At the end of July 2015, the Internal Revenue Service issued Notice 2015-53. This notice provides the updated mortality tables for defined benefit plans for 2016. The tables issued will be used to determine funding requirements for the 2016 plan year for private, single employer plans under Internal Revenue Code (IRC) Section 430(h)(3)(A) and 303(h)(3)(A) of the Employee Retirement Income Security Active of 1974 (ERISA). In addition, a modified unisex table was issued to be used to determine present values under IRC Section 417(e)(3). These tables were developed using the methodology in the final regulations under IRC Section 430(h)(3)(A).
Will the IRS Adopt the New Mortality Tables?
On October 27, 2014, the Society of Actuaries (SOA) released the RP-2014 mortality tables and mortality improvement Scale MP-2014. These tables will “form a new basis for the measurement of retirement program obligations in the United States” [SOA – RP-2014 Mortality Tables Report] and reflect a substantial increase in the life expectancy of Americans. It is expected that the IRS will adopt these new tables, although when issued, it was unclear whether the tables would be adopted for 2016. As noted in Notice 2015-53, the Treasury Department and IRS are expected to issue proposed regulations revising the base mortality rates and mortality improvement projection factors; however the new regulations will not apply until 2017.
New Regulation Projections
The mortality tables developed under the new regulations are expected to create significant increases in the liabilities of plans, as well as increase the cost of lump sum distributions for benefits earned under a traditional defined benefit plan design. In anticipation of the new mortality tables, retirement program sponsors can take some proactive steps now, such as:
- Increase Voluntary Contributions to the retirement programs now to smooth the transition to larger required contributions
- Open Lump Sum Windows to take advantage of the “cheaper” current mortality tables – as lump sums could increase by 6% to 10% under the new mortality tables
- Run Stochastic Forecasting to analyze risk by reviewing projected funded status, cash flow and volatility of different funding strategies
If you would like to discuss these or other strategies to help mitigate the effect of the new mortality tables please contact your Harbridge Consultant.