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Guest Article

(From the June 11, 2007 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

IRS Guidance on Applying to Use Substitute Mortality Tables

The IRS on May 29, 2007 issued proposed regulations on the mortality tables for valuing plan liabilities under the Pension Protection Act's (PPA) new minimum funding requirements, including the plan-specific substitute mortality tables that certain large single-employer plans may be permitted to develop and use. On June 1, the IRS followed with Rev. Proc. 2007-37, which provides specific procedures for plan sponsors to follow when petitioning the IRS to use substitute mortality tables.

The real headline may be the deadline for submitting requests to the IRS to use substitute mortality tables. As a general rule, these requests must be submitted at least seven months prior to the first day of the first plan year for which the substitute mortality tables are to apply -- for example, June 1, 2008 for a plan year beginning January 1, 2009. However, the revenue procedure provides the following special rule for plan years beginning before May 1, 2008: As long as the request to use substitute mortality tables is submitted on or before October 1, 2007, it will be considered timely.

The following summary of the revenue procedure is for information purposes only. It is not comprehensive, and should not be relied upon when petitioning the IRS for permission to use substitute mortality tables. The full text of Rev. Proc. 2007-37 is readily available on the IRS's Web site, at www.irs.gov/pub/irs-drop/rp-07-37.pdf.

Background

The Pension Protection Act (PPA) of 2006 (P.L. 109-280) repeals the current minimum funding rules for single-employer defined benefit plans and replaces them with a new minimum funding regime effective for plan years beginning on or after January 1, 2008. Briefly, under the new rules -- which have been codified in IRC § 430 -- a plan sponsor's minimum required contribution for a plan year will be based on the plan's funding target for that year. Generally, a plan's funding target for a plan year will be the present value of all benefits accrued or earned under the plan as of the beginning of the plan year.

Most plan sponsors will use the generally applicable mortality tables prescribed by the Secretary of the Treasury for purposes of this and other present value calculations under IRC § 430. However, certain large plan sponsors may petition the IRS to use substitute mortality tables based on their own plans' actual experience. The proposed regulations would provide rules for when the IRS will permit single-employer plan sponsors to use plan-specific substitute mortality tables. Rev. Proc. 2007-37 specifies how single-employer plan sponsors must go about requesting the IRS's approval, as well as the information that must be included in the request.

Information to Be Included in Request

The following is a list of some of the information that must be included in a plan sponsor's petition to use substitute mortality tables.

Identification of Plans -- Specific identifying information with respect to each plan (or each plan within the permissive group of aggregated plans) for which the plan sponsor is requesting to use substitute mortality tables, is not requesting to use substitute mortality tables, and with respect to each plan maintained by the plan sponsor (or a member of the plan sponsor's controlled group) that was spun off from another of the plan sponsor's plans during the previous five years.
Demonstrations of Credible Mortality Experience -- The period of time covered by the mortality experience study (the "Experience Study Period") the plan sponsor used to develop the Base Tables, the Base Year, and the number of deaths for each year of the Experience Study Period (and, in total, for the entire Experience Study Period) within each population for which the plan sponsor is requesting to use substitute mortality tables.
Demonstration of Stability -- Information about the average number of individuals within the population during the Experience Study Period, as well as the number of individuals within the population as of the last day of the most recent plan year. If the difference between these two numbers is 20 percent or more, an analysis showing that the mortality experience during the Experience Study Period is still accurately predictive of the future mortality of the population also must be submitted.
Demonstrations of Lack of Credible Mortality Experience -- Subject to exceptions, the four-year period of time used to demonstrate a lack of credible mortality experience for all of the plan sponsor's plans must be identified.
Unadjusted Mortality Experience -- The following information "for all individuals within each population for whom the use of a separate mortality table is requested, for each year of the Experience Study Period, and for the Experience Study Period in its entirety, for all ages between 18 and 100" (which may be presented in five-year age groups) must be provided:
- The sum of the accrued benefits (or payable benefits, in the case of individuals in pay status) of all individuals who left the population during the year for reasons other than death;
- The sum of the accrued (or payable) benefits of all individuals at that age at the beginning of the year who left the population during the year for reasons other than death, adjusted to reflect exposure periods of less than one year;
- The sum of the accrued (or payable) benefits of all individuals at that age at the beginning of the year who died during the year;
- The quotient determined by dividing the sum of the accrued (or payable) benefits of all individuals at that age who died during the year by the sum of the accrued (or payable) benefits for all individuals at that age adjusted for individuals at that age who left the population for reasons other than death;
- The total number of individuals at that age at the beginning of the year;
- The total number of individuals at that age at the beginning of the year who left the population for reasons other than death;
- The total number of individuals at that age at the beginning of the year who died during the year; and
- The average accrued benefit of all individuals at that age at the beginning of the year.

Constructing Base Tables

If a plan sponsor wants to use substitute mortality tables, the proposed regulations would require the plan sponsor to create a Base Table and identify a Base Year, which will be used to determine generational substitute mortality tables. The revenue procedure outlines the general method for constructing Base Tables, as well as an alternate method.

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.

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