The Society of Actuaries’ (SOA) new Scale MP-2019 mortality improvement rates will lead to lower liabilities compared to the previous versions. Along with the improvement scale, the SOA’s Retirement Plans Experience Committee (RPEC) also released a set of new mortality tables, Pri-2012, both on October 23rd. The new tables and improvement scale may be used for financial reporting purposes now. The improvement scale is expected to be used in 2021 for PBGC, lump sum, and cash funding calculations.
Pri-2012 Mortality Tables
The Pri-2012 tables are the most recent private mortality tables released by the SOA since the RP-2006 tables. The SOA estimates that most plan liabilities will fall within 1.0% (up or down) of the liability they would have seen under the RP-2006 tables. The new tables were developed using data from 2010-2014 and reflect the RPEC’s commitment to update the base mortality tables every five years.
When compared to the RP-2006 tables, life expectancy for a 65 year old female remains at 87.4, while the life expectancy of a 65 year old male decreased from 85.0 to 84.7.
The new Pri-2012 tables are based on more
multiemployer data compared to the prior tables. Mortality experience under
multiemployer plans did not differ significantly from experience in single
employer plans. The SOA determined that job classification (blue-collar and
white-collar) is an increasing forecaster of mortality and more indicative of
future experience than benefit amount.
The SOA identified that surviving
beneficiaries had higher mortality than the general population and created
separate mortality tables for this demographic with the Pri-2012 tables update.
MP-2019 Mortality Improvement Scale
The new mortality improvement scale MP-2019
is based on historical U.S. population mortality. This continues to fulfill the
RPEC’s pledge to update the improvement scales annually.
Consistent with all prior updates since the first table (MP-2014) was released, the MP-2019 improvement scale will reduce liabilities for pension plans compared to the MP-2018 improvement scale. The SOA estimated that pension obligations will typically be 0.3% to 1.0% lower when compared to using Scale MP-2018.
According to the study, the observed age-adjusted mortality rate increased slightly from the prior year, yet it is fairly level relative to the last several years. Also, the age-adjusted mortality improvement rate averaged just 0.3% per year from 2010 to 2017, compared to 0.5% that was observed in the prior study from 2009 to 2016.
Implications for Pension Plans
Pri-2012 may be adopted for financial
accounting disclosures and pension expense purposes. The adoption of the new
tables will likely result in little change to liabilities. We expect plan
sponsors will generally adopt the Pri-2012 tables to replace the RP-2006 tables.
Plan sponsors who have updated their
improvement scale annually will generally adopt the MP-2019 improvement scale.
As noted, it is expected to lower liabilities, and thus will result in lower
We do not expect that the minimum funding calculations, PBGC premiums, and lump sum calculations will use the Pri-2012 table in the near future. However, the 2021 plan year will likely incorporate the MP-2019 scale based on the currently proposed intent from the IRS. Absent any other changes, this update will result in lower funding liability, PBGC liability and lump sum amounts for pension plans in that plan year.
More information regarding the Pri-2012 mortality table and the Scale MP-2019 mortality improvement scale release can be found on the Society of Actuaries’ website links above.
Almost all pension plans are subject to certain compliance
tests that are outlined by the IRS. The compliance requirements are in place to
make sure that if a plan sponsor’s contributions to a pension plan are
deductible for tax purposes, then the pension plan’s benefits must not be
designed too heavily in favor of the highest paid employees.
set of compliance rules for most pension plans are the minimum participation
requirements. As some defined benefit pension plans continue operating, these
rules are causing compliance concerns.
Minimum Participation Rule Details
Under Internal Revenue Code (IRC) Section 401(a)(26), a defined benefit pension plan must benefit a minimum of
50 employees or
40% of the employees of the employer.
If the pension plan is not benefiting any highly compensated
employees (HCEs), it automatically satisfies the rule.
HCE is generally determined as an individual earning more than a specified dollar threshold established by the IRS for the prior year. This dollar limit is $125,000 based on 2019 earnings to determine HCEs for the 2020 year. All others are considered non-highly compensated employees (NHCEs).
Today, many pension plans have been “partially frozen” for
years, which means they have benefits accruing only for a specified group of
employees. As time passes and ordinary turnover and retirement occur, the
number of employees that accrue benefits in these defined benefit pension plans
Although the original purpose was to provide “meaningful” benefits to employees across the plan sponsor’s organization, these requirements are now causing accruals to be shut off as some plans approach and fall below the minimum threshold of employees accruing benefits.
For the affected employees, it comes at a time close to retirement age when their promised pensions, by design, would be accumulating at the highest rates, and defined contribution style benefits, like 401k plans, can’t realistically replace all lost future accruals.
