On Tuesday, October 3rd, the IRS issued Notice 2017-60 which set forth the mortality tables to be used in determining the minimum lump sum present value under IRC Section 417(e) for distributions whose stability period begins in 2018. In addition, the notice provides updated static mortality tables for determining a Plan’s funding target liability under IRC Section 430 for valuation dates occurring during 2018. The notice also provides relief with regard to the implementation of newer mortality tables for purposes of minimum funding and the determination of the AFTAP for the upcoming plan year if either (1) use of the updated mortality tables would be administratively impracticable or (2) use of the updated mortality tables would cause adverse business hardship that is more than de minimis.
What Impact Will This Have on Benefits Under My Plan?
The 2018 IRS Mortality Table is significantly more conservative than the 2017 IRS Mortality Table. Thus, under the 2018 prescribed mortality table, participants would be expected to live longer. This means that there may be a significant effect on the value of participant’s benefits in 2018 vs 2017 due to mortality. The type of defined benefit plan that your organization sponsors may be impacted very differently depending upon whether or not that plan is a traditional defined benefit plan or a hybrid plan, such as a cash balance plan.
Effect on Traditional Defined Benefit Plans – Lump Sums
Absent changes in interest rates, mortality tables reflecting a longer life expectancy will result in an increase in the lump sum present value of benefits. In fact, the lump sum payable under the 2018 table versus the 2017 table would be expected to result in an increase of between 4 percent and 5 percent for participants retiring between 55 and 70 assuming a consistent lump sum interest rate of 4.00 percent.
Effect on Hybrid Defined Benefit Plans (ie. Cash Balance) – Annuities
Again, ignoring changes in interest rates, the longer life expectancy reflected in the 2018 mortality table implies that an account balance plan design will have to sustain payments over a longer period of time and will result in a smaller annuity value. Whereas the 2018 mortality table produces a larger lump sum for a traditional defined benefit plan, the effect works in the opposite direction for a cash balance plan as the account balance is converted into an annuity. Therefore, resulting annuities would be approximately 4 percent to 5 percent lower utilizing the 2018 mortality table than with the 2017 mortality table.
*Plans that have components that are both traditional and cash balance will see offsetting results and the ultimate effect will depend on the magnitude of the respective components.
Effect of Mortality Changes on Funding Target
The regulations provide updated mortality tables for determining a Plan’s funding target which will ultimately have several ramifications on minimum funding, PBGC variable rate premiums, and benefit restrictions. In general, the mortality tables that have been prescribed will result in higher minimum funding requirements, higher PBGC variable rate premiums, and lower plan funded percentages which may result in benefit restrictions under IRC Section 436.
Effect on Plan funding percentages (ie AFTAP)
Use of the updated 2018 mortality tables will be expected to lower most plans’ funding percentages compared to use of the 2017 mortality tables, all other items being equal. That said, the magnitude of the effect will vary depending upon the type of defined benefit plan, the demographics of the covered population, as well as, the assumptions and plan provisions governing expected distributions. That said, some plans will see reductions of 4 percent – 6 percent in the Plan’s funded percentage.
Impacts of lower funded percentages
Restrictions on accelerated distributions
This could accelerate the date that a plan is subject to benefit restrictions under IRC Section 436 which limits the ability of a participant to receive a full lump sum distribution if the AFTAP is less than 80 percent. In addition, accruals are required to cease if the AFTAP drops below 60 percent. This requires participant notification and affects plan administration.
Accelerated Minimum Required Contributions
If a plan’s AFTAP is below 80 percent and it has more than 500 participants in its controlled group, the Plan must calculate an At-Risk liability using special prescribed assumptions. If the At-Risk liability drops below 70 percent, the plan will be subject to additional higher required contributions in the next year. Though the increase is phased-in over a number of years, a plan that remains in At-Risk for several years will see a significant acceleration in required contributions.
Alternative Mortality for 2018 for Funding and AFTAP
The newly released regulations do allow for a plan sponsor to utilize alternative mortality tables in 2018 for determining its AFTAP and minimum funding determination if either: (1) use of the newer mortality tables would be administratively impracticable or (2) would result in an adverse business impact that is greater than de minimis.
At this time, there are no guidelines regarding how to satisfy either of the criteria above but if a plan sponsor believes they might be eligible, they would need to contact the Plan’s actuary in writing.