IRS approves substitute mortality tables for a pension plan's funding calculations

Plain-English summary

A single-employer defined benefit pension plan asked the IRS for permission to use its own substitute mortality tables, instead of the IRS standard tables, when calculating the plan's minimum funding obligations under IRC § 430. Substitute tables let a large plan reflect the actual death experience of its own participants, which can change how much the sponsor must contribute each year. The IRS granted the request for one of the sponsor's plans (Plan 2) for up to five plan years starting October 1, 2024, covering combined healthy and disabled male and female populations. The tables were built from the plan's experience study for October 1, 2017 through September 30, 2022, with a 2020 base year. The letter reviews the § 430(h)(3) requirements, spells out the events that would cut the approval short (such as a big change in who is covered, or a plan merger or spinoff), and requires annual actuary certifications. Because of a July 2024 regulation change, the letter notes the sponsor will have to submit a new substitute mortality table for Plan 2 for the plan year beginning October 1, 2026.

Ruling snapshot

• Question: May the plan sponsor use its proposed substitute mortality tables for Plan 2 in making minimum funding computations under IRC § 430?
• Outcome: Approved (for up to 5 plan years beginning October 1, 2024)
• Key authorities: IRC § 430(h)(3); Treas. Reg. § 1.430(h)(3)-2; ERISA § 303(h)(3); Revenue Procedure 2017-55

Full text (IRS public release)

Significant Index No. 0430.00-00

[illegible letterhead]

Date: NOV 0 8 2024

Release Number: 202505025
Release Date: 1/31/2025

Re: Substitute mortality table ruling

Taxpayer = [redacted]
(EIN: [redacted])

Plan 2 = [redacted]
(EIN: [redacted]; Plan No. [redacted])

Other plan in controlled group:

Plan 1 = [redacted]
(EIN: [redacted]; Plan No. [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 ("Code") for the above Plan 2 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 October 1, 2024. 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 ("ERISA").

This approval applies to the following specific populations:

• Combined annuitant and non-annuitant healthy and disabled males
• Combined annuitant and non-annuitant healthy and disabled females

Taxpayer also requests approval for substitute mortality tables for Plan 1, which will be addressed in a separate ruling letter.

Taxpayer previously received two rulings, both dated November 14, 2019, granting the use of substitute mortality tables for Plan 1 and Plan 2 effective for a period up to 5 years beginning with the plan year commencing October 1, 2019. The studies used to construct those tables were based on the experience period from October 1, 2012 to September 30, 2017. Taxpayer has requested approval for substitute tables to take effect immediately following the currently approved period, which ends September 30, 2024.

This request is made in accordance with section 430(h)(3)(C) of the Code, section 303(h)(3) of ERISA, section 1.430(h)(3)-2 of the Treasury Regulations ("Regulations"), and Revenue Procedure 2017-55.

Section 430(h)(3)(A) of the Code states, in relevant part, that "the Secretary shall by regulation prescribe mortality tables to be used in determining any present value or making any computation" under section 430 of the Code.

Section 430(h)(3)(C) of the Code states that "upon request by the plan sponsor and approval by the Secretary, a mortality table which meets the requirements of clause (iii) shall be used in determining any present value or making any computation under this section during the period of consecutive plan years (not to exceed 10) specified in the request,"

Section 430(h)(3)(C)(ii) of the Code states that a substitute mortality table "shall cease to be in effect as of the earliest of—
(I) the date on which there is a significant change in the participants in the plan by reason of a plan spinoff or merger or otherwise, or
(II) the date on which the plan actuary determines that such substitute mortality table does not meet the requirements of clause (iii)," as provided below.

Section 430(h)(3)(C)(iii) of the Code states that "a mortality table meets the requirements of this clause if—"

(I) there is a sufficient number of plan participants, and the pension plans have been maintained for a sufficient period of time, to have credible information necessary for purposes of subclause (II), and

(II) such table reflects the actual experience of the pension plans maintained by the sponsor and projected trends in general mortality experience."

Section 1.430(h)(3)-2(c)(3) of the Regulations states, in relevant part, that "a plan's substitute mortality tables must be generational mortality tables." Additionally, "the base year for the base substitute mortality table is the calendar year that contains the day before the midpoint of the experience study period."

Section 1.430(h)(3)-2(c)(6)(ii) of the Regulations states that "a plan's substitute mortality tables must not be used beginning with the earliest of—"
(A) For a plan using a substitute mortality table for only one gender because of a lack of credible mortality information with respect to the other gender, the first plan year for which there is credible mortality information with respect to the gender that had lacked credible mortality information (unless an approved substitute mortality table is used for that gender);

(B) The first plan year for which the plan fails to satisfy the requirements of paragraph (c)(1) of this section (regarding use of substitute mortality tables for all plans in the controlled group), taking into account the rules of paragraph (f)(3) of this section (regarding the transition period for newly-affiliated plans);

(C) The second plan year following the plan year for which there is a significant change in individuals covered by the plan as described in paragraph (c)(6)(iii) of this section;

(D) The first plan year following the plan year for which a substitute mortality table used for a 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

(E) The date specified in guidance published in the Internal Revenue Bulletin (see § 601.601(d) of this chapter) in conjunction with a replacement of mortality tables specified under section 430(h)(3)(A) and § 1.430(h)(3)-1 (other than changes to the mortality improvement rates under § 1.430(h)(3)-1(b)(1)(iii) or annual updates to the static mortality tables issued as noted in § 1.430(h)(3)-1(c)(1)(iv))."

