IRS Publishes New Mortality Tables - Benefits Affected
The IRS released new mortality tables that must be used for maximum benefit limits for all qualified benefit pension plans (both public and private sector plans), and lump-sum cash-outs for private sector plans (single-employer, multiemployer, and multiple employer plans), starting in 2018.1 Plan administrators will need to implement the new tables for plan years beginning in 2018. Also, plan administrators may need to implement the new tables for plan years beginning in 2017 for annuity starting dates on and after January 1, 2018. This alert describes the new mortality tables and their impact upon plan benefits.
General Overview of Impact on Benefits: For private sector plans, the new mortality tables will generally increase lump-sum payments. For all qualified plans, the new mortality tables will increase the maximum benefits in some situations and decrease the maximum benefits in other situations.
Action Needed Now: Plan administrators need to review plan terms and operations, and determine the impact of the new mortality tables. Further action is needed to implement the new mortality tables in benefit determinations.
Section 4302 requires the Department of the Treasury to prescribe mortality tables to be used in determining the present value of plan benefits.3 Section 430 requires that the tables be based upon the actual experience of pension plan participants and projected trends in that experience. Accordingly, the IRS is required to take into account results of available independent studies of mortality of individuals covered by pension plans and make revisions to any table at least every 10 years to reflect actual mortality experience of pension plan participants and projected trends in that experience.
In December 2016, the IRS published proposed regulations to update the mortality tables based upon the RP-2014 Mortality Tables Report and the improvement scales published by the Retirement Plans Experience Committee (RPEC) of the Society of Actuaries. On October 5, 2017, final regulations were published in the Federal Register.4
Present Value Requirements5
The law generally provides that the present value of certain forms of benefit under a qualified defined benefit plan (including lump-sum distributions) must not be less than the present value of the accrued benefit using specified interest rates and a specified mortality table. These are referred to as the "applicable interest rates" and the "applicable mortality table." The law defines the "applicable mortality table" as the mortality table based upon the mortality table specified for the plan year under the funding rules, modified as appropriate by the IRS.
Revenue Ruling 2007-67 provides that (subject to future guidance) the applicable mortality table is a static table developed based on a fixed blend of 50% male combined rates and 50% female combined rates. The IRS has updated the applicable mortality each year when the funding standard mortality tables were updated.
Maximum Benefit Under a Defined Benefit Plan6
For private single-employer plans, the maximum benefit is the lesser of 100% of the high three year average compensation or a maximum dollar amount ($215,000 for 2017). For public sector plans and multiemployer plans, the compensation limit doesn't apply so the maximum benefit is the maximum dollar amount.
The maximum benefit is expressed in terms of a single life annuity payable starting at ages 62-65. In general, if the form of benefit is not payable as single life annuity but is paid in another form of benefit (such as a lump sum) then the payment in such other form cannot exceed the maximum benefit when expressed as an equivalent single life annuity.7 The applicable mortality table and prescribed interest rates are used to determine the equivalence.
With certain exceptions, there is a reduction in the maximum dollar amount for annuity starting dates below age 62 and an increase in the maximum dollar limitation for annuity starting dates after age 65. The applicable mortality table and prescribed interest rates are used in determining the reduction and the increase.
The new mortality tables are set forth in two documents. One is the final regulations under Section 430. The other is Notice 2017-60.
Final Regulations Under § 430
The final regulations follow the proposed regulations and generally require the use of mortality tables for 2018 based upon the RP-2014 Mortality Tables projected using the MP-2016 improvement scale. The tables for subsequent years will be published by the IRS and will be based upon the RP-2014 Mortality Tables and a mortality improvement scale determined at that time. The tables in the regulations impact funding (which will be the subject of a separate advisory) but are also used to determine the mortality tables used for purposes of § 417(b) and § 417(e)(3).
Notice 2017-60 contains a new applicable mortality table for use in determining the present value of benefits that applies to "stability periods"8 beginning in 2018.9 Accordingly, a calendar year plan will need to apply the new table for lump sums (and certain other benefit determinations) starting January 1. Because the same mortality table is used for purposes of benefit limits, determinations of the maximum dollar amount will similarly be affected starting January 1. For plans with a fiscal plan year and a stability period that is not the plan year, the new table will apply for stability periods beginning in 2018.
