Pension sponsor approved to use substitute mortality tables for its salaried plan

Plain-English summary

A company that sponsors defined benefit pension plans asked the IRS for
permission to use its own "substitute" mortality tables, rather than the
standard IRS tables, when calculating the minimum required funding for its
Salaried Plan under IRC Section 430. Substitute tables built from a plan's own
experience can change how much a sponsor must contribute each year. The IRS
granted the request for the male and female participant populations
(including disabled participants), effective for a set number of plan years.
As always, the IRS reviewed only whether the tables were developed by the
correct method under Treas. Reg. Section 1.430(h)(3)-2 and Revenue Procedure
2017-55, not whether the underlying numbers are accurate, and the plan's
actuary must certify each year that the tables remain predictive. This is the
companion ruling to 202006015, which covers the same sponsor's Hourly Plan.

Ruling snapshot

• Question: May the sponsor use substitute mortality tables for its Salaried Plan when making IRC § 430 minimum-funding computations?
• Outcome: Approved for the male and female participant populations (including disabled participants), for a specified number of plan years
• Key authorities: IRC § 430(h)(3); ERISA § 303(h)(3); Treas. Reg. § 1.430(h)(3)-2; Rev. Proc. 2017-55

Full text (IRS public release)

Significant Index No. 0430.00-00

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

TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION

Date: NOV 14 2019

Number: 202006016

Re: Substitute Mortality Table Ruling

Taxpayer = [redacted]
Salaried Plan = [redacted]
Other plan in controlled group:
Hourly Plan = [redacted]

Dear [redacted]:

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 Salaried Plan has been granted with respect to the populations specified in this letter. This ruling is effective for a period of [redacted] plan years beginning with the plan year commencing [redacted]. 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.

This approval applies to the following specific populations:

• Male participants, including disabled participants
• Female participants, including disabled participants

The Taxpayer is also requesting approval for substitute mortality tables for the Hourly Plan, which will be addressed in a separate ruling letter.

In granting this approval, we have only considered whether the substitute mortality rates were developed in accordance with section 1.430(h)(3)-2 of the Treasury Regulations ("Regulations") and Revenue Procedure 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 to use the substitute mortality rates shown in the table below for the Salaried Plan:

Substitute Mortality Tables
Approved for use beginning with the plan year commencing [redacted]
Base year: [redacted]

[The letter reproduces a Substitute Mortality Tables grid listing Male Participant and Female Participant mortality rates by age, for ages 1 through 120. The numeric rate values were redacted from the public release; only the age labels survive in the scan. -- transcriber]

The above rates were developed based on an experience study period from [redacted] through [redacted], with a base year of [redacted]. The rates were calculated by adjusting the applicable standard mortality tables in section 1.430(h)(3)-1(d) of the Regulations, using the mortality ratio and credibility weighting factor individually determined for each population, as shown in the table below.

[Male Participants / Female Participants -- Mortality ratio: [redacted]; Credibility Weighting Factor: [redacted]. -- transcriber]

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 developed in accordance with section 1.430(h)(3)-2 of the Regulations and Revenue Procedure 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(c)(6) of the Regulations, which describe the circumstances in which the use of the substitute mortality table will terminate before the end of the [redacted]-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 section 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 section 1.430(h)(3)-1 of the Regulations, other than annual updates to the static mortality tables issued pursuant to section 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.

In particular, section 1.430(h)(3)-2(c)(6)(iii) provides that the use of substitute mortality tables must be discontinued after a significant change in coverage unless the plan's actuary certifies in writing to the satisfaction of the Commissioner that the substitute mortality tables used for the population continue to be accurately predictive of future mortality of the population (taking into account the effect of the change in the population). For this purpose, a significant change in coverage occurs if the number of individuals covered by the substitute mortality table for a plan year is less than [redacted] percent or more than [redacted] percent of either (1) the average number of individuals in that population over the years covered by the experience study on which the substitute mortality table is based, or (2) the number of individuals covered by the substitute mortality table in a plan year for which a certification described in section 1.430(h)(3)-2(c)(6)(iii)(A) of the Regulations was made.

