On December 29, 2016 the IRS released proposed rules prescribing mortality tables for minimum funding purposes starting with 2018 plan years. We have been waiting for these new tables since the Society of Actuaries released updated mortality tables in 2014. For our prior commentary on these new tables, see:
- Mortality Improvement – Good/News Bad News
- New Mortality Tables – Again!
- 2016 Mortality Table Update – Lower Liabilities Again!
The proposed rules note that the 2018 prescribed lump sum table under IRC 417(e) will be released via IRS Bulletin following finalization of these tables. Below is our initial analysis of the impact of these proposed mortality tables. The technical details can be found at the end of our article.
The new mortality tables will increase funding liabilities and lump sums. The table below illustrates liability increases at sample ages between the current and the proposed 2018 tables (using a 5.50% interest rate):
* For the comparison above, we have assumed a 50/50 male female blend of the optional combined static mortality table will be used for lump sum purposes in 2018.
Minimum Funding Requirements: Sponsors can expect a 3 to 5% increase in minimum funding liabilities. Depending on the Plan’s funding level, this could cause a spike in required contributions. For instance, a $20 million dollar plan with $19 million in assets could see its underfunding double from $1 million to $2 million with a 5% ($1 million) increase in liabilities. In this case, funding attributable to the shortfall would also double.
AFTAP and Plan Administration: Plans with AFTAPs just above 80% or 60% could fall below these levels and be subject to restrictions on lump sum distributions. Plus, those lump sum distributions will be increasing!
PBGC Premiums: Underfunded plans that are below the variable cap will see their PBGC premiums increase.
Financial Accounting: Plans that pay lump sums will see increases in their accounting liabilities once these rules are finalized and the IRS issues new tables reflecting the updated mortality rates.
What To Do Now?
We do not expect significant changes in these proposed rules. Sponsors will want to work with their actuary and their pension consultant to understand how the new tables will impact future cash requirements. Sponsors looking to de-risk their plans should consider a lump sum window in 2017 if they have not recently done one.
Current IRS mortality tables, for use through 2017, are based upon the RP-2000 mortality table with mortality improvement projections based on Scale AA. Plan sponsors may elect to use a fully generational version of this table, or may use static versions with projections for a set number of years. An optional combined (static) table is available for plans with 500 or fewer participants. The IRS mortality table is also used for PBGC premium purposes, and a blended (unisex) version is used for minimum lump sum calculations.
The updated mortality tables use the RP-2014 mortality table and the MP-2016 projection scale. The projection of mortality improvements for the static tables is noticeably different. As a starting point, the new table projects improvements 8 years for males and 9 years for females with further projections based on age. The current tables project 15 years for non-annuitants and 7 years for annuitants.
Sponsors will continue to have the option to use either a fully generational table or a static mortality table. Most sponsors have historically used the static tables; however, with the new tables it’s expected that the static and generational tables will produce similar results. Plan sponsors and their actuaries may find that it makes sense to move to the generational table in 2018 as it may be slightly less complex to administer, and can provide consistency with their balance sheet accounting.
A public hearing to discuss this proposal has been set for April 13, 2017. Comments are due by March 29, 2017.
Dan Atkinson is a director and chief technical actuary and Charlie Cahill is a managing director and leads the firm’s actuarial practice. Dan and Charlie are based in P-Solve’s Boston office.