By Michael Lee
On October 3, 2017 the Department of Treasury and IRS released final regulations on the mortality tables plan sponsors must use beginning in 2018 for defined benefit plans, per the Pension Protection Act of 2006. These tables are to be used to determine funding requirements, lump sum calculations and other acceleration of benefit calculations. On October of 2014, the tables were released in two reports released by the Society of Actuaries (SOA), the RP-2014 Mortality Tables Report and the Mortality Improvement Scale MP-2014 Report. Each of these reports contained new mortality assumptions recommended for valuing private-sector pension liabilities.
The increase in liabilities that is expected to occur for most plans under the new mortality tables could lead to the following consequences:
A Society of Actuaries report released April 26, 2017 projects that the updates to the mortality tables will increase minimum required contributions by as much as 11% in 2018 - and lump sums are projected to increase 3%-5%.
Now final, the regulations generally update the mortality for plan years beginning on or after January 1, 2018. The IRS expects to continue to take updated mortality improvement rates into account in years after 2018 and states that it is likely new rates will be published each year.
While these new tables must be used starting in 2018, 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 must 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 plan sponsor must also notify the plan actuary of the plan’s intent to use the prior mortality table.
Given the impact of these new tables, plan sponsors need to consider taking the following steps in the coming months:
Bottom line? The calculus has changed for all plan sponsors, especially those looking to terminate or de-risk.