The IRS recently released final regulations (T.D. 10005) with the requirements for single-employer defined benefit pension plans to obtain IRS approval to substitute the generally applicable mortality tables to calculate minimum funding requirements.
Single-employer pension plans are subject to the minimum funding requirements of Section 430 based on the plan’s funding target. A plan’s funding target for a plan year generally is the present value of all benefits accrued or earned under the plan as of the first day of that plan year.
Single-employer plans generally must use mortality tables prescribed by the IRS in determining the funding target. However, a plan sponsor can request the IRS’s approval to use plan-specific substitute mortality tables that meet certain requirements.
The IRS previously finalized regulations in 2017 for obtaining approval and using substitute mortality tables and Rev. Proc. 2017-55 provides the procedures. The newly finalized regulations address the use of mortality experience data for the COVID-19 pandemic period when constructing substitute mortality tables.
The IRS explained in the preamble that beginning in 2020 and continuing into 2023, the mortality experience of plan participants for many defined benefit pension plans was significantly higher than expected due to the COVID-19 pandemic. The IRS is concerned that absent any changes in the rules for creating plan-specific mortality tables, future actuarial valuations that use such tables developed based on experience from these years would result in an overstatement of the expected future mortality for the plan’s population, which would result in the plan’s liabilities and minimum required contributions being understated.
The IRS considered the comments received in response to the 2023 proposed regulations (88 FR 72409) and implemented certain revisions and transition rules in the final version. The IRS also issued Rev. Proc. 2024-32 in conjunction with the final regulations, which updates the procedures set forth in Rev. Proc. 2017-55.
The IRS now requires that adjustment factors be applied to the expected number of deaths for each year in the pandemic experience period, to mitigate the understatement of funding requirements caused by a discrepancy between actual deaths and expected number of deaths from COVID-19.
The new regulations include a transition rule that treats substitute mortality tables previously approved for use for a plan year beginning in 2025 as satisfying the rules for developing substitute mortality tables that apply for that plan year.
The final rule also includes a transition rule for requests for approval to use substitute mortality tables for a plan year beginning in 2025. Under this rule, the request for that plan year will be considered timely if is submitted on or before Oct. 31, 2024, provided the plan sponsor agrees to a 90-day extension of the regular 180-day IRS review period under Treas. Reg. Sec. 1.430(h)(3)-2(b)(2)(iv).
These final regulations became effective July 31, 2024, and apply for plan years beginning on or after Jan. 1, 2025.
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