Guest Article

(From the November 18, 2002 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits. Hyperlinks within the article have been added by BenefitsLink.)

IRS Clears Way for Cash Balance Plans to Adopt New Mortality Table

As expected, the IRS on November 12 announced that cash balance plans can be amended to adopt the GAR mortality table for determining the present value of plan benefits without violating the anticutback rule or triggering the 204(h) notice requirements for amendments causing a significant reduction in the rate of future benefit accruals. The IRS announcement is available on the Employee Plans Division's Web site, at www.irs.gov/ep.

Background

In general, defined benefit plan sponsors must use certain interest rate and mortality assumptions (aka, the "applicable mortality table") in order to determine the lump sum present value of participants' benefits. IRC section 417(e)(3). Additionally, they must use the same mortality table for making adjustments to the IRC section 415(b) benefit limits.

Pursuant to Revenue Ruling 2001-62, 2001-53 I.R.B. 632, the GAR mortality table will be the "applicable mortality table" for distributions with annuity starting dates on or after December 31, 2002, unless the plan specifies an earlier effective date. Furthermore, plans must be amended to reflect this change by the last day of the plan year in which it becomes effective. For calendar year plans that do not specify an earlier effective date, the amendment must occur on or before December 31, 2002.

The change to the GAR mortality table is expected to result in a roughly 2 to 3 percent decrease in the annual annuity benefit for participants in cash balance plans. This has led cash balance plan sponsors to question whether amending their plans to implement this change would violate the anticutback rule [IRC section 411(d)(6)] and/or trigger the ERISA section 204(h) notice requirements. [Remember, IRC section 4980F now imposes an excise tax on defined benefit plan sponsors that fail to send a 204(h) notice when required.]

However, according to the IRS announcement, "It is the Service's position that an amendment to a cash balance pension plan adopting the new table as described in Rev. Rul. 2001-62 would not violate section 411(d)(6) and that advance notice to participants is not required under a good faith interpretation of section 204(h) of ERISA and section 4980F of the Code."

The information in this Washington Bulletin is general information only and not intended to provide advice or guidance for specific situations. Contact your Deloitte advisor for information regarding your specific circumstances. If you have questions or need additional information about this article and you do not have a Deloitte advisor, please contact Martha Priddy Patterson (202.879.5634) or Robert B. Davis (202.879.3094). Human Capital Advisory Services, Deloitte LLP, 555 12th Street NW, Suite 500, Washington, DC 20004-1207. Copyright 2002, Deloitte.