We draw your attention to the fact that the number of Salaried male participants as of [redacted] had already changed so that it was [redacted] less than the average number of individuals covered during the experience study. In other words, the number of male participants covered by the substitute mortality table had decreased to [redacted] of the average number of male participants included in the experience study. A certification will be required for each year, if and when, the number of male or female participants (1) is less than [redacted]% (or is greater than [redacted]%) of the average number of male or female participants included in the experience study or (2) is less than [redacted]% or more than [redacted]% of the number of male or female participants as of [redacted], the date of the most recent determination that the mortality tables are accurately predictive of the mortality of the remaining population.

A certification must be provided each year that it is required under the Regulations, as described above, signed by the enrolled actuary for the plan and stating that the substitute mortality tables continue to be accurately predictive of the expected future mortality for the plan. The certification must also contain a statement that:

a. The enrolled actuary is current with educational requirements set forth by the Joint Board for the Enrollment of Actuaries as well as any other actuarial designations asserted;

b. The enrolled actuary was personally involved in the determination that the substitute mortality table is still accurately predictive and provides the actuary's best estimate for the Plan;

c. In determining that the substitute mortality table is still accurately predictive, the enrolled actuary took into consideration the effect of business combinations, plan mergers or spinoffs and settlements/other risk transfers, and other events that would have similar effects on the relevant populations; and,

d. The enrolled actuary has the specific knowledge and experience to make the judgements set forth above and attests to these representations.

All required certifications must be provided on or before the date Form 5500 is filed for each plan year for which the certification is required and must be accompanied by the supporting information relied upon by the enrolled actuary to make that certification. To the extent possible, please also provide the following supporting information:

(1) The number of actual deaths during the experience study period used to develop the substitute mortality tables and the beginning and ending dates of the experience study period.

(2) A table showing the number of expected deaths and actual deaths, reported separately for each plan year beginning with deaths during the plan year ending [redacted] through the plan year immediately preceding the most recent actuarial valuation, and in total.

(3) A table similar to the stability demonstration required under section 8 of Revenue Procedure 2017-55, showing the average number of participants in the population included in the experience study and the number of participants in the population as of the end of each plan year, beginning with [redacted] through the plan year immediately preceding the most recent actuarial valuation, expressed both as a headcount and as a percentage of the average number of participants in the experience study.

(4) A table showing a comparison of (i) the average ages and (ii) percentage of the population, by the following monthly single life annuity brackets: under $[redacted], between $[redacted] and $[redacted], between $[redacted] to $[redacted], between $[redacted] to $[redacted], between $[redacted] and $[redacted], and $[redacted] and over, along with the average age and average benefit amount for the population in total. This information should be provided for the population in the experience study and at the end of each plan year, beginning with the valuation date for the first plan year that the certification is required, through the date immediately preceding the most recent actuarial valuation at the time the information is reported.

(5) An explanation of any material changes in the population.

This information must be provided to David M. Ziegler (or to another individual designated by the Service), by fax at (202) 317-8811, or to the following address:

Internal Revenue Service
Attn: Mr. David M. Ziegler
TE/GE: SE:T:EP:RA:T:A2
NCA-630
1111 Constitution Ave. NW
Washington DC 20224-0002

Failure to provide this information by the due date may result in a requirement that the standard mortality tables must be used for purposes of section 430 of the Code, beginning with the earlier of (1) the plan year for which the deadline for providing this information is missed or (2) the date required for early termination of the use of the substitute mortality tables pursuant to section 1.430(h)(3)-2(c)(6)(ii) 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 representatives 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 have any questions regarding this matter, please contact Ms. Qian Magee (ID# [redacted]) at [redacted].

Sincerely,

David M. Ziegler, Manager
Employee Plans Actuarial Group 2

CC: