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From Spencer's Benefits Reports: The Internal Revenue Service has issued final regulations that provide new mortality tables to be used in determining present value or making any computation for purposes of applying certain pension funding requirements. The final regulations, which reflect provisions of the Pension Protection Act of 2006 (PPA), appeared in the July 31 Federal Register.
The PPA moved the minimum funding rules for defined benefit plans from former IRC Sec. 412 to new IRC Sec. 430 and made extensive changes to those requirements, generally effective for plan years beginning on or after Jan. 1, 2008. As provided by Sec. 430(d)(1), a plan’s funding target for a plan year generally is the present value of all benefits accrued or earned under the plan as of the beginning of the plan year.
On May 29, 2007, the IRS issued proposed regulations that would set forth the methodology that the agency would use to establish mortality tables as provided under Sec. 430(h)(3)(A) to be used for participants and beneficiaries to determine present value or make any computation under Sec. 430. These mortality tables also would apply for purposes of determining the current liability of a multiemployer plan pursuant to IRC Sec. 431(c)(6)(D)(iv)(II).
On May 31, 2007, the IRS issued Rev. Proc. 2007-37, C.B. 2007-1, 1433, which set forth procedures by which a plan sponsor may request approval to use substitute mortality tables. Then, in Notice 2008-21, I.R.B. 2008-7, 431, the IRS specified that certain pension funding regulations, when finalized, will not apply to plan years beginning before Jan. 1, 2009. For plan years beginning during 2008, taxpayers must follow applicable statutory provisions and can rely on the proposed regulations for compliance with those statutory provisions. The new final regulations adopt the 2007 proposed rules, with certain modifications, and incorporate the subsequent guidance.
In the preamble to the final regulations, the IRS explains, “The new mortality tables under section 430(h)(3)(A) are based on the tables contained in the RP-2000 mortality tables because the IRS and the Treasury Department have determined that the RP-2000 mortality tables form the best available basis for predicting mortality of pension plan participants and beneficiaries (other than disabled individuals) based on pension plan experience, including expected trends. The mortality tables set forth in these regulations are gender-distinct because of significant differences between expected male mortality and expected female mortality.” The mortality tables provide separate mortality rates for annuitants and nonannuitants.
The final regulations provide an option for plans with fewer than 500 participants that choose to use static mortality tables to use a single blended static table for all participants—in lieu of the separate tables for annuitants and nonannuitants—in order to simplify the actuarial valuation for these plans. The blended table is constructed from the separate nonannuitant and annuitant tables using the nonannuitant/annuitant weighting factors published in the RP-2000 mortality tables report. The final regulations also generally adopt the methodology set forth in the proposed rules for the development and use of substitute mortality tables upon written request of the plan sponsor and approval of the IRS.
Sec. 430(h)(3) provides rules regarding the mortality tables to be used under Sec. 430. Sec. 430(h)(3)(A) directed the IRS to prescribe by regulation mortality tables to be used in determining any present value or making any computation under Sec. 430. Those tables are to be based on the actual experience of pension plans and projected trends in such experience. In prescribing those tables, the IRS must take into account results of available independent studies of mortality of individuals covered by pension plans.
Furthermore, Sec. 430(h)(3)(C) provides rules for a plan sponsor’s use of substitute mortality tables. Upon the request of a plan sponsor and approval by the IRS, mortality tables that meet the requirements for substitute mortality tables are used in determining present value or making any computation under Sec. 430 during the period of consecutive plan years (not to exceed ten) specified in the plan sponsor’s request. The plan sponsor’s request to use substitute mortality tables must be made at least seven months before the first day of the first plan year for which substitute mortality tables are to apply. Mortality tables meet the requirements for substitute mortality tables if the pension plan has a sufficient number of participants and the plan has been maintained for a sufficient period of time in order to have credible mortality experience, and such tables reflect the actual experience of the plan.
Sec. 430(h)(3)(D) provides for the use of separate mortality tables with respect to certain individuals who are entitled to benefits on account of disability. These separate mortality tables may be used with respect to disabled individuals in lieu of the generally applicable mortality tables or the substitute mortality tables. The IRS must establish separate tables for individuals with disabilities occurring in plan years beginning before Jan. 1, 1995, and in later plan years, with the mortality tables for individuals with disabilities occurring in those later plan years applying only to individuals who are disabled within the meaning of Title II of the Social Security Act.
Sec. 431, which also was added by the PPA, specifies the minimum funding requirements that apply to multiemployer plans. Sec. 431(c)(6)(D)(iv)(II) provides that the IRS may by regulation prescribe mortality tables to be used in determining a multiemployer plan’s current liability for purposes of Sec. 431(c)(6). The standards for these mortality tables are the same as the standards for mortality tables to be prescribed under Sec. 430(h)(3)(A).
The final regulations were effective as of July 31, 2008. For further information, contact Lauson C. Green or Linda S.F. Marshall at (202) 622-6090.
For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.
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