Conditionally approves revised pension-plan actuarial assumptions

Plain-English summary

A pension plan sponsor asked to change non-prescribed assumptions used to calculate the plan's funding target. The sponsor said participants were retiring later and cash-balance participants were leaving money in the plan longer after ending employment, so revised retirement, termination, benefit-commencement, and benefit-form assumptions would better track actual experience. Section 430(h)(5) required advance approval because the changes exceeded the statutory limits. The IRS conditionally approved the changes for the specified plan year, requiring gains and losses to be measured annually by decrement to test each assumption's accuracy. The approval addressed only the assumptions and their methodology, and the plan also had to file an amended Schedule SB reporting the change.

Ruling snapshot

• Question: Could the plan change its non-prescribed retirement, termination, benefit-commencement, and benefit-form assumptions under section 430(h)(5)?
• Outcome: Conditionally approved.
• Key authorities: IRC § 430(h)(5); ERISA § 303(h)(5).

Full text (IRS public release)

Significant Index No: 430.00-00

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

DEC 20 2017

201812010

RE: Change in Actuarial Assumptions

Taxpayer = [redacted]

Plan = [redacted] (the “Plan”)
EIN: [redacted] / PN: [redacted]

Dear [redacted]:

This letter constitutes notice that conditional approval has been granted for the change in assumptions as described below. The approval applies for the plan year beginning January 1, 20[redacted]. This approval has been granted in accordance with section 430(h)(5) of the Internal Revenue Code (Code) and section 303(h)(5) of the Employee Retirement Income Security Act of 1974. Approval is conditioned on gains and losses being measured annually, by decrement, to assure the accuracy of each Plan assumption.

In granting this approval, we have considered only the acceptability of the proposed assumptions and, as necessary, the methodology by which they were determined. We are not expressing any opinion as to the accuracy or acceptability of any calculation or other material submitted with your request.

Section 430(h)(5) of the Code provides that, subject to certain limits, no actuarial assumption (other than interest rates and mortality assumptions) used to determine the funding target may be changed without approval from the Secretary. According to information submitted with the request, implementing the proposed changes in assumptions exceeds the limits provided in section 430(h)(5)(B)(ii) of the Code. Therefore, the Taxpayer is requesting approval before these proposed changes in assumptions are implemented.

The Taxpayer represents that participants over the last several years are retiring later than expected, consistent with trends observed in the broader U.S. workforce. The Taxpayer has also observed that many cash balance participants are electing to keep their money in the Plan longer following termination of employment. The Taxpayer has proposed revised assumptions to better follow the actual experience of the Plan.

The proposed revisions are based on an experience study period spanning 20[redacted] through 20[redacted]. A lump-sum window was offered in 20[redacted] to terminated-vested participants of the Plan who had not yet commenced benefit receipt of their benefits and were otherwise ineligible to receive a lump-sum payment. The Taxpayer has represented that no participants in payment status were offered lump sums.

This approval applies to the following changes in assumptions:

1. Rates of Retirement – Final Average Pay Participants
2. Rates of Retirement – Cash Balance Participants
3. Rates of Termination – Final Average Pay Participants
4. Rates of Termination – Cash Balance Participants
5. Benefit Commencement Age for Final Average Pay – Active participants who are
   not retirement eligible and may terminate in the future & terminated vested participants¹
6. Benefit Commencement Age for Cash Balance Plan Active Participants²
7. Benefit Commencement Age for Cash Balance Plan Term Vested Participants
   (Termed in the Last Year)³
8. Benefit Commencement Age for Cash Balance Plan Term Vested Participants
   (Termed Over 1 Year Ago)⁴
9. Benefit Form for Final Average Pay Participants (Other Than Retirement)

You verified in writing on March 22, 20[redacted], that each assumption contained in this ruling is the actual assumption of which you seek approval.

Revised Rates of Retirement
Final Average Pay Participants

Age Assumption

<55 [redacted]%
55 [redacted]%
56 [redacted]%
57 [redacted]%
58 [redacted]%
59 [redacted]%
60 [redacted]%
61 [redacted]%
62 [redacted]%
63 [redacted]%
64 [redacted]%
65 [redacted]%

¹ This assumption applies to future terminated vested participants who decrement from active status as well as current terminated vested participants as of the valuation date.

² This assumption relates to when the lump sum is paid to cash balance participants.

³ Ibid.

⁴ Ibid.