Do Nothing and Wait
We can hope that legislative relief will be passed
to eliminate the participation issues. However, Congress has considered
addressing these issues over the last 5 to 7 years, and no movement towards
enacting relief rules has been seen yet.
Merge Pension Plans
This provides immediate relief to minimum
It could be a temporary solution if the benefits
are also partially frozen across the combined defined benefit pension plan.
Review the demographics to project how long this solution will last when
weighing the advantages of this strategy for your situation.
Open the Pension Plan
Reopen the pension plan to additional
participants. (Yes, this could make sense!)
More employees will be benefiting and eliminate minimum
participation rule issues.
New plan participants can receive a different
formula (something similar to the current plan formula but reduced, cash
balance formula, variable annuity formula, etc.)
Consider if recruiting or employee retention
issues can be reduced or alleviated by designing new pension benefits for
targeted employee groups.
This can be designed to help bridge the time
until the potentially affected employees reach retirement age.
Watch the mix of HCEs and NHCEs because the additional
pension benefit design still needs to satisfy other IRS coverage,
nondiscrimination, and design-based compliance rules.
Freeze Remaining Pension
The freeze can be for all participants or only for current and future HCEs.
Replacement benefits can be provided to address employee retention and retirement readiness issues.
Provide projected lost benefits as cash payment(s).
Executive employees can have some or all lost benefits replaced in a nonqualified deferred compensation plan or other executive compensation arrangement.
Design partial replacement benefits in a 401k plan.
Consider the impact of the pension plan freeze on other sponsored benefit plans. For example, are there benefits that are automatically available, or not available, based upon whether an employee is accruing benefits in the pension plan?
Curtailment accounting rules are triggered which may require an additional one-time expense to be recognized through income in the year of the benefit freeze.
There are many valid business reasons that explain why a plan sponsor would want to stop pension accruals for everyone except a specified group. We know the IRS rules were not intended to cause the loss of benefits for employees late in their careers. Regardless, several pension plan sponsors are at the point where their partially frozen pension plans are close to becoming noncompliant. While we continue to wait for legislative relief for this issue (that may never come), if you sponsor a partially frozen pension plan, you should determine when this will become an issue for you. Begin discussing possible strategies, and have an approach in place well ahead of time to minimize the disruption to your organization as much as possible.
How will defined benefit pension plans fare as a result
of the 30-year U.S. Treasury bond rates falling below 2.00% for the first time
in U.S. history? This 100 basis point drop from the beginning of the year and
the fact that U.S. Treasury bond rates of all durations are down significantly
from the beginning of the year, have pension plan sponsors, CFOs, and actuaries
alike, taking an in-depth look at the financial impact.
Will Record Low Treasury Bond Rates Impact Your Company’s Defined Benefit Plan?
Due to the long-term benefit structure of pension plans, their
liabilities produce high duration values that are particularly sensitive to
movement in long-term interest rates. For instance, a standard frozen pension
plan may have a duration of 12 which indicates that a decrease in the discount
rate of 100 basis points would produce a 12% increase in liabilities.
Under U.S. GAAP and International Accounting Standards,
pension liabilities are typically valued using a yield curve of corporate bond
rates (which have high correlation to treasury bond rates) to discount
projected benefit payments. Current analysis shows that the average discount
rate has decreased over 100 basis points from the beginning of the year using
this methodology. Assuming all other plan assumptions are realized, the larger
liability value caused by the decrease in discount rates will drive up the
pension expense and cause a significant increase in the company’s other
comprehensive income, reflecting negatively on the company’s financial
What If We Want
to Terminate our Pension Plan in the Near Future?
For companies that
are contemplating defined benefit pension plan termination, there will also be
a significant increase in the cost of annuity purchases. The actual cost difference
depends on plan-specific information; however, an increase of 10-20% from the
beginning of the year would not be out of line with the current market. This
can be particularly problematic for companies who have already started the plan
termination process. Due to the current regulatory structure of defined benefit
pension plan terminations, companies must begin the process months before the annuity
contract is purchased. Their decision to terminate is based on estimated
annuity prices which could be significantly different than those in effect at the
time of purchase.
in Lump Sum Payment Value and PBGC Liabilities
consequences of record low treasury bond rates include growth in the value of
lump sum payments and PBGC liabilities. Minimum lump sum amounts must be
computed using interest rates prescribed by the IRS in IRC 417(e)(3) which are
based on current corporate bond yields. PBGC liabilities are also determined
using these rates (standard method) or a 24-month average of those rates
(alternative method). If current interest rates hold, lump sums paid out during
2020 will likely be 10-15% higher than those paid out in 2019 for similarly
situated participants. In addition, there would be a corresponding increase in
the liability used to compute the plan’s PBGC premium. In 2020, there will be
an estimated 4.5% fee for each dollar the plan is underfunded on a PBGC basis.
