IRS Mandates Use of New Mortality for 2018…Unless You Don’t Want To!

On October 3, 2017, the IRS released Notice 2017-60, finally acknowledging that new mortality assumptions would be required for 2018 in the determination of minimum contributions and, by association, Pension Benefit Guaranty Corporation (PBGC) premiums.

But in an altruistic maneuver by the IRS (two words not often read in the same sentence) an option to defer adoption until 2019 was added to the final regulations. The stated reason for this was lack of lead time, though the proposed change has been communicated extensively since the Society of Actuaries released their latest mortality report in 2014.

Option to Defer

New mortality assumptions must be used for lump sum conversions next year, but there is an option to delay adoption for funding and PBGC purposes. According to the notice, to claim the one-year deferral a plan sponsor must inform their actuary that use of the new assumption for 2018 is either:

  1. “administratively impracticable”, or
  2. “would result in an adverse business impact that is greater than de minimis

This is a very considerate provision, but taken literally it may be difficult to prove either point.

In this day and age, it is inconceivable that entering a new mortality table into valuation software is impracticable. Especially considering actuaries have months to do this coding before any liability reporting is required.

So What About De Minimis?

As for business impact, except for a few outliers under the Pension Protection Act (PPA), it is hard to prove mathematically that the additional cost satisfies the greater than de minimis requirement.

Consider that the expected increase in plan liabilities from the mortality change is roughly 3.0 percent. According to PPA minimum funding rules, approximately one-sixth of this increase would be added to the minimum contribution for the year, or 0.5 percent of liability. (Although better funded plans may see no impact at all.)

The PBGC variable rate premium level for 2018 is expected to be around 4.0 percent. So the maximum impact on 2018 PBGC premiums is about 0.12 percent of liability (.03 x .04). Plans subject to the new variable rate premium caps would have less (or even zero) immediate impact. Note that although the PBGC premium impact is generally less, it is garnering more attention as the money is “lost” like a tax rather than put into the plan to fund benefits.

I’ll oversimplify and just add the two, resulting in total added cost for 2018 of 0.62 percent of plan liabilities give or take. In the context of other business expenses, this seems hard to frame as “un-de minimis”.

(For comparison, IRS regulations regarding pension plan mergers and spinoffs define “de minimis” as less than 3 percent of plan assets.)

Write Your Own Ticket

The last section makes a fairly compelling case that de minimis probably doesn’t apply to the vast majority of cases based on traditional understanding of the term. Except perhaps where plan sizes are disproportionately large compared to the plan sponsor.

Fortunately for sponsors, the term “de minimis” (Latin for “of minimis”) is never defined in the notice. Adverse business impact can be claimed if a sponsor simply “informs the actuary for the plan of the intent to apply the option”.

The regulations don’t establish a threshold of proof. Nor do they include provisions for filing or verification procedures to claim greater than de minimis impact. So de minimis is in the eye of the beholder, who also happens to be writing checks to the plan and the PBGC.

There isn’t sample language for the communication to the actuary included, but I imagine it can be pretty basic. I thought of a good template for the classic sit-com fans out there:

“Dear Mr. Kotter,

Please excuse Juan from adopting the new mortality assumption for 2018.

Signed,

Epstein’s Mother.”

Wink and Nod

So while the IRS has nominally satisfied its goal of implementing new mortality assumptions by 2018, with no plans to enforce the election it essentially amounts to a free pass. A literal satisfaction of the deferral rules seems hard to support.

Sponsors may want to wait-and-see if any additional clarifying guidance is issued before making their decisions. But ultimately, perceived unreasonable PBGC premium increases from the past may encourage most to give their actuaries a wink and a nod, and defer real mortality changes until 2019.

Mike Clark is a fellow of the Society of Actuaries (SOA) and member of the American Academy of Actuaries (AAA) so his understanding of this subject is obviously “de maximus”.

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