Retirement plan permitted to use plan-specific mortality tables after amending plan to provide annuity settlement window

After a retirement plan was amended to provide an annuity settlement window for a limited time period, the plan could continue to use plan-specific mortality tables previously approved by the IRS, according to an IRS letter ruling.

The plan provided a traditional defined benefit for employees hired before a certain date, and, for employees hired after that date, benefits under the plan were based on a cash balance benefit formula. The sponsoring company proposed to amend the plan to allow an annuity settlement window, under which, during a period of no more than 60 days, certain participants and beneficiaries would be given a one-time opportunity to receive the actuarial present value of their remaining benefits under the plan at the time of election in the form of a lump-sum payment.

IRS Reg. §§1.430(h)(3)-2(d)(4)(i)(A)-(E) lists five circumstances under which the continued use of previously approved plan-specific mortality tables to determine the minimum required contribution for a single-employer defined benefit plan must be terminated. In general, the IRS concluded that, provided the conditions of Reg. §§1.430(h)(3)-2(d)(4)(i)(A) through (E) were not applicable, the plan could continue to use the plan-specific mortality tables after the plan was amended to provide an annuity settlement window for a limited time period. However, if those tables no longer accurately reflected future mortality of the plan population, the company could apply for a new plan-specific mortality table.

Specifically, if, after implementation of the annuity settlement window, the plan did not experience a significant change in the individuals covered by the plan, the plan’s actuary continued to monitor the plan to confirm that the tables remain accurately predictive of the future mortality of the plan’s population, and assuming the other circumstances did not apply, the IRS ruled that the plan could continue to use its plan-specific mortality tables. If, after implementation of the annuity settlement window, the plan did experience a significant change in the individuals covered by the plan, but the actuary was able to certify that the plan-specific mortality tables remained accurately predictive of the future mortality of the plan’s population taking into account the effect of the change in the plan’s population, and assuming that the other circumstances did not apply, the plan could also continue to use its plan-specific mortality tables. However, the IRS stated that the sponsoring company could apply for a new plan-specific table if, after implementation of the annuity settlement window, the plan’s actuary was unable to certify that the plan-specific mortality tables remained accurately predictive of the future mortality of the plan’s population. The IRS explained that nothing in the procedures for obtaining approval of the use of plan-specific mortality tables precluded an application for a new plan-specific table subsequent to the termination of a previously approved plan-specific table due to any of the five circumstances.

In addition, the IRS ruled that another defined benefit plan sponsored by the company could continue to use its previously approved plan-specific mortality tables as long as none of the five circumstances applied to the plan if the first plan was unable to use plan-specific mortality tables because of a lack of credible mortality experience.

Furthermore, implementation of the annuity settlement window did not cause the plan to fail to meet the required minimum distribution requirements of Code Sec. 401(a)(9), nor did it trigger an excise tax under Code Sec. 4974. Code Sec. 4974 imposes an excise tax for distributions that are less than the required minimum distribution.

Source: IRS Letter Ruling 201228051.

For more information, visit http://www.wolterskluwerlb.com/rbcs.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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