Pension plan approved to use substitute mortality tables, but subject to yearly actuarial recertification

Plain-English summary

Single-employer defined benefit pension plans value their liabilities using mortality tables, and a plan with enough of its own credible mortality experience can ask the IRS to approve "substitute" tables based on that experience. This taxpayer requested substitute mortality tables under section 430(h)(3) for one plan ("Plan R") in its controlled group. The IRS approved substitute tables for Plan R's male and female participants (annuitants and nonannuitants, including disabled participants) for ten plan years, while another plan in the group ("Plan P") lacked credible experience and must use the standard tables. What makes this letter distinctive is a condition: because Plan R's population has already shrunk to less than 80 percent of the average headcount in the experience study (a "significant change" under the regulations), the plan's enrolled actuary must certify in writing each year that the tables remain accurately predictive, backed by detailed demographic information due every October 15. If the taxpayer misses that deadline, the plan must revert to the standard tables. The letter shows that a substitute-table approval can come with ongoing monitoring obligations when the covered population is small or changing.

Ruling snapshot

• Question: May the plan use substitute mortality tables developed from its own experience for computations under section 430, and on what conditions?
• Outcome: Approved for Plan R male and female participants for ten plan years, subject to an annual actuarial recertification (because the population fell below 80% of the experience-study average); standard tables required for the plan lacking credible experience.
• Key authorities: IRC § 430(h)(3); ERISA § 303(h)(3); Treas. Reg. §§ 1.430(h)(3)-1 and 1.430(h)(3)-2 (incl. -2(c)(6)(iii)); Rev. Proc. 2017-55

Full text (IRS public release)

Scanned document transcribed from the IRS OCR text. Obvious scan misreads were corrected; wording is otherwise verbatim. Redactions appear as they do in the release. The per-age male and female mortality rate values do not appear in the IRS public release text (the rate columns are blank; only the age labels survive), as noted at the table below.

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

HRYficant index No. 0430,00-00 901904022

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION | OCT 3 0 2018

TEP. 12ZA A2

Re: Substitute Mortality Table Ruling
Taxpayer =

Plan R=
(EIN: , Plan No. )

Other plans in controlled group:

Plan S =

(EIN: , Plan No. )
Plan X =

(EIN: , Plan No. )
Plan W =

(EIN: , Plan No. )
Plan P =

(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 Plan R
has been granted with respect to the populations specified in this letter, subject to the
conditions below, effective for a period of 10 plan years beginning with the plan year
commencing January 1,20 . 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.

Specifically, this approval applies to the following populations:

2 20190402 2

• Plan R — Male participants (annuitants and nonannuitants), including disabled

participants
• Plan R —Female participants (annuitants and nonannuitants) including disabled

participants

Based on the information provided by the Taxpayer, the following populations do not
have credible mortality experience, and therefore the standard mortality tables will be
used for calculations under section 430 of the Code:

• Plan P — all participants

The Taxpayer is also requesting approval for substitute mortality tables for Plans S, X,
and W, which will be addressed in separate ruling letters.

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 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 Plan R:

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

Male Annuitants Female Annuitants

[Transcriber note: in the columns that follow, only the age labels are legible in the IRS release text; the per-age male and female substitute mortality rate values do not appear in the released text. Refer to the official PDF for any values that were published.]
and Nonannuitants | and Nonannuitants

()

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901904022

Age

Male Annuitants
and Nonannuitants

Female Annuitants
and Nonannuitants

18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42

43
44
45
46
47
48
49
50
51
52
53
54

55 .
56

57

58

59
60
61
~ 62
63
64


201904022

Age

Male Annuitants
and Nonannuitants

Female Annuitants
and Nonannuitants

65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95

96

97

98

99

100
101
102
103
104
105
106
107
108

109 .

110

111


5 201904029

Male Annuitants Female Annuitants
Age and Nonannuitants | and Nonannuitants
112
113
114
115
116
117
118
119
120

The above rates were developed based on an experience study period from January 1,
2013 through December 31, 2016, with a base year of 2014. 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.

Mortality Credibility

Population Standard base mortality table ratio factor

Male combined annuitant/
nonannuitant mortality
Female combined annuitant/
nonannuitant mortality

Male Participants

Female Participants

- 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 Procedure 2017-55.

The above rates must be applied on a generational basis, as provided i 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),

6 201904029

(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.

In particular, since the number of individuals in the population is already less than 80%
of the number of the average number of individuals reflected in the experience study
used to construct the substitute mortality tables and therefore has experienced a
significant change as described in paragraph 3 above, Plan R’s actuary will be required
to certify in writing that the substitute mortality tables used for Plan R continue to be
accurately predictive of the future mortality of that plan. This certification is required
each year, as long as either: :

(1) The number of individuals in the population is less than 80 percent or more
than 120 percent of the average number of individuals included in the
experience study (see section 1.430(h)(3)-2(c)(6)(iii)(A) of the Regulations),
and/or . .

(2) _ The number of individuals covered by the substitute mortality table for the plan
year is less than 80 percent or more than 120 percent of the number of —
individual covered by the substitute mortality table in.a plan year for which a
certification described in the previous paragraph was made (see section
1.430(h)(3)-2(c)(6)(iii)(B) of the Regulations).

Therefore, in order to continue using the substitute mortality tables for making
computations under section 430(h) of the Code, the following information must be
provided by October 15 after the end of each plan year that the above conditions apply,

in addition to any other information required under section 1.430(h)(3)-2 of the
Regulations:

(1)
(2)

(3)

(4)

(5)

(6)

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.

A table showing the number of expected deaths and actual deaths, reported
separately for each year beginning with deaths during 2018 through the year
preceding the most recent actuarial valuation, and in total.

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 (aggregated for male and female -
participants, annuitants and nonannuitants), beginning with December 31, 2018,
through the date 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.

A table showing a comparison of (i) the average ages and (ii) percentage of the
population as of the end of the year immediately preceding the most recent
actuarial valuation and the population included in the experience study. The
table should show this comparison by the following monthly single life annuity
brackets: under $100, between $100 and $250, between $250 to $500, between
$500 to $1,000, between $1,000 and $1,500, and $1,500 and over. The table
‘should also show the average age and average benefit amount for the group in
total, for both the experience study data and at the end of the plan year
immediately preceding the most recent actuarial valuation date.

An explanation of any material changes in the population and a certification by
the enrolled actuary for the Plan as to whether the substitute mortality table is
accurately predictive, along with any additional demographic or other
information to substantiate this claim.

A certification, signed by the enrolled actuary, stating 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 his or her best
estimate, the enrolled actuary took into consideration the effect of business

201904020

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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.

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-629

1111 Constitution Ave. NW
Washington DC 20224-0002

Failure to provide the required information by the due date will mean that the standard
mortality tables must be used for purposes of section 430 of the Code, beginning with
the plan year following the year during which the deadline for providing this information
is missed.

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.

201904022

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

David M. Ziegler, Manager
Employee Plans Actuarial Group 2

CC: