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Pension and Employee Benefits: Code, ERISA, & Regulations
This series provides an authoritative and comprehensive reference to the full text of benefits-related provisions of the Internal Revenue Code, the full text of ERISA, and related proposed and final regulations, as well as the official IRS and DOL preambles, and Committee Reports.
The IRS has released final rules providing mortality tables to determine present value of accrued benefits under single-employer defined benefit plans and guidance on the use of substitute, plan-specific, tables under Code Sec. 430. The final regulations also include mortality tables for multiemployer plans under Code Sec. 431. Code Secs. 430 and 431, which were added by the Pension Protection Act of 2006 (PPA, P.L. 109-280), replace the prior minimum funding requirements under Code Sec. 412.
The mortality tables for both single-employer and multiemployer defined benefit plans contained in the final rules are generally applicable for plan years beginning on or after January 1, 2008. The final rules concerning the approval and use of substitute mortality tables for single-employer plans are generally applicable for plan years beginning on or after January 1, 2009. Except for some minor revisions, the final regs are substantially the same as the proposed regulations (see CCH Pension Plan Guide Newsletter, Report No. 1686, June 4, 2007).
Code Sec. 430(a) defines the minimum required contribution for a defined benefit plan that is not a multiemployer plan by reference to the plan’s funding target for the plan year. Under Code 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.
Code Sec. 430(h)(3) provides rules regarding the mortality tables to be used in determining any present value or making any computation under Code 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 Treasury Secretary is required to take into account results of available independent studies of mortality of individuals covered by pension plans. The standard to be used for issuing the mortality table under Code Sec. 430(h)(3)(A) is the same as the standard for issuing updated mortality tables pursuant to the review under Code Sec. 412(l)(7)(C) (ii)(III) of the mortality table used in determining a plan’s current liability pursuant to Code Sec. 412(l) (7)(C)(ii)(I) for plan years before the effective date of the PPA changes.
Code Sec. 430(h)(3)(C) provides that a plan sponsor may use substitute, plan-specific, mortality tables. Substitute mortality tables are permitted if the pension plan has a sufficient number of plan 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 and projected trends in general mortality experience of participants in pension plans. A substitute mortality table is considered to demonstrate credible mortality experience for a gender within a plan if and only if the mortality experience is based on at least 1,000 deaths within that gender over the period covered by the experience study. The 1,000 death threshold was set at a level to provide a high degree of confidence that the plan’s past mortality experience will be predictive of future mortality.
The experience study must be based on mortality experience data over a two- to five-year consecutive year period, the last day of which must be no less than three years before the first day of the first plan year for which the substitute mortality tables are to apply. In response to comments, the final regulations extend from four to five years the maximum period for an experience study to establish 1,000 deaths within a gender.
Except as provided by the Secretary, a plan sponsor cannot use substitute mortality tables for any plan unless substitute mortality tables are established and used for each other plan maintained by the plan sponsor and the plan sponsor’s controlled group. The rules provide guidance concerning aggregation of plans and the use of substitute tables when the data for male or female deaths do not reach the 1,000 death threshold. The final regulations replace the term “newly acquired plan” with the term “newly affiliated plan.” The regulations provide a transition rule for an acquiring plan sponsor whose newly affiliated plan does or does not use substitute tables, as the sponsor does.
The plan sponsor must request and the Secretary must approve the plan sponsor’s use of substitute mortality tables. Approved substitute mortality tables may be used in determining present value or making any computation under Code Sec. 430 during the period of consecutive plan years (not to exceed ten) specified in the request. Substitute mortality tables cease to be in effect as of the earliest of: (1) the date on which there is a significant change in the number of participants in the plan by reason of a plan or merger or otherwise, or (2) the date on which the plan actuary determines that those tables do not meet the requirements for substitute mortality tables.
Generally, the plan sponsor’s request to use substitute mortality tables is to be made at least seven months before the first day of the first plan year for which the substitute mortality tables are to apply. Under the final rules, a request to use substitute mortality tables is deemed approved unless the Secretary denies approval for the use of those mortality tables within 180 days of the request (subject to extension of this period by mutual agreement).
The IRS anticipates the publication of a notice in the near future that will provide a series of tables for valuation dates occurring during 2009 through 2013. Also, a revenue procedure should be published in the “near future” that updates the requirements in Rev. Proc. 2007-37 (CCH Pension Plan Guide ¶17,299S20) regarding the approval to use substitute mortality tables to reflect the final regulations.
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