Plan sponsors need to watch out for 2018. That's when they'll have to start using new IRS-provided mortality tables to determine minimum pension funding requirements and to calculate lump-sum pension payouts.
The Society for Human Resource Management reports that newly updated tables from the IRS will take effect next year. The new mortality tables for single-employer defined benefit plans were announced in IRS Notice 2017-60, which also 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.
In the report, Scott Hittner, partner and chief actuary at plan advisory firm October Three Consulting in Greenwood Village, Colorado, is quoted saying, "The final regulations adopt the mortality tables in the proposed regulations without change."
Beginning in 2018, minimum pension-funding levels and the calculation of Pension Benefit Guaranty Corp. variable-rate premiums "will be significantly affected by use of the new tables," according to David Weaver, senior consultant and actuary at Pittsburgh-based consultancy Cowden Associates.
Weaver is quoted in the report saying that funding increases will be likely in the mid-single digits, percentagewise, "depending on a plan''s benefit structure and demographics of its participants."
In the report, Hittner also says that the new regulations make substantial changes to 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.
"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," he explains.
The change is particularly pronounced for women. The U.S. Social Security Administration estimates that women and men who turn 65 can now expect to live an average of 21.6 years and 19.3 years longer, respectively.
And 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 says, adding, "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," unless they clear it with the IRS first.
While the new tables have to be used starting next year, plan sponsors can apply for a one-time option to delay use of the new tables for one year for minimum plan-funding calculations.
To qualify for the one-year transition relief, a plan sponsor has to believe 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" (that is, minimal).
The sponsor must also notify the plan actuary of the plan's intent to use the prior mortality table.
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