Plan-Specific Substitute Mortality Tables for Determining Present Value

<RULE> DEPARTMENT OF THE TREASURY <SUBAGY>Internal Revenue Service</SUBAGY> <CFR>26 CFR Part 1</CFR> <DEPDOC>[TD 10005]</DEPDOC> <RIN>RIN 1545-BQ67</RIN> <SUBJECT>Plan-Specific Substitute Mortality Tables for Determining Present Value</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Internal Revenue Service (IRS), Treasury. <HD SOURCE="HED">ACTION:</HD> Final regulations. <SUM> <HD SOURCE="HED">SUMMARY:</HD> This document sets forth final regulations that update the requirements that a plan sponsor of a single-employer defined benefit plan must meet to obtain IRS approval to use mortality tables specific to the plan in calculating present value for minimum funding purposes (as a substitute for the generally applicable mortality tables). These regulations affect participants in, and beneficiaries of, certain retirement plans and employers maintaining those plans. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> <E T="03">Effective date:</E> These regulations are effective July 31, 2024. <E T="03">Applicability date:</E> These regulations apply for plan years beginning on or after January 1, 2025. </EFFDATE> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Arslan Malik or Linda S.F. Marshall, Office of Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes) at (202) 317-6700 (not a toll-free number). </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">Background</HD> Section 412 of the Internal Revenue Code (Code) prescribes minimum funding requirements for defined benefit pension plans. Section 430 specifies the minimum funding requirements that apply generally to defined benefit plans that are single-employer plans (that is, not multiemployer plans). <SU>1</SU> <FTREF/> For a plan subject to section 430, section 430(a) defines the minimum required contribution for a plan year by reference to the plan's funding target for the plan year. Under section 430(d)(1), 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. <FTNT> <SU>1</SU>  Section 302 of the Employee Retirement Income Security Act of 1974, Public Law 93-406, 88 Stat. 829 (1974), as amended (ERISA), sets forth funding rules that are parallel to those in section 412 of the Code, and section 303 of ERISA sets forth additional funding rules for defined benefit plans (other than multiemployer plans) that are parallel to those in section 430 of the Code. Pursuant to section 101 of Reorganization Plan No. 4 of 1978, 5 U.S.C. App., as amended, the Secretary of the Treasury has interpretive jurisdiction over the subject matter addressed in these regulations for purposes of ERISA, as well as the Code. Thus, these regulations issued under section 430 of the Code also apply for purposes of section 303 of ERISA. </FTNT> Section 430(h)(3) provides rules regarding the mortality tables to be used under section 430. Under section 430(h)(3)(A), except as provided in section 430(h)(3)(C) or (D), the Secretary is to prescribe by regulation mortality tables to be used in determining any present value or making any computation under section 430. Section 430(h)(3)(C) prescribes rules for a plan sponsor's use of substitute mortality tables reflecting the specific mortality experience of a plan's population instead of using the generally applicable mortality tables. Under section 430(h)(3)(C), the plan sponsor may request the Secretary's approval to use plan-specific substitute mortality tables that meet requirements specified in section 430(h)(3)(C)(iii). If the Secretary determines that the proposed tables meet the statutory standards and approves the request, the substitute mortality tables are used to determine present values and make computations under section 430 during the period of consecutive plan years (not to exceed 10) specified in the request. Under section 430(h)(3)(C)(iii), a substitute mortality table may be used for a plan only if: (1) the plan has a sufficient number of plan participants and has been maintained for a sufficient period of time to have credible mortality information necessary to create a substitute mortality table; and (2) the table reflects the actual mortality experience of the plan's participants and projected trends in general mortality experience. Except as provided by the Secretary, a plan sponsor may not use substitute mortality tables for any plan unless substitute mortality tables are established and used for each plan maintained by the plan sponsor or a member of its controlled group. Final regulations (TD 9826) under section 430(h)(3) were published in the <E T="04">Federal Register</E> on October 5, 2017 (82 FR 46388). The final regulations issued in 2017 include rules regarding generally applicable mortality tables under section 430(h)(3)(A), which are set forth in § 1.430(h)(3)-1, as well as rules regarding substitute mortality tables under section 430(h)(3)(C), which are set forth in § 