Depending on the size and funding level of the plan, the spike in PBGC
liability may correspond to a significant increase in the PBGC premium amount.
You Can Take to Mitigate the 2020 Financial Impact
There is potential to help mitigate the financial impact for
2020 by taking action now. Since lump sum payments are projected to increase
significantly in 2020, offering a lump sum window to terminated vested or retired
participants during 2019 could be a cost effective way to reduce the overall
liability of the plan.
to the plan in excess of the mandatory required amount will help offset rising
PBGC premiums since the premium is based on the underfunded amount, not the
total liability. Additional contributions would also help offset the increase
in pension expense.
The best advice we can offer at this time is to discuss these implications internally and with your service providers. Begin a dialogue with your investment advisors about the potential need to re-evaluate the current strategy due to market conditions. Contact your plan’s actuary to get estimated financial impacts so you can plan and budget accordingly. If your plan has recently begun the plan termination process, you may need to reconvene with decision-makers to make sure this strategy is still economically viable.
For more information, you can utilize Findley’s Pension Indicator to track
the funded status of a variety of plan types each month. To learn more about
how falling interest rates may impact your plan specifically contact your
Findley consultant or Adam Russo at firstname.lastname@example.org or
If a single employer overfunded pension plan is terminating and its participants and beneficiaries are on track to receive full benefits, the plan sponsor will likely ask if the excess is theirs. In other words, will the surplus revert to the plan sponsor? The answer is maybe.
To determine how excess plan funds can
be exhausted, which may include a reversion to the plan sponsor, there are 7
possibilities to consider. As always, the place to start with any retirement
plan issue is to answer the question: what does the plan say?
Consider if the Terminating Plan Document does not Permit a Reversion
A plan document may state that no part of the plan’s assets can be diverted for any purpose other than for the exclusive benefit of participants and beneficiaries. The plan may also indicate that the plan cannot be amended to designate any part of the assets to become the employer’s property. If an overfunded pension plan has these provisions, it is tempting to assume the only choice is to allocate the excess among participants and beneficiaries. However, even in the face of these explicit provisions, there may be other provisions that permit an employer to recover or use a portion of the excess assets.
1 and 2 – Return of Mistaken and Nondeductible Contributions
Plan documents generally indicate
that if an employer makes an excessive plan contribution due to a mistake, the
employer can demand the surplus is returned. The employer is required to
request this from the trustee within one year after the contribution was made
to the trust. In addition, plans generally provide that a contribution is made
on the condition that the employer receives a corresponding tax deduction. In
the unlikely event that the deduction is not permitted by the IRS, the
contribution can be returned to the employer within one year following the IRS’
final determination that the tax deduction was not allowed.
An example of a contribution mistake may be an actuarial calculation error. In a 2014 Private Letter Ruling, the IRS considered a surplus reversion when a terminating single employer plan purchased an annuity contract. The excess assets were created when the purchase price selected to fully fund plan benefits actually came in at a lower price than estimated. Using reasonable actuarial assumptions, the plan’s actuary had advised the employer to contribute a higher amount than was ultimately calculated as necessary by the insurance company. In this case, the IRS permitted the return of the mistaken excess contribution.
3 – Have all Reasonable Plan Expenses Been Paid from the Trust?
Many plan documents provide that
plan expenses can be paid from the trust. In some instances, appropriate and
reasonable plan termination expenses will go a long way to exhaust excess
assets. Reasonable plan termination expenses include determination letter costs
and fees, service provider termination charges and termination implementation
charges such as those for the plan audit, preparing and filing annual reports,
calculating benefits, and preparing benefit statements.
Possibilities to Consider if the Terminating Plan
Document Permits a Reversion
The overfunded pension plan may explicitly state that excess assets, once all of the plan’s obligations to participants and beneficiaries have been satisfied, may revert to the plan sponsor. On the other hand, the plan may not explicitly permit a reversion. In that case, the plan sponsor may want to consider amending the plan to allow a reversion well ahead of the anticipated termination.
4 – Take a Reversion
If the first three possibilities do not work or are inadequate to exhaust the surplus, and the overfunded pension plan allows a reversion, there are three more possibilities. In the first, the employer takes all. The employer can take all of the excess funds back subject to a 50% excise tax, as well as applicable federal tax. Notably, a not-for-profit organization may not be subject to the excise tax on the reversion at all if it has always been tax-exempt.
Possibility 5 – Transfer the Excess to a Qualified
The opportunity to pay only a 20% excise tax (and any applicable federal tax) on part of the surplus is available where the remaining excess assets are transferred from the terminating pension plan to a newly implemented or preexisting qualified replacement plan (QRP). A QRP can be any type of qualified retirement plan including a profit sharing plan, 401(k) plan, or money purchase plan. For example, an employer’s or a parent company’s 401(k) plan, whether newly implemented or preexisting, may qualify as a qualified replacement plan.