Section 1.430(h)(3)-2(c)(6)(iii) of the Regulations states, in relevant part, that "a significant change in the individuals covered by a substitute mortality table for a plan year occurs if 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 average number of individuals in that population over the years covered by the experience study on which the substitute mortality tables are based," or "is less than 80 percent or more than 120 percent of the number of individuals covered by the substitute mortality table in a plan year for which a certification described in paragraph (c)(6)(iii)(A) of this section was made on account of a prior change in coverage. However, a change in coverage is not treated as significant if the plan's actuary certifies in writing to the satisfaction of the Commissioner that the substitute mortality tables used by the plan with respect to the covered population continue to be accurately predictive of future mortality of that population (taking into account the effect of the change in the population)."

Section 1.430(h)(3)-2(d)(2) of the Regulations states, in relevant part, "the experience study period must consist of 2, 3, 4, or 5 consecutive 12-month periods, and must be the same period for all populations. . ." Additionally, "the last day of the experience study period must be less than 3 years before the first day of the first plan year for which the substitute mortality tables are to apply. . . . If the plan sponsor submits a request for approval to use of substitute mortality tables more than 1 year (and less than 2 years) before the first day of the first plan year for which the substitute mortality tables are to apply, then the experience study is not treated as failing to satisfy the rule in paragraph (d)(2)(ii)(A) of this section if the last day of the final year reflected in the experience data is less than 2 years before the date of submission."

Section 1.430(h)(3)-2(d)(4) of the Regulations states, in relevant part, that the base mortality rates are determined by multiplying the mortality rate from the standard mortality table by the mortality ratio.

Section 1.430(h)(3)-2(e)(1) of the Regulations states, in relevant part, that if the actual number of deaths is less than the full credibility threshold, then the base mortality rates are determined using a partial credibility weighting factor.

The substitute mortality tables were developed based on an experience study period from October 1, 2017 through September 30, 2022, with a base year of 2020. This satisfies the requirements under sections 1.430(h)(3)-2(c)(3) and (d)(2) of the Regulations.

The substitute mortality tables were developed by adjusting the applicable standard mortality tables in section 1.430(h)(3)-1(d) of the Regulations with the mortality ratio and credibility weighting factors shown below.

Mortality Ratio and Credibility Weighting Factor Table
[Columns: Male combined annuitant and non-annuitant healthy and disabled | Female combined annuitant and non-annuitant healthy and disabled; rows: Mortality Ratio; Credibility Weighting Factor. Individual values redacted/[illegible] in the scanned release.]

These were determined by aggregating annuitant and non-annuitant experience (including disabled participants) for each group.

This approval applies to the following specific populations:

• Combined annuitant and non-annuitant healthy and disabled males
• Combined annuitant and non-annuitant healthy and disabled females

Based on the information provided by the Taxpayer, there are no populations that lack credible mortality experience. Therefore, there are no populations for which the standard mortality tables will be used for calculations under section 430 of the Code.

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 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 2.

Substitute Mortality Tables
Approved for use beginning with the plan year commencing October 1, 2024 for Plan 2
Base year 2020

[Multi-page table listing, for each Age from 1 through 120, the "Male combined annuitant and non-annuitant healthy and disabled" and "Female combined annuitant and non-annuitant healthy and disabled" mortality rates. The individual per-age rate values are not legibly captured in the scanned release and are marked [illegible].]

The above mortality rates were developed based on an experience study period from October 1, 2017 through September 30, 2022, with a base year of 2020.

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 for plan years beginning prior to January 1, 2025; 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.

We also draw your attention to sections 1.430(h)(3)-2(d)(4)(iii) and 1.430(h)(3)-2(g) of the Regulations effective July 31, 2024. The amended sections above describe the circumstances in which the use of a previously approved substitute mortality table would continue to satisfy the requirements of section 1.430(h)(3)-2 of the Regulations for plan years beginning on or after January 1, 2025. Therefore, the new regulation will require a new substitute mortality table to be submitted for Plan 2 for the plan year beginning October 1, 2026.

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). As noted on page 3 of this letter, 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. The following information was submitted by the Taxpayer to demonstrate stability:

[Table: Population | Average Number During Experience Study Period | Number as of September 30, 2023 | Percentage. Rows: Male combined annuitant and non-annuitant healthy and disabled; Female combined annuitant and non-annuitant healthy and disabled. Individual values redacted/[illegible] in the scanned release.]

Since the number of participants in the population as of September 30, 2023 is within 20% of the average number of individuals during the experience study period, Taxpayer has satisfied the stability requirement of section 1.430(h)(3)-2(d)(4)(v) of the Regulations.

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 as of September 30, 2023 and for each plan year beginning with deaths during the plan year ending September 30, 2023 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 September 30, 2023 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 also 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) to the following address:

Internal Revenue Service
Attn: Mr. David M. Ziegler
TE/GE: SE: T-EP:RA:T:A2
IR-6213
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.

This ruling may be revoked or modified retroactively if there was a misstatement or omission of controlling facts, the facts at the time of the transaction are materially different from the controlling facts on which this ruling is based, or the transaction involves a continuing action or series of actions, and the controlling facts change during the course of the transaction.

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.

Pursuant to a power of attorney on file with this office, a copy of this letter ruling is being sent to your authorized representative. Additionally, a copy of this letter ruling is being sent to the Manager, Classification Group 4 in Houston, Texas.

If you have any questions concerning this matter, please contact [redacted] (ID# [redacted]) at [redacted].

Sincerely,
David M. Ziegler, Manager
Employee Plans Actuarial Group 2

Enclosures:
Notice 437, Notice of Intention to Disclose (Rulings)
A deleted copy of the ruling

cc: Manager, Classification Group 4, Houston, TX