Revised Rates of Retirement
Final Average Pay Participants

Age Assumption

66 [redacted]%
67 [redacted]%
68 [redacted]%
69 [redacted]%
>69 [redacted]%

Revised Rates of Retirement
Cash Balance Participants

Age Assumption

<55 [redacted]%
55 [redacted]%
56 [redacted]%
57 [redacted]%
58 [redacted]%
59 [redacted]%
60 [redacted]%
61 [redacted]%
62 [redacted]%
63 [redacted]%
64 [redacted]%
65 [redacted]%
66 [redacted]%
67 [redacted]%
68 [redacted]%
69 [redacted]%
>69 [redacted]%

Revised Rates of Termination
Final Average Pay Participants

Age Assumption

20 [redacted]%
21 [redacted]%
22 [redacted]%
23 [redacted]%
24 [redacted]%
25 [redacted]%
26 [redacted]%
27 [redacted]%
28 [redacted]%
29 [redacted]%
30 [redacted]%
31 [redacted]%
32 [redacted]%
33 [redacted]%
34 [redacted]%
35 [redacted]%
36 [redacted]%
37 [redacted]%
38 [redacted]%
39 [redacted]%
40 [redacted]%
41 [redacted]%
42 [redacted]%
43 [redacted]%
44 [redacted]%
45 [redacted]%
46 [redacted]%
47 [redacted]%
48 [redacted]%
49 [redacted]%
50 [redacted]%
51 [redacted]%
52 [redacted]%
53 [redacted]%
54 [redacted]%
55 [redacted]%
56 [redacted]%
57 [redacted]%
58 [redacted]%
59 [redacted]%
60 [redacted]%
61 [redacted]%
62 [redacted]%
63 [redacted]%
64 [redacted]%
>64 [redacted]%

Revised Rates of Termination
Cash Balance Participants

Age q[x]+0 q[x]+1 q[x]+2 q[x]+3 q[x]+4

20 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 21 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 22 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 23 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 24 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 25 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 26 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 27 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 28 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 29 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 30 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 31 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 32 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 33 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 34 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 35 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 36 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 37 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 38 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 39 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 40 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 41 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 42 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 43 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 44 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 45 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 46 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 47 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 48 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 49 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 50 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 51 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 52 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 53 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 54 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 55 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 56 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 57 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 58 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 59 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 60 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 61 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 62 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 63 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 64 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 65 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 66 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 67 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 68 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]% 69 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]%
>69 [redacted]% [redacted]% [redacted]% [redacted]% [redacted]%

Benefit Commencement Age for Final Average Pay – Active participants who are not retirement eligible and may terminate in the future, and terminated vested participants

% Electing Revised Assumption

Pre-January 1, 19[redacted] Participants Age 60
Post-January 1, 19[redacted] Participants with 20 or more years of service Age 64 Post January 1, 19[redacted] Participants with less than 20 years of service Age 65

Benefit Commencement Age for Cash Balance Plan Active Participants

% Who Terminate and Elect Revised Assumption

Immediate Lump Sum upon Termination [redacted]%
Lump Sum at Age 64 and older [redacted]%

Benefit Commencement Age for Cash Balance Plan Terminated Vested Participants (Terminated in the last year)

% Electing Proposed Assumption

Immediate Lump Sum [redacted]%
Lump Sum at Age 64 [redacted]%
Lump Sum at Age 65 [redacted]%

Benefit Commencement Age for Cash Balance Plan Terminated Vested Participants (Terminated over 1 year ago)

% Electing Proposed Assumption

Lump Sum at Age 64 [redacted]%
Lump Sum at Age 65 [redacted]%

Benefit Form for Final Average Pay Participants (Other Than Retirement)

% Electing Proposed Assumption

Lump Sum [redacted]%
Life Annuity [redacted]%
[redacted]% Joint and Survivor Annuity [redacted]%

An amended Schedule SB (Actuarial Information) of Form 5500 must be filed for the plan year beginning January 1, 20[redacted] reflecting that a change in non-prescribed assumptions as been made for the plan year. When filing the amended Schedule SB indicate on line 24 of the Schedule SB by checking the “Yes” box that a change in non- prescribed assumptions has been made for the current year.

This ruling is directed only to the taxpayer that requested it. Section 6110(k)(3) of the Code provides that it may not be used or cited by others as precedent.

This ruling is intended to solely address the issues specifically described above. For any issue not specifically addressed in this ruling, the Plan must satisfy any and all applicable sections of the Code and/or regulations as in effect for the relevant plan year(s).

A copy of this letter is being sent to your authorized representatives pursuant to a power of attorney (Form 2848) currently on file in this office, the Manager of EP Compliance, and the Manager of EP Classification.

If you have any questions regarding this matter, please contact [redacted] (ID# [redacted]) at ([redacted]) [redacted]-[redacted].

Sincerely yours,

David M. Ziegler, Manager
Employee Plans Actuarial Group 2

Cc:

Manager, EP Compliance
Manager, EP Classification