In order to reflect the increased longevity of today’s society, the IRS has finalized regulations that adopt a new mortality table for use with pension plans. This increased longevity has several impacts on defined benefit plans - minimum funding requirements, lump sum payments and Pension Benefit Guaranty Corporation (PBGC) premiums.
A portion of the minimum contribution that must be made each year is based on the amount of the plan’s unfunded liability. Unless your plan is fully funded, increasing the plan’s liability will increase the required contribution and could also result in a lower AFTAP. The lower AFTAP can potentially result in restrictions on benefits, as well as requiring additional contributions.
If your plan pays lump sums based on the IRS’ minimum assumptions for calculating a lump sum, the new mortality table will increase the lump sum payable beginning with the first stability period on or after January 1, 2018.
For plans that are subject to the PBGC, beginning with 2018 plan year premiums, the PBGC unfunded liability will be based on the new mortality tables and result in a larger premium due to a larger unfunded liability. The amount of the increase in premium will depend on a number of different factors specific to your plan, however, estimates are that for each $1,000 increase in unfunded liability, your 2018 PBGC premium will increase by $38.
There is one exception to the timing. Adoption of the new mortality tables may be delayed until 2019 if the plan sponsor:
- Concludes that the new mortality table would be administratively impractical or would result in a non-de minimis adverse business impact, and
- Informs the actuary of the intent to apply the former mortality tables for 2018. This exception applies only to minimum funding and, by extension, will likely apply to PBGC premiums. However, it will not apply to lump sum payments.
If you have any questions regarding the new mortality table and how it may affect your plan, please contact Nyhart and one of our actuaries will be glad to help you.