Once an appropriate plan is chosen, the amount transferred into the QRP must be allocated directly into participant accounts within the year of the transfer or deposited into a suspense account and allocated over seven years, beginning with the year of the transfer.
additional requirements for a qualified replacement
plan. At least 95% of the active participants from the terminated plan who
remain as employees must participate in the QRP. In addition, the employer is required
to transfer a minimum of 25% of the surplus into a qualified replacement plan
prior to the reversion. If all of the QRP requirements are satisfied, then only
the amounts reverted to the employer are subject to a 20% excise tax and
federal tax, if applicable.
Possibility 6 – Provide Pro
Rata Benefit Increases
If the employer chooses not to use a QRP, it can still limit
the excise tax if it takes back 80% or less of the surplus and provides pro
rata or proportionate benefit increases in the accrued benefits of all
qualified participants. The amendment to provide the benefit increases must
take effect on the plan’s termination date and must benefit all qualified
participants. A qualified participant is an active participant, a participant
or beneficiary in pay status, or a terminated vested participant whose credited
service under the plan ended during the period beginning 3 years before
termination date and ending with the date of the final distribution of plan
assets. In addition, certain other conditions apply including how much of the
increases are allowed to go to participants who are not active.
A Possibility That’s Always Available
7 – Allocate all of the Excess Among Participants and Beneficiaries
It is always possible to allocate all
of the excess assets among participants in a nondiscriminatory way that meets
all applicable law. A plan amendment is necessary to provide for these higher
You may know at the outset of terminating your plan that
there will be excess assets. On the other hand, a surplus may come as a
surprise. Even if a pension plan is underfunded at the time the termination
process officially begins, it is possible that the plan becomes overfunded
during the approximate 12 month time period to terminate the plan. In this
scenario, the plan sponsor will have to address what to do with the excess
Dealing with the excess assets in a terminating defined
benefit plan can be a challenge. There are traps for the unwary, and
considerations beyond the scope of this article. Plan sponsors need to
determine first how the excess was created, because the answer to that question
may determine what happens to it. If there is no obvious answer in how to deal
with the surplus, then the plan sponsor needs to look at all of the
possibilities. It may be that a combination of uses for the excess plan assets
is best. If you think you will find yourself in this situation with your
defined benefit plan, consult your trusted advisors at your earliest
opportunity so that you know the possibilities available to you.
Questions on your defined benefit pension plan’s possibilities? Need help navigating your options? Please contact Sheila Ninnenam in the form below.
Equity markets have rallied in early 2019
and the losses from December 2018 have all but been erased. Interest rates
haven’t recovered to the November, 2018 high, but the funded status for most
pension plans has rebounded. Findley’s April 2019 Pension Indicator
shows how the funded status of pension plans has improved since year-end 2018.
With all of this volatility, plan sponsors
that started planning for a plan termination in early 2018, and monitored the
improving funded status of the plan, may have taken some steps to help mitigate
the impact of a market downturn. In this case, a plan sponsor which hedged the
assets to better match the liabilities prior to December experienced only about
a 2% reduction in the plan’s funded status during December. In addition, even
though a hedged plan following an LDI investment approach hasn’t seen a great
improvement in funded status from the market rebound, it still has a better
funded percentage than plans with other investment strategies.
The lesson is most plan sponsors probably don’t really know how close (or far) the plan is or was to being financially ready for a plan termination. And, as the adage goes, “failure to plan is a plan to fail.”
Planning is Fundamental to Success
To help plan sponsors understand this
volatility and how to manage it, Findley has developed a process to help plan sponsors
prepare for a plan termination. (See Findley’s article “Mapping Your Route to Pension Plan
Termination Readiness”). The plan termination process itself requires
many steps, but there are also steps that a plan sponsor can take prior to
beginning a plan termination to be better prepared. Whether plan termination is
1, 5, or 10 years away, planning is critical.
Taking a closer look at plan’s financial
readiness, there are a few topics plan sponsors should explore:
the plan’s investment strategy,
the benefits of de-risking strategies, and
a formalized contribution policy.
Reviewing these financial topics early and
monitoring them periodically can help plan sponsors achieve plan termination
financial goals in a more orderly and predictable way.
Knowing the time horizon, identifying data
issues, and reviewing the plan document are other areas to include in your
readiness planning. Findley’s Rapid MapTM process helps
plan sponsors take a project management approach to all of these aspects of
getting ready for a plan termination.
