the determination of minimum contributions and, by association, Pension Benefit Guaranty Corporation (PBGC) premiums. (See New IRS Mortality Tables for 2018 Bring Host of Concerns for DB Plan Sponsors.)
But in an altruistic maneuver by the IRS (two words not often read in the same sentence), an option to defer adoption until 2019 was added to the final regulations. The stated reason for this was lack of lead time, though the proposed change has been communicated extensively since the Society of Actuaries released their latest mortality report in 2014. (See IRS Delay in Implementing New Mortality Tables Affects Pension Liability Valuation.)
Meanwhile, the IRS gave plan sponsors much more notice on 2019 mortality tables by publishing them on December 15, 2017, in Notice 2018-02. They bring another year of slightly improved mortality assumptions, which should lower plan liabilities and lump-sum valuations somewhat.
Option to Defer
New mortality assumptions for 2018 now must be used for lump-sum conversions, but there is an option to delay adoption for funding and PBGC purposes. According to the notice, to claim the 1-year deferral a plan sponsor must inform its actuary that use of the new assumption for 2018 is either:
- “Administratively impracticable,” or
- “Would result in an adverse business impact that is greater than de minimis.”
This is a very considerate provision, but taken literally, it may be difficult to prove either point.
In this day and age, it is inconceivable that entering a new mortality table into valuation software is impracticable, especially considering that actuaries have months to do this coding before any liability reporting is required.
So What About De Minimis?
As for business impact, except for a few outliers under the Pension Protection Act of 2006 (PPA), it is hard to prove mathematically that the additional cost satisfies the greater-than-de-minimis requirement.
Consider that the expected increase in plan liabilities from the mortality change is roughly 3.0%. According to PPA minimum funding rules, approximately one-sixth of this increase would be added to the minimum contribution for the year, or 0.5% of liability (although better-funded plans may see no impact at all).
The PBGC variable rate premium level for 2018 is around 4.0%. So, the maximum impact on 2018 PBGC premiums is about 0.12% of liability (.03 × .04). Plans subject to the new variable rate premium caps would have less (or even zero) immediate impact. Note that although the PBGC premium impact is generally less, it is garnering more attention as the money is “lost” like a tax, rather than put into the plan to fund benefits.
I’ll oversimplify and just add the two, resulting in total added cost for 2018 of 0.62% of plan liabilities, give or take. In the context of other business expenses, this seems hard to frame as “un-de minimis.”
(For comparison, IRS regulations regarding pension plan mergers and spinoffs define “de minimis” as less than 3% of plan assets.)
Write Your Own Ticket
The last section makes a fairly compelling case that de minimis probably doesn’t apply to the vast majority of cases based on traditional understanding of the term. Except perhaps where plan sizes are disproportionately large compared with the plan sponsor.
Fortunately for sponsors, the term de minimis (Latin for “of minimis”) is never defined in the notice. Adverse business impact can be claimed if a sponsor simply “informs the actuary for the plan of the intent to apply the option.”
The regulations don’t establish a threshold of proof. Nor do they include provisions for filing or verification procedures to claim greater than de minimis impact. So, de minimis is in the eye of the beholder, who also happens to be writing checks to the plan and the PBGC.
Wink and Nod
So, while the IRS has nominally satisfied its goal of implementing new mortality assumptions by 2018, with no plans to enforce the election, it essentially amounts to a free pass. A literal satisfaction of the deferral rules seems hard to support.
Sponsors may want to wait and see if any additional clarifying guidance is issued before making their decisions. But ultimately, perceived unreasonable PBGC premium increases from the past may encourage most to give their actuaries a wink and a nod, and defer real mortality changes until 2019.
|Mike Clark is a consulting actuary for the Principal Financial Group and a fellow of the Society of Actuaries (SOA) and member of the American Academy of Actuaries (AAA), so his understanding of this subject is obviously “de maximus.”|