New Rule Revises Present Value Calculations for Pension Distributions

The IRS issued a final rule on Jan. 19 to update present value calculations for pension distributions.

The rule took effect immediately. It will apply to pension distributions with annuity starting dates on or after Oct. 1.

We’ve gathered a group of articles on the news from SHRM and other trusted sources.

Mortality Discount

If a pension permits a distribution as a single lump sum, the benefit must satisfy a minimum present value requirement. Typically, the present value calculation reflects an interest discount and a mortality discount, and there are legal limitations on the calculation of these discounts. The mortality discount reflects the probability of some plan participants dying before distributions start.

The new regulations clarify that the mortality discount for the pre-retirement period is generally applied to employer-provided accrued benefits, but not to employee-provided accrued benefits. Thus, for defined-benefit plans that include employee contributions, the minimum present value must be calculated by bifurcating the benefit into the employer and employee components, and calculating the present values of each.

(Groom Law Group)

Revised Mortality Tables

A mortality table displays the rate of deaths in a population during a certain time period or survival from birth to a given age. The mortality tables under the Internal Revenue Code (IRC) are used to determine a pension plan’s minimum funding requirements and other funding-related purposes.

The IRS is required to release new tables at least every 10 years to reflect the actual mortality experience of pension plans and projected mortality trends. The IRS issued new mortality tables in October 2023, which show no mortality improvement for 2020 through 2023 to approximate the effect of the COVID-19 pandemic. The new tables generally will decrease minimum lump sums for pension recipients.

(Mercer)

Pension Protection Act

The new regulations reflect the statutory changes the Pension Protection Act made, including the new interest rates and mortality tables set forth in IRC Section 417(e)(3) and the exception from the valuation rules for certain pension plans.

(American Society for Pension Professionals & Actuaries)

Normal Retirement Age

Every defined-benefit plan is designed with a formula that determines the benefit to be paid starting at a set time, known as normal retirement age. Typically, ERISA and the IRS Code provide that the normal retirement age may not be greater than age 65.

About 16 percent of employers offered a traditional defined benefit pension open to all employees in 2023, while 7 percent offered a traditional defined benefit pension that’s frozen for current employees or not open to new hires, according to the SHRM Employee Benefits Survey.

(SHRM Research and SHRM Toolkit)