If you are contemplating plan termination, consider
taking advantage of this early 2019 rebound. Planning early for a plan
termination can have a positive long-term effect on the point in time when your
plan is ultimately ready to terminate. Take steps now to put a process in place
to regularly monitor your plan’s funded status. Spending time now can reap
rewards and potentially mitigate the negative outcomes from future market
Questions? Contact the Findley consultant
you normally work with, or Larry Scherer at Larry.Scherer@findley.com, or 216.875.1920.
January 2019 15 Due date to make fourth required quarterly contribution for 2018 plan year 31 Last day to file Form 945 to report withheld federal income tax from distributions 31 Last day to furnish Form 1099-R to recipients of distributions during 2018 calendar year
February 2019 28 Last day to file Form 1096 and Form 1099-R on paper with the IRS
March 2019 31 Deadline for enrolled actuary to issue AFTAP certification for current year to avoid presumption for benefit restrictions (if applicable)
April 2019 01 Presumed AFTAP takes effect unless and until enrolled actuary issues certification of AFTAP for current plan year (if applicable). 01 Last day to pay initial required minimum distributions to applicable plan participants 01 Last day to file Form 1099-R electronically with the IRS 15 Due date to make first required quarterly contribution for 2019 plan year 15 Last day to file financial and actuarial information under ERISA section 4010 with PBGC (if applicable) 15 Last day for C corporation employer plan sponsors to make contributions and take tax deduction for 2018 without corporate tax return extension 30 Last day to furnish Annual Funding Notice (for plans covered by PBGC that have more than 100 participants)
May 2019 01 Last day to provide notice of benefit restrictions, if restrictions are applicable as of April 1, 2019
July 2019 15 Due date to make second required quarterly contribution for 2019 plan year 29 Last day to furnish Summary of Material Modifications (SMM) to participants and beneficiaries receiving benefits 31 Last day to file Form 5500 for 2018 without extension. 31 Last day to file Form 8955-SSA without extension 31 Last day to provide a notice to terminated vested participants describing deferred vested retirement benefits (in conjunction with Form 8955-SSA) 31 (or the day Form 5500 is filed, if earlier) – Last day to furnish Annual Funding Notice (for PBGC covered plans with 100 or fewer participants without extension) 31 Last day (unextended deadline) to file Form 5330 and pay excise tax on nondeductible contributions and prohibited transactions (if applicable)
September 2019 15 Last day to pay balance of remaining required contributions for 2018 plan year to satisfy minimum funding requirements. 30 Last day to furnish Summary Annual Report to participants and beneficiaries (for non-PBGC covered plans) 30 Last day for enrolled actuary to issue AFTAP certification for current plan year
October 2019 01 If enrolled actuary does not issue AFTAP certification for plan year, then AFTAP for plan year presumed to be less than 60 percent and plan will be subject to applicable benefit restrictions. 15 Last day to file Form 5500 (with extension) 15 Last date to file Form 8955-SSA (with extension) 15 Last day to provide a notice to terminated vested participants describing deferred vested retirement benefits (in conjunction with Form 8955-SSA) 15 Due date to make third required quarterly contribution for 2019 plan year 15 Last day to file PBGC comprehensive PBGC premium filing and pay premiums due (for plans covered by PBGC) 31 Last day to provide notice of benefit restrictions, if restrictions are applicable as of October 1, 2019
December 2019 15 Last day (with extension) to furnish Summary Annual Report (for non-PBGC covered plans) 31 Last day for enrolled actuary to issue a certification of the specific AFTAP for current year if a range certification was previously issued 31 Last day for plan sponsors to adopt discretionary plan amendments that would be effective for the current plan year
*This calendar is designed to provide a general overview of certain key compliance dates and is not meant to indicate all possible compliance dates that may affect your plan.
Trying to nail down the financial aspect of being ready to
terminate a pension plan is like trying to hit a moving target. And, unfortunately,
it is not the only consideration to determine if your pension plan is ready to
terminate. A qualified plan termination is a multi-step, government-regulated
process. It involves multiple parties, requires accurate participant data and
benefit information, and includes managing the resources and messaging for
several required communications with plan participants. It also requires
leadership involvement and effective change management to determine a
successful implementation strategy. Assessing the status of all these aspects
will lead to the successful execution of a termination strategy that is
predictable and efficient.
Terminating a plan is not something most organizations do
more than once. So it is unlikely that you have a prior project plan saved on
your company network. Typical project management approaches will require months
to coordinate all the people involved and all the decisions that need to be
approach, as an alternative to typical project planning, can dramatically
accelerate the process.
Determine Your Destination:
Gather Background Data and Assess Current Status
The first phase of your process should focus on developing
some financial projection analyses and assessing the current status of the
plan. This will give stakeholders a baseline understanding of your time
horizon, the biggest areas you will need to focus on to get ready, and the
capacity of your team to take on tasks related to the termination.
