Long-Awaited Changes to IRS Mortality Tables
Update on Mortality Tables
The IRS has released final regulations on the applicable mortality tables used by pension plans for 2018. The proposed tables are based on the Society of Actuaries mortality tables released in 2014 and the MP-2016 improvement scale. Many plan sponsors are already using versions of these tables for accounting calculations.
How will this affect your Plan?
The new mortality tables will increase liabilities. The tables will impact pension funding, PBGC premium, lump sum and possibly financial accounting calculations.
- Minimum Funding Requirements: Plan liabilities are expected to increase 3% to 5%. This increase could result in additional required contributions, depending on the plan’s funding level. This increase could also impact the funded percentage and cause additional administrative restrictions. For example, lump sums may be partially or fully restricted if the AFTAP falls below 80%.
- PBGC Premiums: Underfunded plans that are below the variable cap will see their PBGC premiums increase.
- Lump Sum Payments: Lump sum values will increase. Depending on the age of the participant, lump sum values will increase to varying degrees (all other assumptions being equal).
- Financial Accounting: Plans that pay lump sums and are valuing lump sums in their accounting disclosures will also see an increase in their accounting liabilities (all other assumptions being equal).
Static vs. Generational
Like the prior mortality tables, these tables provide rates for males and females, and separate rates for annuitants and non-annuitants. Also, the new regulations require mortality improvements to be reflected using a static projection scale or a fully generational projection scale. The IRS intends to provide updated static tables annually.
Decision to Delay
The final regulations include a provision for a one-year delay in implementing the new tables for funding purposes, provided that the plan sponsor:
- Concludes that the use of mortality tables would be administratively impractical or would result in an adverse business impact that is greater than de minimis
- Informs the actuary of the intent to exercise this option
No additional guidance was included on what constitutes de minimis or “adverse business impact”. The IRS has indicated that they will be interpreting the adverse business requirement “very liberally”. This could be interpreted as the IRS will not challenge use of the one-year delay if the plan sponsor can demonstrate that reflecting the new tables in 2018 would increase the funding obligation or increase the PBGC variable-rate premium. However, it is possible the PBGC will issue guidance that the one-year delay is not applicable to variable-rate premium calculations.
Plan Specific Mortality Tables
For plans that have a very large number of retiree deaths, they may apply to the IRS (for a fee) to use a plan specific mortality table using the plan’s mortality experience. We expect most plans will not have sufficient experience to choose this option.
Talk to your consulting actuary today to review how the mortality tables will impact your pension plan.