IRS approves an employer's substitute mortality tables for pension funding for 10 plan years

Plain-English summary

Employers that sponsor traditional (defined benefit) pension plans must calculate their required annual funding using mortality tables, which predict how long retirees will live and therefore how much the plan must set aside. IRC § 430(h)(3) lets an employer use its own "substitute" mortality tables built from the plan's actual experience, instead of the IRS standard tables, but only with advance IRS approval. This employer asked to use substitute tables for all the pension plans in its controlled group, and the IRS granted the request for a 10-plan-year period. The approval covers male and female participants (including annuitants, non-annuitants, and disabled participants), and the tables must be applied on a "generational" basis. The IRS reviewed only whether the substitute rates were developed correctly under Treas. Reg. § 1.430(h)(3)-2 and Revenue Ruling 2017-55; it did not vouch for the taxpayer's other calculations. The letter also spells out the events that would cut the approval short before the 10 years end (for example, a significant change in the covered population, or the tables no longer accurately predicting mortality). This is a routine but consequential approval, because substitute tables can materially change how much an employer must contribute to its pension plans.

Ruling snapshot

• Question: May the employer use its own substitute mortality tables for § 430 pension funding across its controlled group?
• Outcome: Approved (for 10 plan years, for the specified male and female populations, applied generationally)
• Key authorities: IRC § 430(h)(3); ERISA § 303(h)(3); Treas. Reg. §§ 1.430(h)(3)-1, 1.430(h)(3)-2; Rev. Rul. 2017-55

Full text (IRS public release)

Proofreader's note (scanned OCR document): the letter text below is reproduced
verbatim with obvious scan misreads corrected. Pages 2 through 4 of the release
consist of the taxpayer's approved Substitute Mortality Table (age-by-age combined
male and female rates). The individual rate values did not survive scanning and are
not legible; the table structure is summarized in brackets rather than reproduced with
invented numbers.

Significant Index No. 0430.00-00

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

TAX EXEMPT AND
GOVERNMENT ENTITIES                              SEP 26 2018

Re: Substitute Mortality Table Ruling

Taxpayer =
EIN: -

Included Group =

    EIN: - , (Plan No. )
    EIN: - , (Plan No. )
    (Plan No. )
    EIN: - , (Plan No. )
    EIN: - , (Plan No. )

Dear

This letter is to inform you that your request to use substitute mortality tables for making
computations under section 430 of the Internal Revenue Code (the "Code") for the
Included Group has been granted with respect to the populations specified in this letter,
effective for a period of 10 plan years beginning with the plan year commencing
January 1, . Your request has been granted in accordance with section 430(h)(3)
of the Code and section 303(h)(3) of the Employee Retirement Income Security Act of
1974.

[Page 2]

Specifically, this approval applies to the following populations:

• Included Group — Male participants (annuitants and non-annuitants), including
disabled participants.

• Included Group — Female participants (annuitants and non-annuitants), including
disabled participants.

Based on the information provided by Taxpayer, the pension plans listed in the Included
Group are all the pension plans subject to section 430 of the Code that are sponsored
by the Taxpayer or by any member of the Taxpayer's controlled group. Thus, the
standard mortality tables will not be used for calculations under section 430 of the Code
by any population in Taxpayer's controlled group.

In granting this approval, we have only considered whether the substitute mortality rates
were developed correctly in accordance with section 1.430(h)(3)-2 of the Treasury
Regulations ("Regulations") and Revenue Ruling 2017-55. Accordingly, we are not
expressing any opinion as to the accuracy or acceptability of any calculations or other
material submitted with your request.

Permission is hereby granted for the Included Group to use the substitute mortality rates
shown in the table below.

Substitute Mortality Tables
Approved for use beginning with the plan year commencing January 1,
Base year

[Substitute Mortality Table — columns: Age; Taxpayer Male Combined Rate;
Taxpayer Female Combined Rate, covering ages 1 through 120 across pages 2-4.
The individual combined-rate values are not legible in the scanned release and are
therefore not reproduced here.]

The above rates were developed based on an experience study period from January 1,
, through December 31, , with a base year of . The rates were calculated
by adjusting the applicable standard mortality tables in section 1.430(h)(3)-1(d) of the
Regulations indicated in the table below, using the mortality ratio and credibility
weighting factor determined by aggregating male and female experience, as shown in
the table below.

[Table — Population / Standard base mortality table / credibility:
Included Group male participants — Male combined annuitant/nonannuitant mortality — 100%;
Included Group female participants — Female combined annuitant/nonannuitant mortality — 100%.]

The Internal Revenue Service has reviewed the substitute mortality rates and
supporting information, and has determined that based on the information submitted,
the rates were correctly developed in accordance with section 1.430(h)(3)-2 of the
Regulations and Revenue Ruling 2017-55.

The above rates must be applied on a generational basis, as provided in section
1.430(h)(3)-2(c)(3) of the Regulations.

Your attention is called to section 430(h)(3)(C)(ii) of the Code and section 1.430(h)(3)-
2(d)(6) of the Regulations, which describe the circumstances in which the use of the
substitute mortality table will terminate before the end of the 10-year period described
above. In general, the substitute mortality tables can no longer be used as of the
earliest of:

(1) For a plan using a substitute mortality table for only one gender, the first plan
year for which there is full or partial credible mortality information with respect to
the other gender that had lacked credible mortality information (unless an
approved substitute mortality table is used for that gender),

(2) The first plan year in which the plan fails to satisfy the requirements of
paragraph 1.430(h)(3)-2(c)(1) of the Regulations, regarding the requirement that
other plans and populations in the controlled group must also use substitute
mortality tables unless it can be demonstrated that they do not have credible
mortality information (taking into account the transition period for newly affiliated
companies in section 1.430(h)(3)-2(f)(3) of the Regulations),

(3) The second plan year following the plan year for which there is a significant
change in individuals covered by the plan as described in section
1.430(h)(3)-2(c)(6)(iii) of the Regulations,

(4) The plan year following the plan year in which a substitute mortality table used
for a plan population is no longer accurately predictive of future mortality of that
population, as determined by the Commissioner or as certified by the Plan's
actuary to the satisfaction of the Commissioner, or

(5) The date specified in guidance published in the Internal Revenue Bulletin
pursuant to a replacement of mortality tables specified under section
430(h)(3)(A) of the Code and 1.430(h)(3)-1 of the Regulations, other than
annual updates to the static mortality tables issued pursuant to 1.430(h)(3)-
1(a)(3) of the regulations or changes to the mortality improvement rates
pursuant to section 1.430(h)(3)-1(a)(2)(i)(C) of the Regulations.

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.

When filing Form 5500 for the plan years for which the substitute mortality tables are
used, please note the information that is required to be attached to Schedule SB
(Actuarial Information) in accordance with the instructions to that form.

We have sent a copy of this letter to your Authorized Representative(s) pursuant to a
power of attorney on file in this office and to the Manager, EP Classification in
Columbus, Ohio and to the Manager, EP Compliance Unit in Chicago, Illinois.

If you require further assistance in this matter, please contact
(ID# ) at ( ) - .

Sincerely,

David M. Ziegler, Manager
Employee Plans Actuarial Group 2

CC: