IRS Final Regulations, Revenue Procedure 2017-55, and Notice 2017-60 Prescribe Mortality Tables for Defined Benefit Plans and Provide Related Guidance

Practical Law Legal Update w-010-7295 (Approx. 10 pages)

IRS Final Regulations, Revenue Procedure 2017-55, and Notice 2017-60 Prescribe Mortality Tables for Defined Benefit Plans and Provide Related Guidance

by Practical Law Employee Benefits & Executive Compensation

Minimum Funding Requirements for Defined Benefit Plans

Section 412 of the Internal Revenue Code (Code) (26 U.S.C. § 412) prescribes minimum funding requirements for defined benefit plans. Code Section 430 (26 U.S.C. § 430), which was added to the Code by the Pension Protection Act of 2006, specifies the minimum funding requirements that apply generally to single employer defined benefit plans. For more information on pension plan funding, see Practice Note, Minimum Funding Standards for Defined Benefit Plans.

Code Section 430(h)(3) contains rules regarding the mortality tables to be used under Section 430. Code Section 430(h)(3)(A) applies to generally applicable mortality tables and Section 430(h)(3)(C) applies to substitute mortality tables. The mortality tables are based on the actual mortality experience of pension plan participants and projected trends in that experience, and must account for the results of available independent studies of mortality of individuals covered by pension plans. The Secretary of the Treasury prescribes by regulation the mortality tables to be used in determining any present value or making any calculation under Code Section 430.

These mortality tables specify the probability of survival year-by-year for an individual based on age, gender, and other factors. This information is used with actuarial assumptions to calculate the present value of a stream of expected future benefit payments, which determines the minimum funding requirements for the plan. The mortality tables are also used to determine the amount of a lump-sum distribution from a plan.

Under Code Section 430(h)(3)(B), the Secretary of the Treasury is required to revise any mortality table in effect under Code Section 430(h)(3)(A) at least every ten years to reflect the actual mortality experience of pension plan participants and projected trends in that experience.

In December 2016, the IRS issued proposed regulations prescribing mortality tables for determining minimum funding requirements and lump-sum distributions for most defined benefit pension plans (81 Fed. Reg. 95911 (Dec. 29, 2016); see Legal Update, IRS Proposed Regulations Prescribe Mortality Tables for Defined Benefit Plans and Simplify the Use of Substitute Mortality Tables).

Final Regulations on Mortality Tables for Defined Benefit Plans

The final regulations replace the 2008 final regulations (73 Fed. Reg. 44632 (Jul. 31, 2008)) that provide rules for generally applicable mortality tables and substitute mortality tables. Specifically, the final regulations revise:

The methodology for developing the generally applicable mortality tables that are used to determine present value or make any computation under Code Section 430 (26 U.S.C. § 430). Under Code Section 417(e)(3)(B) (26 U.S.C. § 417(e)(3)(B)), a modified version of these tables will be used for purposes of determining the amount of a single-sum distribution (or another accelerated form of distribution) (see Generally Applicable Mortality Tables).
The rules regarding substitute mortality tables (see Substitute Mortality Tables).

Generally Applicable Mortality Tables

Like the proposed regulations, the mortality tables under the final regulations are derived from the RP-2014 mortality tables. As under the 2008 general mortality table regulations, the 2017 final regulations provide mortality tables that:

Are gender-distinct, because of significant differences between expected male mortality and expected female mortality.
Set forth separate mortality rates for annuitants and nonannuitants.

The base tables in the 2017 final regulations will be used to develop the mortality tables for future years.

As under the proposed regulations, for a participant's beneficiary, the annuitant mortality table applies for the period beginning with each assumed commencement of benefits for the participant (see Practice Note, Beneficiary Designations in Qualified Retirement Plans). If the participant has died (or if the participant is assumed to die before commencing benefits), the annuitant mortality table applies to the beneficiary for the period beginning with each assumed commencement of benefits for the beneficiary.

The final regulations also provide that the mortality improvement rates for valuation dates in 2018 are the Scale MP-2016 rates. The final regulations provide that mortality improvement rates for years after 2018 will be published in the Internal Revenue Bulletin. Significant revisions to the mortality improvement rates may first be proposed in a new rulemaking, to allow for public comment. The final regulations do not require the mortality improvement rates under Code Section 430(h)(3) to be updated annually. However, the preamble notes that Treasury and the IRS contemplate that generally the rates will be updated annually.

Like the proposed regulations, the final regulations provide that the same mortality assumptions that apply for purposes of Code Section 430(h)(3)(A) and Treasury Regulation Section 1.430(h)(3)-1(a)(2) (26 C.F.R. § 1.430(h)(3)-1(a)(2)) are used to determine a plan's current liability for purposes of applying the full funding rules of Code Section 431(c)(6) (in the case of a multiemployer plan) and Section 33(c)(7)(C) (in the case of a Cooperative and Small Employer Charity (CSEC) plan). For this purpose, a multiemployer plan or CSEC plan may apply either the annually-adjusted static mortality tables or the generational mortality tables.

