Pension plan may use substitute mortality tables for five years

Plain-English summary

A defined benefit pension plan asked to use plan-specific substitute mortality tables when calculating minimum funding under section 430. The request covered male and female annuitants and nonannuitants, including disabled participants. The IRS found that the rates were developed under the applicable regulations and Revenue Procedure 2017-55 and approved them for up to five plan years on a generational basis. The ruling noted that the plan's participant count had already declined from the experience-study average, so actuarial certifications would be required whenever the regulatory coverage-change thresholds were met. Continued use also depended on timely certifications and supporting information and remained subject to the regulation's early-termination rules.

Ruling snapshot

• Question: May the pension plan use substitute mortality tables for its male and female annuitant and nonannuitant populations?
• Outcome: approved
• Key authorities: IRC § 430(h)(3); ERISA § 303(h)(3); Treas. Reg. §§ 1.430(h)(3)-1 and 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

NOV 20 2019

Number: 202007022
Release Date: 2/14/2020

Re: Substitute Mortality Table Ruling

Taxpayer = [redacted]

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 Plan
has been granted with respect to the populations specified in this letter. This ruling is
effective for a period of up to 5 plan years beginning with the plan year commencing
January 1, [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 (annuitants and nonannuitants), including disabled participants
• Female participants (annuitants and nonannuitants), including disabled
  participants

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 Plan:

2

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

Age   Male Annuitants and Nonannuitants   Female Annuitants and Nonannuitants
[The scanned table lists ages 1 through 120. The individual male and female substitute mortality rates were redacted in the IRS release. -- transcriber]

5

The above rates were developed based on an experience study period from January 1,
[redacted] through December 31, [redacted], with a base year of 20[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 determined by
aggregating male and female experience, as shown in the table below.

Male and Female
Annuitants and
Nonannuitants

Mortality ratio
[redacted]

Credibility Weighting Factor
[redacted]

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 5-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 80
percent or more than 120 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 plan participants as of December
31, [redacted] had already changed so that [redacted] was [redacted]% less than the average number of
individuals covered during the experience study. In other words, the number of
participants covered by the substitute mortality table had decreased to [redacted]% of the
average number of plan participants included in the experience study. A certification
will be required for each year, if and when, the number of plan participants (1) is less
than 80% (or is greater than 120%) of the average number of plan participants included
in the experience study or (2) is less than 80% or more than 120% of the number of
plan participants as of January 1, [redacted], the date of the most recent determination that
the mortality tables are accurately predictive of the mortality of the remaining population.

7

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
    December 31, 2018 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 December 31,
    2018 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.

9

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

                                      Sincerely,

                                      David M. Ziegler, Manager
                                      Employee Plans Actuarial Group 2

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