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New tables must be used to determine pension lump-sum payouts starting in 2018
updated on Dec. 15, 2017
Living longer is a good thing, but sponsors of defined benefit pensions will have to ensure that their plans are sufficiently funded to pay for those extra years of retirement.
Pension plans rely on IRS-issued mortality tables to determine minimum pension-funding requirements and for calculating lump-sum pension payouts, based on retirees' average life expectancies. The Pension Protection Act requires the IRS to update these tables at least every 10 years, and on Oct. 3 the IRS released Notice 2017-60, with
a new set of final mortality tables for single-employer defined benefit plans, to take effect beginning in 2018.
The notice includes a unisex table for determining minimum and maximum benefits amounts.
The IRS also issued Revenue Procedure 2017-55, with instructions for
obtaining approval to use plan-specific and gender-based mortality tables for pension funding and related purposes instead of the standard mortality tables.
"The final regulations adopt the mortality tables in
the proposed regulations without change," said Scott Hittner, partner and chief actuary at plan advisory firm October Three Consulting in Greenwood Village, Colo. Regarding the use of substitute mortality tables, the final regulations made only modest changes and clarifications to the rules in the proposed regulations, he said.
Starting in 2018, minimum pension-funding levels and the calculation of Pension Benefit Guaranty Corp. (PBGC) variable-rate premiums "will be significantly affected by use of the new tables"—with likely funding increases, by percentage, in the mid-single digits—"depending on a plan's benefit structure and demographics of its participants," said David Weaver, senior consultant and actuary at Pittsburgh-based consultancy Cowden Associates.
The new tables, however, should have no significant impact on defined benefit
cash balance hybrid plans, which lack a guaranteed payout, Hittner noted.
Update: IRS Releases 2019 Mortality Tables
In December 2017, the IRS issued Notice 2018-02, with updated mortality tables that defined benefit plans will use for minimum funding, maximum benefits, and minimum lump sums beginning in 2019.
The Society of Actuaries' released their
MP-2017 report in October 2017, and the IRS has now adopted the factors in that update for the 2019 applicable mortality rates, using the same methodology as in 2018.
The new tables should reduce 2019 valuation present values (if not using a plan-specific table) and lump-sum factors, pension consultants said.
The new regulations make substantial changes to the current rules on using substitute mortality tables based on so-called experience-based mortality rates for a specific workforce, which is used to determine single-employer minimum funding requirements, Hittner explained. "The changes generally simplify the construction of experience-based substitute mortality tables and allow smaller plans not having 'fully credible' mortality data on their workforce to use a weighted average of the standard mortality table and the experience-based substitute mortality table that would result if the plan had fully credible data."
As women tend to live longer than men—the U.S. Social Security Administration estimates that women and men who turn 65 can now expect, on average, to live a further 21.6 years and 19.3 years respectively—substitute mortality tables are structured by gender. "If credible experience is not available for one gender, the standard table can be used for that gender," Hittner noted.
"Small plans not having at least 100 deaths for a gender over a five-year period are not permitted to use a substitute mortality table, however," without receiving IRS approval, he pointed out.
[SHRM members-only toolkit:
Designing and Administering Defined Benefit Retirement Plans]
The updated tables must be used to determine minimum lump-sum payouts starting next year. For minimum plan-funding calculations, however, plan sponsors can apply for a one-time option to delay use of the new tables for one year.
To qualify for the one-year transition relief, a plan sponsor must:
"An initial reading of the notice and regulations does not clearly explain what qualifies as de minimis, but sponsors will likely want to choose to delay use of the new tables if possible," Weaver said.
Sponsors of small and medium-sized plans, in particular, should "consider the option to delay use of the new tables for calculating contribution requirements until 2019 if no additional guidance regarding de minimis business impact is provided," Weaver advised.
"Sponsors of large plans may benefit from generating their own mortality assumptions, even if their plan experience did not warrant doing so in the past," he added.
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