Effective Date

The effective date of the final regulations governing generally applicable mortality tables is January 1, 2018, which was the same effective date under the proposed regulations. However, the final regulations provide an option to use the 2008 final regulations during the 2018 plan year for plans for which substitute mortality tables are not used for the 2018 plan year. Specifically, such plans may use mortality tables determined using the 2008 final regulations to apply the rules of Code Section 430 to a valuation date occurring during 2018, if the plan sponsor:

Concludes that the use of mortality tables determined in accordance with the final regulations for the plan year would be administratively impracticable or would result in an adverse business impact that is greater than de minimis.
Informs the actuary of the intent to apply this option.

The preamble notes that while this option will provide significant flexibility to plan sponsors, the use of the option will not affect the mortality table used to determine minimum present value for distributions with annuity starting dates in stability periods that begin during 2018.

Substitute Mortality Tables

The proposed regulations provided new, simpler rules for the use of substitute mortality tables, and the final regulations largely adopt those new rules, but make several changes based on comments received on the proposed regulations.

Under Section 303(h)(3)(C)(iii) of the Employee Retirement Income Security Act of 1974 (ERISA) (29 U.S.C. § 1083(h)(3)(C)(iii)) and Code Section 430(h)(3)(C)(iii) (26 U.S.C. § 430(h)(3)(C)(iii)), plan sponsors may use a plan-specific substitute mortality table if:

There is a sufficient number of plan participants.
The plans have been maintained for a sufficient period of time, to have credible information necessary so that the table reflects:
- the actual experience of the pension plans maintained by the sponsor; and
- projected trends in general mortality experience.

The first major change under the final regulations is that a substitute mortality table is constructed by multiplying the mortality rates from a projected version of the generally applicable base mortality table by a mortality ratio (a ratio of the actual deaths for the population to the expected deaths determined using the standard mortality tables for that population). The 2008 substitute mortality table regulations used graduated raw mortality rates, but according to the preamble to the final regulations, use of mortality ratios:

Is expected to make it easier for plan sponsors to develop substitute mortality tables because they will not have to apply a complex graduation technique.
Facilitates efficient IRS review of applications for approval to use substitute mortality tables.

The other major change made in the final regulations is to permit the use of substitute mortality tables for a plan that does not have sufficient deaths to have fully credible mortality information (the plan has mortality experience that is only partially credible). The substitute mortality table used for a partially credible plan is the weighted average of the standard mortality table and the substitute mortality table that would be developed for the plan if it were to have fully credible mortality information.

The final regulations provide general requirements for experience studies of a population with full credibility (credibility is based on actuarial theory), which help create base substitute mortality tables that are used to create substitute mortality changes. The requirements in the final regulations are similar to the 2008 substitute mortality table regulations, but reflect certain changes from the proposed regulations in response to comments, including use of an earlier experience study than is normally allowed and use of data in an experience study that is collected over different periods for plans with different plan years.

The final regulations also provide how the base substitute mortality table is determined.

The final regulations, like the proposed regulations, adopt revised standards for the full credibility of a population for purposes of substitute mortality tables. Based on comments on the proposed regulations, the final regulations include an option to increase the credibility of a plan's mortality experience by basing it on the combined mortality experience of both genders.

The final regulations also cover:

The requirement under Code Section 430(h)(3)(iv) for consistency in the use of substitute mortality tables with respect to all plans within a controlled group. The 2017 final regulations narrow an exception to this requirement that was provided under the 2008 final regulations.
Rules for the use of substitute mortality tables in connection with multiple-employer plans, including application of the controlled group consistency rule to multiple-employer plans.
The option to use combined male and female mortality experience. The final regulations provide that a single mortality ratio may be developed for both genders and then used to construct separate gender-specific base substitute mortality tables for the plan.
Special rules for newly-affiliated plans (plans that have become maintained within a new controlled group in connection with a transaction under Treasury Regulation Section 1.410(b)-2(f) (26 C.F.R. § 1.410(b)-2(f))). The final regulations provide a longer transition period than did the proposed regulations, during which time the controlled group consistency requirement does not apply to a newly-affiliated plan.
Early termination of the use of substitute mortality tables (the final regulations retain the rules from the 2008 regulations).

These revisions to the substitute mortality table regulations are revised under Section 503 of the Bipartisan Budget Act of 2015 (BBA), which requires that established actuarial credibility theory be used to determine whether a plan has credible information (for more information on how the BBA affects substitute mortality tables, see Legal Update, Bipartisan Budget Act of 2015 Includes Pension Funding Provisions and Repeals Automatic Enrollment Under the ACA).

Effective Date

The final regulations governing substitute mortality tables apply to plan years beginning on or after January 1, 2018. However, the final regulations include a transition rule for previously approved base mortality tables:

The transition relief under which previously approved base substitute mortality tables continues to apply for plan years beginning in 2018.
Previously approved base substitute mortality tables continue to apply to later plan years during the term of their original approval, if the plan sponsor satisfies the requirement that substitute mortality tables be used for all plans in the controlled group that have credible mortality information under the standards in the final regulations.

