On December 28, 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)).

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.

These mortality tables specify the probability of survival year-by-year for an individual based on age, sex, 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. The proposed regulations would replace the 2008 final regulations (73 Fed. Reg. 44632 (Jul. 31, 2008)) that provide rules for generally applicable mortality tables and substitute mortality tables.

The proposed regulations cover the methodology the Treasury Department (Treasury) and the IRS use to update 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 the proposed regulations, the tables used to project the mortality of pension plan participants under Code Section 430 are based on the tables in the RP-2014 Mortality Tables Report. The mortality tables regulations are gender-distinct because of significant differences between expected male and female mortality (the mortality tables in the 2008 general mortality table regulations are also gender-distinct). They also distinguish between annuitants and nonannuitants, as did the 2008 general mortality table regulations, because of significant differences in the two groups' mortality experiences.

Under the proposed regulations:

The proposed regulations also:

The proposed regulations also provide new, simpler rules for the use of substitute mortality tables which may be used by plan sponsors in certain situations.

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, and the pension plans have been maintained for a sufficient period of time, to have credible information necessary so that the table reflects:

The proposed rules for the use of substitute mortality tables are being proposed 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). To satisfy this requirement, Treasury and the IRS reviewed actuarial literature regarding credibility theory and consulted with experts from the Society of Actuaries.

Based on that review, the proposed regulations provide a method for developing substitute mortality tables that is materially different from the method required under the 2008 substitute mortality table regulations and the associated revenue procedure. The new method would require a substitute mortality table to be constructed by multiplying the mortality rates from a projected version of the generally applicable base mortality table by a mortality ratio (versus the graduation of raw mortality rates under the 2008 regulations).

The preamble to the proposed regulations notes that use of mortality ratios should make it easier for plan sponsors to develop the substitute tables because they would not have to apply a graduation technique. The method in the proposed regulations:

The IRS is seeking comments regarding additional simplifications for use in developing substitute mortality tables.

The proposed regulations also cover:

The proposed regulations would 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 these new proposed rules in order to properly calculate benefit payments to participants and beneficiaries and may welcome the simpler methods for setting up their own mortality tables under the proposed regulations.