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Defined benefit plans are likely to have their funding and lump-sum payment costs rise under an IRS proposed rule updating the mortality tables plans use to calculate the present value of benefits.
The new tables, proposed Dec. 28, reflect the longer life expectancy of plan participants and are also used by plan sponsors to calculate how they fund their pension plans.
The proposed rule would require that sponsors use the updated tables for plan years beginning on or after Jan. 1, 2018.
The Internal Revenue Service also proposed updating the requirements that a plan sponsor must meet to obtain IRS approval to use custom mortality tables for minimum funding purposes.
If finalized, it’s expected that the long-anticipated rule would require sponsors to increase the funding of their plans. Several large employers over the past year have ended, or de-risked, their plans in anticipation of the costs associated with these new mortality tables. That trend is likely to continue in 2017.
The rule “would increase plan minimum funding costs by about 5 percent on average,” but “it’s too early to say how much they will affect” plan costs of lump-sum payments to participants, Scott A. Hittner, partner and chief actuary with pension actuarial consulting firm October Three in Denver, told Bloomberg BNA. The impact on cash balance and other hybrid plans, however, would be minimal, he said.
Although the IRS has said that updating the tables in 2016 was a priority, the failure to do so sooner has drawn criticism from some who believe the delay has prompted plan sponsors to offer lump-sum payouts to the detriment of participants.
“Treasury’s actions on mortality tables are a travesty,” former Pension Benefit Guaranty Corporation Director Joshua Gotbaum told Bloomberg BNA.
“Treasury delayed its update at the request of plan sponsors, who took advantage of the obsolete mortality tables to shed their pension obligations in discounted lump sums to unsuspecting participants. Not only did Treasury enable this undermining of pension rights of hundreds of thousands of people, they were an accomplice by not requiring employers to admit that the lump sums were below fair market value,” he said.
Gotbaum, who is now a guest scholar in economic studies at the Brookings Institution in Washington, added that Treasury should be updating these tables “every 10 years, not 18.”
He was referring to the fact that sponsors currently use tables reflecting expected longevity from the year 2000.
Use of custom mortality tables would be available to many more plans under the proposed rule.
To design a custom table for each gender, current rules require that a plan have had at least 1,000 participants of that gender die within the plan’s two- to five-year plan experience, Hittner said. The new rule would permit plans with at least 100 deaths over the same experience period to use tables that reflect at least partially the plan’s experience, he said.
Single-employer plans would also see their variable-rate plan premiums owed to the PBGC increase under the new rule. That’s because the rule would increase the plan’s unfunded liability, Hittner said.
Plans would need to apply to the IRS to use new mortality tables at least seven months before the beginning of their next plan year. For example, for plan years beginning on Jan. 1, 2018, a plan would need to apply by May 31, 2017.
The rule also adopts partially the RP-2014 Mortality Table promulgated by the Society of Actuaries in 2014. It also adopts the SOA’s Mortality Improvement Scale MP-2016, which considers future mortality improvement, Hittner said.
The rule is slated to appear in the Federal Register on Dec. 29.
The IRS will hold a public hearing on the proposal April 13. Comments on the rule or outlines of topics to be discussed at the hearing are due to the IRS by March 28.
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The proposed rule is at http://src.bna.com/k1P.
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