A fully funded plan, measured on a termination basis, is a
moving target with several factors that influence the funded level over time (asset
returns, cash contributions, interest rates, etc.). Actuarial analytics,
projections, and interactive scenarios, that can be modeled with a tool like
Findley’s PlanTermTM Financial Modeler, show how possible future
economic conditions could affect your plan and will provide critical data for
stakeholders to understand which variables have the most impact, and how they
Outside of the financial aspect, a review of the plan
document provisions and compliance and an assessment of historical data will
uncover any additional work needed.
Plan Your Itinerary:
Define Your Objectives by Leveraging a Collaborative Session
Defining your multi-year strategy requires key leadership
engagement and effective change management. C-suite leaders understand the
importance of this preparation but are often challenged to find the time
required for the typical strategic planning approach. To overcome this, a
compressed planning session, like Findley’s Rapid MapTM session, can
be used to form the basis of the strategic plan and build consensus around the
priorities and action items.
A trained facilitator addresses important issues connected
to the plan termination process in a systematic and focused manner. The Rapid
MapTM approach is a proven technique used to:
Reach decisions on strategic objectives in a compressed timeframe. In the course of one afternoon, the process can be used to develop and prioritize objectives related to the plan’s readiness to terminate.
Build consensus among the many stakeholders. Internally, this group of stakeholders is likely to include key members of your executive, finance, and HR teams. Externally, it also may involve your investment advisors, annuity consultants, actuaries, third party benefit administrators, and ERISA legal counsel.
Outline key communications priorities. There are many required communications that must be sent over the course of the plan termination. It is important to discuss a communication strategy that includes the timing, target audiences, key messages to be delivered, who will deliver those messages, and the communication channels you will use.
The trained facilitator will lead a prioritizing activity to
define and map out the top goals and objectives that become part of your
strategic plan. Action steps are then refined in the last phase.
Start Your Trip:
Create, Implement, and Monitor Your Multi-Year Strategic Plan
In this final phase, project leaders manage the multi-year
milestones and implement the change management strategy developed in the
planning session. Once the strategic plan is set, a detailed change management
project plan defines each year’s implementation steps and timing. Monitoring
actual vs. forecast experience begins immediately and continues throughout the
course of the multi-year strategic plan. The interactive forecast modeling tool
established in the first phase becomes a key tool for ongoing monitoring of
financial readiness to terminate, and will also indicate if economic conditions
are causing time horizon changes.
While waiting for the plan to be financially ready to
terminate, use the time to tackle other objectives identified during the
planning session. This might include research into historical data sources,
finalization of any benefits that are not already certified, and locating lost
participants. You may also need to engage an annuity consultant or identify a
partner to outsource some or all of the administrative functions to handle the
expected increase in volume.
Plan termination communications can also be tackled during
this time. Effective communications will make sure participants are
well-informed about their decisions while helping to anticipate and alleviate
concerns. Be sure to leverage the opportunity to tailor the messaging and
layout of the required notices to be consistent with your company or benefit
Once the plan termination has begun, the steps in the
process are defined by several governmental agencies, and each step has
specific timing requirements that make all of the steps interrelated. So, once
you start, you need to be ready to progress through the steps at a regular
To make the plan termination process run predictably,
smoothly, and most efficiently, the best approach is to assess your readiness
well ahead of time and have a strategic plan and process in place.
Questions? For additional information about developing or enhancing your strategic plan, contact the Findley consultant you normally work with, or Colleen Lowmiller at Colleen.Lowmiller@findley.com, 216.875.1913.
Retirement and health and welfare plan sponsors have a relatively short list of employee benefit changes that begin on or around January 1, 2019. However, some changes were announced so long ago that they could be easily forgotten; here’s a refresher.
For Sponsors of Disability Welfare Plans and Retirement Plans that Provide Disability Benefits
New claims procedures regulations for disability benefits claims, after multiple delays, have finally been set. The Department of Labor (DOL) requires that the new procedures apply to disability claims that arise after April 1, 2018. The rules generally give disability benefit claimants the same level of procedural protections that group health benefit claimants have after the enactment of the Affordable Care Act (ACA). Its aim is to protect disability claimants from conflicts of interest; ensure claimants have an opportunity to respond to evidence and reasoning behind adverse determinations; and increase transparency in claims processing.
What Do Plan Sponsors Need to Do
For most plan sponsors, ERISA claims procedures are described in their summary plan descriptions. That means that the new disability benefit claims procedures require a summary of material modifications. Certain other plan sponsors will want to consider amending their plans to provide that the disability determination under their plan is made by a third party, such as the Social Security Administration or their long-term disability benefits insurer. Plan sponsors are advised to adopt any necessary amendments on or before the last day of the plan year that includes April 2, 2018. For calendar year plans, the amendment deadline is December 31, 2018.
