The Internal Revenue Service (IRS) has recently released the regulations on mortality tables for 2024. This has gained a lot of attention from plan sponsors as these regulations play a significant role in calculating benefits for qualified retirement plans. Plan sponsors need to stay compliant with these regulations to avoid penalties and provide fair and just benefits to their plan participants. Let’s take a closer look at what we can expect from 2024’s mortality tables.
The Importance of Mortality Tables
Mortality tables are mathematical models used to calculate life expectancy and also the benefits for qualified retirement plans. Because of this, plan sponsors must use mortality tables to ensure they remain compliant with the latest IRS regulations. This update correlates with increased life expectancies among plan participants and better reflects modern life expectancies.
Understanding the Newest Mortality Tables
The new regulations shift the basis for the tables from the RP-2014 mortality tables to the Pri-2012 tables, accompanied by an adjusted version of the MP-2021 mortality improvement scale. This adjustment is essential to reflect the impact of COVID-19 on mortality rates.
The release of these regulations also addresses concerns about the potential distortion of future mortality expectations due to the temporary increase in mortality COVID-19 caused. To counteract this, the IRS has proposed an adjustment to the method for developing substitute mortality tables. Plan sponsors and actuaries need to submit these substitute tables to the IRS for approval before use.
The regulations establish generally applicable mortality tables for both men and women, as well as for annuitants and non-annuitants. Expected mortality improvements can be reflected through either static projections or fully generational projections. However, for small plans with 500 lives or fewer, only static tables will be allowed for valuations in 2024. These static tables will approximate the generational tables and will be combined into a blended static table for all participants.
The IRS acknowledges that in cases where gender information is unavailable, a reasonable approach must be used when applying mortality rates. This can involve using a weighted average liability based on the gender distribution of available data or randomly assigning a gender based on the same distribution.
For plan-specific mortality tables, also known as substitute tables, the IRS allows their use under certain conditions. The proposed regulations address the concern that the number of deaths due to COVID-19 during certain years may be overstated and not predictive of post-COVID experience. To account for this, adjustment factors will be applied to the expected number of deaths from 2020 to 2023.
The Impact of 2024’s Mortality Tables
The updated mortality tables are expected to have a slight impact on liabilities. The specific effect will vary depending on the plan design, demographics, and the use of static or generational tables. Overall, liabilities are anticipated to decrease by one to two percent when transitioning from static mortality to updated generational mortality.
While the measurement of plan benefits will change, the cost of the plan itself will not if benefits are paid in annuity form. However, plans that allow lump sums or other distribution options subject to Section 417(e) may see slightly decreased benefits due to the new applicable mortality table. Additionally, the restrictions imposed by Section 436 on certain payment options may be affected by the changes.
Plan sponsors need to follow the new regulations to avoid costly penalties. Firstly, plan sponsors should update their plan's mortality tables and review any changes in interest rates. They should ensure they are using the latest mortality tables to calculate benefits to avoid providing an outdated amount. Plan sponsors should also review their plan document language and make sure it aligns with the latest regulations.
Remember, to help you navigate these changes, RPCSI offers comprehensive, timely, high-quality administrative and technical services. Our team is committed to providing industry-leading consulting, administration, and record-keeping services for all types of qualified retirement plans. Don't hesitate to contact us to learn more about how RPCSI can help you stay compliant with the latest regulations and update your plan to meet your goals.