Pension plan granted seven-year approval to use its own substitute mortality tables for funding calculations

Plain-English summary

A single-employer defined benefit pension plan normally computes its minimum required funding using standard IRS mortality tables. Section 430(h)(3) lets a plan sponsor apply to use its own "substitute" mortality tables, built from the plan's actual experience, if the plan's population is large enough to be statistically credible. Here the IRS granted the plan permission to use substitute mortality tables for its male and female annuitants (including disabled participants) for a period of up to seven plan years. The plan's nonannuitants (participants not yet drawing benefits) did not have credible mortality experience, so the plan must keep using the standard tables for that group. The IRS emphasized that it only checked whether the rates were developed under the method in Treas. Reg. § 1.430(h)(3)-2 and Rev. Proc. 2017-55; it did not verify the accuracy of the plan's calculations. The approval can terminate early if the covered population changes significantly or other listed conditions occur, and the plan's enrolled actuary must file annual certifications that the tables remain accurately predictive. This matters because substitute tables reflecting a plan's own longevity can raise or lower its funding obligations, so a large employer with a distinctive workforce may prefer them to the generic tables.

Ruling snapshot

• Question: May the plan use substitute mortality tables reflecting its own experience for section 430 minimum-funding calculations?
• Outcome: approved for up to seven plan years (annuitants only; nonannuitants must use the standard tables)
• 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)

202150036
Significant Index No. 0430.00-00

SEP 23 2021

Re: Substitute Mortality Table Ruling

Taxpayer =
EIN: -

Plan for which substitute mortality tables are requested:

Plan =
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 ("Code") for the above
Plan has been granted with respect to the populations specified in this letter. This ruling
is effective for a period of up to 7 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.

This approval applies to the following specific populations:

• Male annuitants, including disabled participants
• Female annuitants, 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:

• Male nonannuitants
• Female nonannuitants

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 Income Tax
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:

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

Age   Male Annuitants   Female Annuitants
[The scanned table lists per-age substitute mortality rates for male and female annuitants, running through age 120. The individual rate values, the base year, and the effective plan year were redacted or illegible in the IRS release. -- transcriber]

The above mortality rates were developed based on an experience study period from
July 1, through June 30, , with a base year of . The mortality 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 annuitant experience, as
shown in the table below.

Combined Male and Female Annuitants
Mortality ratio                  [redacted]
Credibility Weighting Factor     [redacted]

[The mortality ratio and credibility weighting factor values were redacted in the IRS release. -- 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 7-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) of the Regulations 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.

For reference, the average number of the combined male and female annuitants in the
Plan over the years covered by the experience study, as well as the most recent
number of combined male and female annuitants in the submission, are as follows:

Combined Male and Female Annuitants
Average during the experience study period       [redacted]
Most recent data in the submission
(December 31, )                                   [redacted]

[The population counts were redacted in the IRS release. -- transcriber]

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
June 30, 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 covered by the substitute mortality table during the experience study
period and the number of participants in that population as of the end of each
plan year, beginning with June 30, 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 $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, 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 data 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) at the following address:

Internal Revenue Service
Attn: Mr. David M. Ziegler
TE/GE: SE:T:EP:RA:T-A2
NCA-630
1117 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 the Manager, EP Classification in Houston, Texas
and to the Manager, EP Compliance Unit in Chicago, Illinois.

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

Sincerely,

David M. Ziegler, Manager
Employee Plans Actuarial Group 2

Enclosures:
Copy of ruling letter
Form 437
Redacted copy of ruling letter