CHEIRON OBSERVATIONS - Impact of New Mortality Tables
Present Value Requirements
The new mortality table will increase the amount of lump-sum distributions payable by a private sector plan. We estimate that a lump-sum distribution will increase by 3% to 5%, depending on the age of the participant, when compared to the lump sum using the table for 2017. The lump-sum comparisons were made using the August 2017 segment rates and a normal retirement age of 65.
Maximum Benefit Under a Defined Benefit Plan
Similar to the lump sums, the new mortality table will produce a higher maximum lump-sum benefit. For a retirement age of 65 and a 5.5% interest rate, the lump-sum equivalent of the maximum dollar limit of $215,000 will increase by approximately 3.5% (about a $90,000 increase).
For retirement before age 62, the impact of the new mortality table also will be to increase the maximum dollar limit. Using the required 5% interest, no pre-retirement mortality discount, and a retirement age of 55, the maximum amount of $215,000 is reduced to $135,059 using the new mortality table compared to $133,669 using the 2017 § 417(e)(3) mortality table.
For retirement after age 65, the impact of the new mortality table will be to decrease the maximum dollar limit. Using the required 5% interest, no post-retirement mortality increase, and a retirement age of 67, the maximum amount of $215,000 is increased to $248,848 using the new mortality table, compared to $249,720 using the 2017 § 417(e)(3)mortality table.10
Another aspect of the new mortality table is to slightly lower the benefit attributable to employee contributions. This will have the effect of lowering the overall maximum benefit payable from a plan with after-tax employee contributions. The reason is that the maximum benefit is a benefit derived from employer contributions. The benefit derived from employee contributions is not taken into account and is determined using the applicable mortality table and applicable interest rates. This aspect is illustrated by the following example:
Assume that an employee is retiring at age 65 and has accumulated after-tax employee contributions of $100,000. Using the August 2017 segment rates and the 2017 § 417(e)(3), the $100,000 is converted to a benefit of $7,247.11, which means that the total benefit can be $222,247.11 ($215,000 plus $7,247.11). Using the August 2017 segment rates and the new § 417(e)(3) mortality table, the $100,000 is converted to a benefit of $6,977.41, which means that the total benefit can be $221,977.41 ($215,000 plus $6,977.41). As a result, the total benefit decreases by $269.70.
Cheiron pension consultants can help you to determine the impact of the new mortality tables on your pension plans.
Cheiron is an actuarial consulting firm that provides actuarial and consulting advice. However, we are neither attorneys nor accountants. Accordingly, we do not provide legal services or tax advice.
1 The new mortality tables were issued through a final regulation, a notice, and a new revenue procedure. They also affect funding requirements for private sector plans, which will be discussed in a separate advisory containing a detailed discussion of the impact of the new mortality tables on plan funding, and a discussion of the option for single-employer plans to use plan specific mortality tables.
2 Unless indicated otherwise, all references to the law or citations to sections are to the Internal Revenue Code.
3 The law itself states the Secretary of the Treasury is to prescribe tables; however, the Secretary has delegated that authority to the IRS.
4 The final regulations were released in advance on October 3, 2017.
5 These rules are found in § 417(e)(3).
6 The benefit limits are found in § 415(b).
7 The maximum benefit is based upon employer contributions. Thus, the benefit attributable to employee contributions is not part of the limitation. The benefit attributable to employee contributions is determined (under regulations) as the accumulated employee contributions converted to a benefit using the applicable interest rates and mortality table.
8 Within the meaning of the regulation under § 417(e)(3).
9 Notice 2017-60 also contains an optional mortality table that may be used (if conditions are met) for purposes of § 430. That table has no impact on plan benefit determinations under § 415(b) or § 417(e)(3).
10 Of course, if a plan does not provide for an actuarial increase for post-65 retirement (as is often the case in a public sector plan) then there will be no increase in the maximum dollar limit under the § 415(b) regulations.