For Sponsors of Retirement Plans
Both the December 2017 Tax Cuts and Jobs Act (TCJA) and the February 2018 Bipartisan Budget Act (BBA) made important changes to hardship withdrawals, which can be provided in 401(k), 403(b), and 457(b) retirement plans. The TCJA change made hardship withdrawals more difficult to get for casualty losses, because the damage or loss must be attributable to a federally declared disaster. For more information see our article here. BBA changes generally make hardship withdrawals much more attractive and easier to administer by eliminating certain hurdles for plan participants.
What Changed for Plan Participants
Plan participants no longer need to take the maximum available loan under the plan before requesting a hardship withdrawal for plan years beginning in 2018 (January 1, 2018 for calendar years). Effective on the first day of the applicable plan year beginning in 2019 (January 1, 2019 for calendar year plans), BBA eliminated the rule requiring that employees who take a hardship distribution must cease making salary deferrals for six months. In addition, BBA created a new source of funds for hardship withdrawals— any interest earned on salary deferrals. These hardship withdrawal changes are described here.
What Do Plan Sponsors Need to Do
The TCJA change to hardship withdrawals is an administrative one that impacts internal procedures. However, BBA changes to hardship withdrawals are likely to require a plan amendment to be adopted on or before the end of the 2019 plan year (December 31, 2019 for calendar year plans), and a summary of material modifications to be issued soon thereafter.
402(f) Special Tax Notices
On September 18, 2018, the Internal Revenue Service (IRS) issued updated model notices to satisfy the requirements of Internal Revenue Code (Code) Section 402(f). The modifications are the result of the TCJA, which extended the time within which a participant can roll over the amount of a plan loan offset to effect a tax-free rollover of the loan offset amount. The new extended period applies to accrued loan amounts that are offset from a participant’s account balance at either plan termination or the termination of employment. A detailed description of these changes and links to the new model notices can be found here.
Defined Benefit Plan Restatements
In March 2018, the IRS released Announcement 2018-15, stating that it intends to issue opinion and advisory letters for preapproved master and prototype (M&P) and volume submitter (VS) defined benefit plans that were restated for plan qualification requirements listed in the 2012 Cumulative List. An employer that wants to use a preapproved document to restate its defined benefit plan will be required to adopt the plan document on or before April 30, 2020.
403(b) Plan Restatements
The deadline to restate preapproved 403(b) M&P and VS plans is March 31, 2020, according to Revenue Procedure 2017-18. 403(b) plans can be sponsored by a tax-exempt 501(c)(3) organization (including a cooperative hospital service organization defined under Code Section 501(c)), a church or church-related organization, and a government entity (but only for its public school employees). For more detailed information, see our article here.
On September 28, 2018, the IRS issued Revenue Procedure 2018-52, which provides that beginning April 1, 2019, the IRS will accept only electronic submissions to its Voluntary Compliance Program (VCP) under the Employee Plans Compliance Resolution System (EPCRS). The new procedure modifies and supersedes Revenue Procedure 2016-51, which most recently set forth the EPCRS, a comprehensive system for correcting documentary and operational defects in qualified retirement plans. Revenue Procedure 2018-52 provides a 3-month transition period beginning January 1, 2019, during which the IRS will accept either paper or electronic VCP submissions.
2019 Plan Limits
In Notice 2018-83, the IRS issued the cost-of-living adjusted limits for tax-qualified plans. A number of these limits were increased from 2018 levels. For a detailed listing of these limits, see our article here.
For Sponsors of Health Plans
The IRS issued Revenue Procedure 2018-34 in May 2018, which sets the 2019 affordability threshold for the ACA employer mandate at 9.86 percent. Coverage is affordable only if the employee’s contribution or share of the premium for the lowest cost, self-only coverage for which he or she is eligible does not exceed a certain percentage of the employee’s household income (starting at 9.5 percent in 2014, and adjusted for inflation). See our detailed article here.
For Sponsors of High Deductible Health Plans (HDHPs)
In May 2018, the IRS announced in Revenue Procedure 2018-30 the 2019 limits for contributions to Health Savings Accounts (HSAs) and definitional limits for HDHPs. These inflation adjustments are provided for under applicable law. For a more detailed description of the increases, see our article here.
What Do Plan Sponsors Need to Do
Plan sponsors should review their employee benefit plans to determine if any of them are affected by the changes listed above.
If stakeholders in a government entity’s pension plan were told that the plan is actuarially sound, they would probably believe that a simple, clear definition of actuarial soundness is known and understood by all actuaries and that every actuary would agree that the plan is in good financial shape. But a word or phrase can have different meanings depending on the context, and actuarially sound is no exception. This article examines how the simple phrase “actuarially sound” can be a source of confusion for government entity stakeholders, and it provides more specific questions to follow the first critical follow-up question: In what context?