1.430(h)(3)-2. Section 1.430(h)(3)-2(d)(2) provides that substitute mortality tables must be based on the plan's mortality experience during an experience study period that consists of 2, 3, 4, or 5 consecutive 12-month periods. In conjunction with the 2017 issuance of § 1.430(h)(3)-2, the Department of the Treasury (Treasury Department) and the IRS issued Rev. Proc. 2017-55, 2017-43 IRB 373, which sets forth the procedure by which a plan sponsor of a defined benefit plan may request and obtain approval for the use of plan-specific substitute mortality tables. Beginning in 2020 and extending into the first part of 2023, for many defined benefit pension plans, the mortality experience of the plan participants was significantly higher than expected due to the COVID-19 pandemic. The Treasury Department and the IRS are concerned that, if a plan sponsor applied for approval of plan-specific substitute mortality tables using an experience study period that reflects the actual mortality experience for the plan's population during those years, then unless there is a change in the rules that are used for generating those tables, the resulting plan-specific substitute mortality tables would overstate the expected future mortality for the plan's population. This is because § 1.430(h)(3)-2(d)(4)(i) provides that substitute mortality tables are constructed using a mortality ratio calculated for the plan's population, which is determined by dividing the amounts-weighted number of actual deaths for plan participants during the experience study period by the amounts-weighted number of expected deaths for those participants under the generally applicable mortality tables. In the absence of any changes to the rules and procedures for generating plan-specific substitute mortality tables, a mortality ratio developed using an experience study period that includes the period in which the COVID-19 pandemic occurred (COVID-19 pandemic period) will likely be unusually high, as the numerator of the mortality ratio will reflect the actual number of deaths for the plan population during this period, while the denominator of that ratio will be based on the expected number of deaths from the generally applicable mortality tables (which reflect only a small fraction of the significant short-term increase in mortality rates that occurred during the COVID-19 pandemic period). The Treasury Department and the IRS are concerned that if a substitute mortality table constructed using that mortality ratio is used for a plan's actuarial valuation, then the plan's liabilities will be understated. To address this concern, proposed regulations that provide rules regarding the use of mortality experience data for the COVID-19 pandemic period in the construction of substitute mortality tables were published in the <E T="04">Federal Register</E> on October 20, 2023 (88 FR 72409) (the proposed regulations). On the same date that the proposed regulations were issued, the Treasury Department and the IRS issued final regulations amending § 1.430(h)(3)-1 to update the generally applicable mortality tables under section 430(h)(3)(A) (88 FR 72357) (2023 final mortality regulations). Under § 1.430(h)(3)-2(c)(6)(ii)(E), approval to use a previously approved substitute mortality table terminates in conjunction with the replacement of the generally applicable mortality tables under section 430(h)(3)(A) and § 1.430(h)(3)-1 as of the date specified in guidance published in the Internal Revenue Bulletin. The preamble to the 2023 final mortality regulations indicated that the Treasury Department and the IRS will not require that the use of any previously approved plan-specific substitute mortality tables be terminated in conjunction with the replacement of the generally applicable mortality tables until amendments to the substitute mortality regulations are finalized and an updated revenue procedure that reflects those final regulations is issued. Four comments on the proposed regulations were received. No commenters requested to speak at a public hearing. The Treasury Department and IRS considered the comments that were received and are finalizing the proposed regulations with certain revisions, as explained in the following summary of comments and explanation of revisions. In addition, the Treasury Department and IRS are issuing Rev. Proc. 2024-32, 2024-34 IRB __, which updates the procedures set forth in Rev. Proc. 2017-55 to reflect the amendments to § 1.430(h)(3)-2 made by this Treasury decision. <HD SOURCE="HD1">Summary of Comments and Explanation of Revisions</HD> These regulations provide rules regarding the use of mortality experience data for the COVID-19 pandemic period that supplement the methodology for developing substitute mortality tables provided in § 1.430(h)(3)-2. These rules have the same structure as the rule ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 27k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━