IRS Notice 2017-60 meaning of "adverse buisness impact greater than de minimus"

[Pxhesq]

Does anyone know of how the "would result in an adverse business impact that is greater than de minimis" exception should be interpreted by plan sponsors who want to hold off the mortality table change for this year? I represent a company that has 3 billion in revenue each year and postponement of mortality table change would only yield a savings around 10 million. I anticipate that this is not sufficient to meet the requirement of the Notice but wouldn't mind having some guidance to reference. Thank you.

[Effen]

I don't think anyone really knows for sure, but based on the chatter on other message boards, many people seem to think that any increase in required contribution would satisfy the criteria.  In other words, if your MRC is $0, then you probably need to adopt it, but if you have a required contribution, then you can probably delay it one year.

 

[John314]

I don't believe there is official guidance, but I have seen a number of people make the argument that there is no way this change could be anything but de minimis. Their argument goes something along the lines of if liabilities increase by maybe 5% due to adoption, from a MRC standpoint this will result in an increase of less than 1% and for some other IRS purposes, de minimis is defined as less than 2%. 

What about PBGC premiums though? Even if the MRC doesn't change (stays at 0) or has a de minimis change, but there is an increase in the PBGC variable rate premium, do we know if that can be considered when determining if there is a non-de minimis impact?

[Effen]

So there you go....one opinion saying almost everything would satisfy the criteria and another saying hardly anything would satisfy the criteria.  

Aren't we all glad the IRS gave us such clear direction....

[SoCalActuary]

My take on this is that an AFTAP change at the 60% or 80% threshhold would change participant ability to take certain forms of benefit, and require notifications.  That might also be the case if creditor relations would be adversely affected.  Those would possibly be adverse business consequences. 

So the actuary would run the values both ways, advise on the change in outcome, and ask if the employer has adverse consequences before publishing a final report.

[Effen]

The following was the response of Treasury as conveyed to Intersector Group:

The IRS / Treasury representatives indicated that criteria enabling plan sponsors to opt out of the new mortality tables for 2018 are not intended to be a challenging standard. There is no process for approval or review of a plan sponsor determination that the new table would result in a non-de minimis adverse business impact, nor is a plan sponsor required to provide a written notice to the actuary (the paperwork reduction rules can slow issuance of guidance down when written notices are required). It was anticipated that a note in the Schedule SB attachments would provide sufficient documentation of an opt-out election. One concern was raised from the regulators that it might be difficult to justify the delay for a plan that is significantly overfunded on all measurements (e.g., plan termination liabilities, PBGC variable-rate premium liabilities, funding target). It is unclear whether losing future funding flexibility (e.g., due to the creation of less prefunding balance) should be considered an adverse business impact. However, at the same time, it was reemphasized that the standard in the regulations is not intended to represent a difficult burden to meet.

The group discussed the fact that actuaries are unlikely to be in a position to make a determination of the business impact of the new mortality table, and that their role might be limited to providing information regarding the incremental cost. This incremental cost could consider both minimum funding requirements and PBGC premiums, as well as potential benefit restrictions. The other prong of the opt-out provision is if the application of the new mortality tables is administratively impracticable, which could be relevant to the benefit restrictions. However, this may be a difficult position to take, since plans must always be in a position to implement the restrictions if necessary.

The IRS / Treasury representatives asked if the implementation of the new mortality tables for the purpose of section 417(e) will pose significant challenges. The Intersector Group responded that in some circumstances it may be challenging. Different third-party administrators have reported widely disparate estimates of the time and effort necessary to program and test the new tables. Give that benefit packages for January 2018 commencements are already being prepared and distributed, some sponsors may face administrative difficulties.

The IRS / Treasury representatives also asked about the volume of plans that may apply for substitute mortality tables. The Intersector Group responded that the opt-out provision for 2018 may substantially reduce the number of 2018 applicants. Additionally, given the tight time frames involved, it is likely that the majority of the 2018 applications will be prepared as quickly as possible and be submitted earlier than the deadline. It is also likely that the 2019 volume will be significantly higher than 2018.