Furthermore, the requirement that a plan sponsor apply for approval to use substitute mortality tables at least seven months before the beginning of the plan year will be treated as satisfied if the plan sponsor's application is submitted on or before February 28, 2018, provided that the plan sponsor agrees to a 90-day extension of the 180-day review period.

Revenue Procedure 2017-55

On October 3, 2017, in conjunction with the final mortality table regulations (see Final Regulations on Mortality Tables for Defined Benefit Plans), the IRS issued Rev. Proc. 2017-55, which provides the procedures by which the sponsor of a defined benefit plan that is subject to the funding requirements of Code Section 430 may request IRS approval for the use of plan-specific mortality tables under Code Section 430(h)(3)(C) and Treasury Regulation Section 1.430(h)(3)-2 (26 C.F.R. § 1.430(h)(3)-2). Rev. Proc. 2017-55 updates Rev. Proc. 2008-62, which was issued in conjunction with the 2008 mortality table regulations.

A defined benefit plan that requests approval to use substitute mortality tables that would first apply for a plan year beginning on or after January 1, 2018 must satisfy the requirements of the 2017 final regulations and Rev. Proc. 2017-55.

Rev. Proc. 2017-55 provides:

General administrative procedures, including the address and user fee for an application and the necessary procedural documents that have to be submitted.
Timing provisions related to requests for approval to use substitute mortality tables. Generally, the request for approval must be submitted at least seven months before the plan year that the substitute mortality tables are to apply.
Required content that must be included in a request for approval to use substitute mortality tables, including:
- a description of populations within the plan for which the substitute tables will be used and a description of the populations within the plan for which the generally applicable mortality tables will be used;
- plan identification information, such as plan name, number, and year, both for plans that seek and do not seek approval to use the substitute mortality tables;
- a demonstration of credible mortality information;
- a demonstration of population stability;
- information regarding other plans in the plan sponsor's controlled group;
- Substitute Base Table construction information; and
- demonstrations with respect to base tables, including the generally applicable generational mortality tables and the substitute mortality tables.

Notice 2017-60

Generational mortality tables are a series of mortality tables, one for each year of birth, each of which fully reflects projected trends in mortality for individuals who are born in a particular year. Static mortality tables, which are updated annually, use a single mortality table for all years of birth to approximate the present value that would be determined using the generational mortality tables.

On October 3, 2017, in conjunction with the 2017 final mortality table regulations (see Final Regulations on Mortality Tables for Defined Benefit Plans), the IRS issued Notice 2017-60, which provides updated static mortality tables and mortality tables to be used during stability periods in the 2018 calendar year.

Specifically, Notice 2017-60 provides:

In Appendix A, the updated static mortality tables determined using the methodology in Treasury Regulation Section 1.430(h)(3)-1 (26 C.F.R. § 1.430(h)(3)-1) before its amendment by the 2017 final mortality table regulations. The option under Treasury Regulation Section 1.430(h)(3)-1(f)(2) (26 C.F.R. § 1.430(h)(3)-1(f)(2)), which is available under certain circumstances for valuation dates occurring during 2018, is to apply mortality tables that were created using regulations previously in effect before amendment by the 2017 final mortality table regulations (this option may be used if the plan sponsor concludes that use of mortality tables under the new Treasury Regulation Section 1.430(h)(3)-1 for that plan year would be administratively impracticable or would result in an adverse business impact that is greater than de minimis, and informs the actuary for the plan of the intent to apply the option to use mortality tables under the former regulations). These updated static mortality tables apply to:
- plan years beginning during 2017 with respect to valuation dates occurring during 2018; and
- the plan year beginning during 2018 if the option under Treasury Regulation Section 1.430(h)(3)-1(f)(2) is used for the plan.
In Appendix B, the mortality table that is used to determine minimum present value under Code Section 417(e)(3) (26 U.S.C. § 417(e)(3)) and ERISA Section 205(g)(3) (29 U.S.C. § 1055(g)(3)) for distributions with annuity starting dates that occur during stability periods beginning in the 2018 calendar year. This mortality table is a modified unisex version of the mortality tables specified under Code Section 430(h)(3)(A) (26 U.S.C. § 430(h)(3)(A)), which have been revised by the 2017 final mortality table regulations for plan years beginning in 2018.

Practical Implications

The final regulations governing generally applicable mortality tables and substitute mortality tables apply to plan years beginning on or after January 1, 2018. Plan administrators of single employer defined benefit plans, along with their attorneys and actuaries, must be familiar with the new rules in the final regulations to properly calculate benefit payments to participants and beneficiaries. The updated mortality tables provided in Notice 2017-60 may be useful for certain plans during plan years that begin in 2017 and 2018.

As a result of the changes made in the final regulations, defined benefit plan sponsors may welcome the simpler methods for setting up their own mortality tables, and the Treasury Department and the IRS expect that significantly more plan sponsors will request approval to use substitute mortality tables. Plan sponsors that want to use substitute mortality tables should familiarize themselves with Rev. Proc. 2017-55, which provides the procedures for requesting IRS approval of plan-specific mortality tables.

IRS Final Regulations, Revenue Procedure 2017-55, and Notice 2017-60 Prescribe Mortality Tables for Defined Benefit Plans and Provide Related Guidance | Practical Law