Guest Article

(From the February 5, 2007 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

IRS Updates Mortality Table for Calculating Current Liability for 2007 Plan Years

The Internal Revenue Service (IRS) on February 1, 2007, issued final regulations to update the mortality tables plan sponsors must use to determine current liability for purposes of the deficit reduction contribution requirements of IRC § 412(l) and ERISA § 302(d). 72 FR 4955 (February 2, 2007). The final regulations apply to plan years beginning on or after January 1, 2007. However, the final regulations will be relevant to most single-employer plans only for the 2007 plan year because the Pension Protection Act's (PPA) new minimum funding requirements will begin taking effect in 2008.

Background

Previous IRS guidance required plan sponsors to use two gender-specific mortality tables based on the 1983 Group Annuity Mortality Table (1983 GAM) to calculate current liability for participants not entitled to disability benefits. (Separate mortality tables applied to individuals entitled to benefits on account of disability, as required by IRC § 412(l)(7)(C)(iii)(I).) The IRC requires the Treasury Secretary to periodically (at least every five years) review and, if necessary, update these mortality tables to reflect the actual experience of pension plans and projected trends in such experience.

As part of this periodic review process the IRS issued Notice 2003-62 to request comments on certain issues relating to updating these mortality assumptions. After considering the comments received, as well as two reviews of mortality experience for retirement plan participants undertaken by the Retirement Plans Experience Committee of the Society of Actuaries (the UP-94 Study and the RP-2000 Mortality Tables Report), the IRS determined "the 1983 GAM is no longer appropriate for determining current liability." Based on that conclusion, the IRS in 2005 issued proposed regulations to implement new mortality tables based on the RP-2000 mortality tables.

Updated Mortality Tables for Determining Current Liability

The final regulations implement the same mortality tables that were published in the 2005 proposed regulations. As was the case under previous IRS guidance, the new tables are gender distinct because of significant differences between expected mortality for males and females.

There is one significant difference between the proposed and final regulations. Like the proposed regulations, the final regulations provide for separate sets of tables for annuitants and nonannuitants because these two groups have significantly different mortality experiences. However, for 2007 the final regulations permit plans to use a blended table instead of the separate annuitant and nonannuitant tables. According to the preamble to the final regulations, the IRS continues to believe "that using separate annuitant and nonannuitant tables results in a more accurate measure of a plan's current liability." But due to the "sweeping PPA changes [to minimum funding rules] and the resulting need to overhaul actuarial valuation systems, it was determined that all plans (and not just small plans) should be permitted to use the combined mortality tables for the 2007 plan year."

What About 2008 and Beyond?

As noted, the PPA replaces the current minimum funding requirements with new requirements for plan years beginning on or after January 1, 2008. New IRC § 430(h)(3)(A) directs the Treasury Secretary "to prescribe by regulation the mortality tables used in determining present value or making any computation under the funding rules." The specifications for developing mortality tables pursuant to new IRC § 430(h)(3)(A) are the same as those set forth in current IRC § 412(l), so IRS presumably will prescribe use of the same RP-2000-based mortality tables for purposes of the PPA's minimum funding rules. However, that will be addressed in future proposed regulations.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Taina Edlund 202.879.4956, Laura Edwards 202.879.4981, Mike Haberman 202.879.4963, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104 , Laura Morrison 202.879-5653, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2007, Deloitte.