The IRS recently released final regulations (RIN 1545-BQ14) prescribing mortality tables for most defined benefit pension plans under Section 430. These finalized rules apply for valuation dates occurring on or after Jan. 1, 2024, and will affect participants in, beneficiaries of, employers maintaining and administrators of certain defined benefit plans.
Section 430(h)(3) provides rules regarding the mortality tables to be used under Section 430. The tables specify the probability of survival year-by-year for an individual based on age, gender, and other factors. The mortality tables are used (together with other actuarial assumptions) to calculate the present value of a stream of expected future benefit payments for purposes of determining the minimum funding requirements, as well as for determining the minimum required amount of a lump-sum distribution from a pension plan.
The IRS made several changes to the proposed rules in the final regulations, including:
- Delaying the applicability date
- Modifying the mortality improvement rates to reflect the expected ongoing impact of COVID-19 on mortality rates and to incorporate the 0.78% annual cap on mortality improvement rates as required by Section 335 of the SECURE 2.0 Act
- Making a minor change to the treatment of individuals who are not identified as male or female
The final regulations also include updated methodology for determining the generally applicable mortality tables used to calculate the present value of minimum required contributions to defined benefit plans, if they are not multiemployer plans under Section 430.
Base mortality tables
The final regulations adopt the previously proposed base mortality tables set forth in 2022 (87 FR 25161), derived from the mortality tables in the Pri-2012 Private Retirement Plans Mortality Tables Report issued in 2019 by the Retirement Plan Experience Committee (RPEC) of the Society of Actuaries. The base tables in the final regulations include non-annuitant mortality rates for ages below 18 and above 80, annuitant mortality rates for ages below age 50, as well as the employee and non-disabled annuitant mortality rates (amounts weighted) released by RPEC in connection with the Pri-2012 Report. This is generally follows the same approach that was used to develop the base mortality tables in the 2017 regulations.
Mortality improvement rates
The IRS will apply the new 2024 Adjusted Scale MP-2021 Rates for valuation dates occurring on or after Jan. 1, 2024, adopting a modified version of the MP-2021 Mortality Improvement Scale, which includes the latest mortality improvement scale issued by RPEC. In its October 2022 update, RPEC noted that, as of the date of the RPEC 2022 Morality Improvement Update, the most recent year for which full-year mortality data was available was 2020, severely affected by the COVID-19 pandemic. RPEC concluded that it would not be appropriate to incorporate, without adjustment, the substantially higher rates of mortality from 2020 into the models.
The 2024 Adjusted Scale MP-2021 reflects a modification that eliminates any mortality improvement during 2020, 2021, 2022, and 2023 (while retaining any projected mortality deterioration for those years under the MP-2021 Mortality Improvement Scale). It also incorporates a cap on mortality improvement rates of 0.78% per year for years after 2024.
Use of static tables for small plans
The final regulations also adopt a proposed provision for the elimination of the use of static mortality tables outside of small plans. This change was proposed because the IRS believes that there is no longer a need to allow the use of static mortality tables for larger plans (as most actuarial firms have the capability to use generational mortality tables) and to minimize anti-selection by plan sponsors who determine that the use of static mortality tables results in lower minimum funding requirements.
Individuals not identified as male or female
The final regulations also clarify how the mortality tables under Section 430(h)(3)(A) apply in the case of a plan participant or beneficiary who identifies as nonbinary. The regulations provide that the plan’s actuary must use a reasonable approach in applying the Section 430(h)(3)(A) mortality tables with respect to the portion of a plan’s population whose gender is not identified as male or female. The regulations include two examples of reasonable methods for determining liabilities with respect to individuals for whom male or female gender is not identified, and also clarifies that other reasonable approaches may be appropriate.
Plan-specific substitute mortality tables
Until amendments to the plan-specific substitute mortality regulations under Section 430(h)(3)(C) are finalized, and an updated revenue procedure that reflects the final regulations is issued, the IRS will not require that any previously approved plan-specific substitute mortality tables be terminated.
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