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IRS Releases Updated Mortality Tables and Guidance for Funding Method Changes

Publications - Client Alert | November 1, 2017

Recently, the IRS released final regulations and notices setting forth new mortality tables and updated its revenue procedures for funding method changes to defined benefit plans.

The updated mortality tables, which replace the RP-2000 tables, are used for minimum funding calculations and for calculating lump sums and other forms of benefit that are subject to Code Section 417(e)(3). In general, the new mortality tables will apply to plan years beginning in 2018.

The new tables reflect improved mortality rates, which are expected to have a number of impacts on defined benefit plan sponsors. These include higher PBGC premiums, higher values for lump sum distributions, higher minimum funding requirements, and lower plan funding percentages.

Under the final regulations, plan sponsors have some flexibility to mitigate the effect of the new tables. Specifically, the regulations give plan sponsors who do not use plan-specific mortality tables and who make certain determinations the ability to delay use of the new mortality tables for funding purposes for one year.

In response to the adoption of the new mortality tables, defined benefit plan sponsors should evaluate their options to minimize the anticipated increase in plan costs. These may include determining whether a one-year delay is available and appropriate or evaluating whether the plan sponsor can adopt a plan-specific mortality table.

The IRS updated its guidance for defined benefit plans making changes to their funding methods, which are the techniques used by an actuary to determine a defined benefit plan’s estimated costs. These types of changes can affect a plan’s projected ability to pay future benefits and employers’ contribution obligations. These procedures are updates to those provided in Revenue Procedures 2000-40 and 2000-41 to account for subsequent legislative changes to the minimum funding requirements, including the Pension Protection Act and the Multiemployer Pension Reform Act.

Like the IRS’s prior guidance, Revenue Procedure 2017-56 allows single-employer defined benefit plans to receive automatic approval for certain types of funding method changes. Included in the pre-approved changes are those related to asset valuation methods, valuation dates, new accounting software, and other changes for terminating plans or those related to a merger. The updated procedures generally cover the same types of funding method changes and situations, but have been revised to reflect the new minimum funding standards under Code Section 430. For plans that change their actuary, the new funding method must estimate the funding target and costs within 3% of the values as determined in the prior year, and the valuation of plan assets must be within 2% of the prior year. These are tighter estimates than the 5% difference in valuations of these elements previously allowed. Similarly, certain asset valuation methods must also hit a narrower target and be within 110%-90% of fair market value as compared to the prior 120%-80% window.

Other types of defined benefit plans (e.g., multiemployer plans) and funding method changes require the IRS’s approval before such changes are effective. Revenue Procedure 2017-57 generally provides that a written request must be made to the IRS describing the proposed change and an explanation of why the change is being implemented. This guidance has similarly been updated to reflect the minimum funding standards now applicable to multiemployer plans under Code Section 431. Additionally, Revenue Procedure 2017-57 now provides an application procedure for single employer plans seeking approval for a revocation of an interest rate election. The difficulty in administering certain funding method changes is determining whether they neatly fit within a category the IRS will automatically approve.

If you would like assistance evaluating the impact of the new mortality tables on your defined benefit plan or determining whether changes in the Plan’s funding method requires IRS approval, please contact a member of our Employee Benefits Practice Group.