For government pension plan sponsors, regular analysis of the plan’s experience is a vital tool in the ongoing financial management of the plan. The experience analysis not only provides monitoring of recent trends, it is the basis for determining the forward-looking assumptions used in the actuarial valuations that measure the plan’s liabilities, funded status, accounting expense, and recommended contributions.
Regular experience analysis identifies emerging trends among the plan’s participants, the plan’s investment performance, and the current economic environment. We’ve seen the following general trends in recent years:
During the Great Recession (2008-2010), plan participants’ retirement patterns shifted to later retirement, particularly when there were changes in benefits or coverage under a post-retirement health benefits plan. Participant retirements are returning to historical patterns as the economy improves.
Participants are living longer in retirement, but not as much as originally expected. Government workers in public safety positions have not seen the increases in life span that employees in other government roles have experienced (e.g., teachers or general employees). A participant’s income level prior to retirement appears to be a better predictor of life expectancy than job role.
Low inflation has changed expectations for future investment performance; many investment advisors believe that the current environment is the ‘new normal’ for long-term inflation.
Monitoring changes in demographic, investment and economic trends is important, because the actuarial model should use the best estimates of future experience (the actuarial assumptions) to ensure integrity in the plan’s financial measurements. All stakeholders of a government entity rely on these measurements, but perhaps the most important is the individual taxpayer. The allocation of plan costs should be fair to current and future generations of taxpayers—which means that the actuarial assumptions used in determining the financial measurements should be the best estimates of expected future events.
The Government Finance Officers Association (GFOA), the Government Accounting Standards Board (GASB), and the actuarial profession have each issued standards regarding appropriate actuarial assumptions. The GFOA has also published its recommendations on practices to enhance the reliability of the actuarial valuation; among these are regularly analyzing actuarial gains and losses and periodically performing actuarial experience studies.
How Should Plan Sponsors Monitor Actuarial Experience?
The GFOA recommends analyzing actuarial gains and losses with every valuation cycle, typically annually. The details of the experience analysis should reflect the plan’s specific circumstances, with economic and demographic factors analyzed separately, and the experience of more significant assumptions highlighted.
Experience monitoring over shorter periods provides real-time information on emerging trends; continuing the analysis over multiple years adds more value by identifying longer-term trends in pension plan experience. The value of a long-term approach can be seen in the research article ”How Did State/Local Plans Become Underfunded” by the Center for Retirement Research at Boston College. This article details the actuarial experience in the Georgia Teachers’ Retirement System (TRS) over a 12-year period and illustrates how actuarial experience ultimately affected the Georgia TRS.[i]
When Should a Formal Experience Study Be Performed?
Ongoing experience analysis may suggest the need for a more in-depth, formal experience study. The experience study can then be the basis for decisions to modify the plan’s actuarial assumptions. An experience study looks at all of the demographic, investment and economic factors that make up the total experience for the plan. Also, the experience study reviews experience over a longer period (typically three to five years).
Some plan sponsors perform an actuarial experience study regularly while others perform studies as circumstances arise, such as after significant plan events, changes within the government entity, or changes in the economy.
Using the Experience Study in Setting Assumptions
The plan sponsor, guided by their actuary, uses an experience study as a key reference point in making assumptions regarding future experience. Each assumption chosen should reflect a combining of recent experience, experience over a longer period of time, as well as expectations for the future. The actuarial experience study can be used to blend the plan’s experience with national experience tables from the Society of Actuaries, or indicate which national experience tables are most appropriate.
Successful financial management of a public pension plan is a recurring process of financial forecasting based on the best available information. Ongoing experience analysis and experience studies gives the plan sponsor and actuary the needed information to best ensure the integrity of plan financial measurements. The bottom line: this process results in less volatile contributions in the short-term, and provides greater generational equity among taxpayers for the long-term.
Questions to Ask Your Actuary
WHEN WAS THE MOST RECENT ACTUARIAL EXPERIENCE STUDY PERFORMED FOR THE PLAN?
ARE THERE SPECIFIC ACTUARIAL ASSUMPTIONS THAT ARE ON YOUR WATCH LIST FOR FUTURE CHANGES?
DOES THE PLAN HAVE ENOUGH DATA FOR THE EXPERIENCE TO BE RELIABLE (I.E., STATISTICALLY CREDIBLE)?
DO RECENT EXPERIENCE ANALYSES (I.E., GAINS AND LOSSES) INDICATE A NEED FOR AN EXPERIENCE STUDY?
Questions? For additional information about experience analysis and experience studies, contact the Findley consultant you normally work with, or Brad Fisher at Brad.Fisher@findley.com, 615.665.5316.