July 19, 2018

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Treasury Issues Final Rule: Mortality Tables for Defined Benefit Plans

On October 5, 2017, the Internal Revenue Service (IRS) and the Department of the Treasury (Treasury) published a final rule in the Federal Register providing new mortality tables used for calculating the minimum present value under Internal Revenue Code (Code) Section 417(e)(3) and minimum funding obligations for single-employer pension plans under Code Sections 412(a)(2) and 430. Related guidance was released in IRS Notice 2017-60 and Revenue Procedure 2017-55; this guidance is collectively referred to herein as the “Rule.”

The Rule will generally result in (1) higher present values in defined benefit plan lump sum distribution calculations, and thus larger cash payouts, and (2) higher minimum funding obligations for employers maintaining single-employer defined benefit plans, as the new mortality tables reflect increased life expectancies for participants and beneficiaries.

General Applicability

The Rule is applicable to lump sum and other distributions tied to Code Section 417(e) made on or after January 1, 2018.

With respect to calculating minimum funding requirements, the Rule is immediately applicable to single-employer defined benefit pension plans with plan years beginning on or after January 1, 2018. However, the Treasury has provided limited transitional relief in the Rule for 2018 calculations.

Minimum Funding: Transitional Relief for the 2018 Plan Year

With respect to calculating the minimum funding requirements, the Rule provides that plans that currently utilize plan-specific mortality tables approved under prior (2008) regulations may continue to do so for 2018 calculations so long as the approved period to use such tables includes 2018. A plan that does not have approval to use a plan-specific table for 2018 may still submit an application to the IRS by February 28, 2018, provided that the plan sponsor agrees to a 90-day extension of the 180-day review period. This is a special exception to the general rule that requires a plan to apply for approval at least seven months prior to the beginning of the plan year for which the plan-specific table is to apply.

Plans that used the generally applicable mortality tables in 2017 may continue to use such tables if it would be administratively impracticable to implement the new tables of the Rule for 2018, or if doing so would have an adverse (i.e., more than de minimis) impact on the plan sponsor’s business.

Applicability for the 2019 Plan Year

The transitional relief for application of the new mortality tables is only applicable for 2018. By the beginning of the 2019 plan year, all single-employer defined benefit plans must apply the new mortality tables provided by the Rule in some form. At that time, plans that use approved plan-specific mortality tables must integrate mortality improvement factors prescribed by the Rule. Moreover, plans that utilize the generally applicable mortality tables must begin applying the new tables provided by the Rule.

Copyright © 2018 by Morgan, Lewis & Bockius LLP. All Rights Reserved.


About this Author

Althea R day, Morgan Lewis, Tax Attorney

Althea R. Day advises plan sponsors of all types—from tax-exempt organizations and governmental employers to Fortune 100 companies—regarding employee benefits and developing practical solutions to complex issues. Her experience includes the design, implementation, governance, operation, and regulatory compliance of qualified and nonqualified retirement plans, equity and executive compensation arrangements, and health and welfare plans. She also counsels clients, both multiemployer funds and contributing employers, on complex multiemployer plan issues.

William Marx, Morgan Lewis Law Firm, Philadelphia, Labor and Employment Attorney

William J. Marx helps employee benefit plan sponsors and financial service providers with a range of matters related to employee benefits. His focus includes advising clients on qualified and nonqualified retirement plan issues, and the fiduciary and prohibited transaction rules under ERISA. William has several years of business experience in the retirement plan industry, including consulting plan sponsors on plan design, employee education, and investments among other business decisions.