PLR 202606009

IRS Greenlights Pension Plan Assumption Tweaks

The IRS has approved a taxpayer's request to modify retirement rate assumptions for their defined benefit pension plan. This approval, documented in a private letter ruling, applies to the plan year beginning January 1, 2025. The request was required under Section 430(h)(5) of the Internal Revenue Code because the assumption changes impacted the plan's funding target by more than $50 million.

IRS Greenlights Pension Plan Assumption Tweaks

The IRS has approved a taxpayer's request to modify retirement rate assumptions for their defined benefit pension plan. This approval, documented in a private letter ruling, applies to the plan year beginning January 1, 2025. The request was required under Section 430(h)(5) of the Internal Revenue Code because the assumption changes impacted the plan's funding target by more than $50 million.

The Data: Late Retirements Drive Liability Shift

The taxpayer's request stemmed from an experience study conducted between 2018 and 2023. This study revealed that actual retirement rates were materially lower than previously assumed, particularly for participants over the age of 65. To more accurately reflect workforce behavior, the taxpayer sought to adjust retirement rate assumptions for active and terminated vested participants. According to the taxpayer, the adjustment was necessary for the plan year beginning January 1, 2025, to better reflect future retirements and more accurately measure the plan's future demographic experience. This change in assumptions increased the plan's liability, impacting the funding target, by more than $50 million. This triggered the requirement for IRS approval under Section 430(h)(5) of the Internal Revenue Code. Section 430(h)(5) requires the Secretary of the Treasury's approval for changes in actuarial assumptions used to determine the funding target for certain defined benefit plans when those changes have a significant impact on the plan's funding status.

IRS Greenlights Pension Plan Assumption Tweaks

The Data: Late Retirements Drive Liability Shift

Regulatory Hurdles: The Section 430 Threshold

As previously discussed, the plan sponsor's demographic study revealed that employees are retiring later than initially projected, impacting the plan's future demographic experience. This change in assumptions increased the plan's liability, impacting the funding target, by more than $50 million. This triggered the requirement for IRS approval under Section 430(h)(5) of the Internal Revenue Code. Section 430(h)(5) requires the Secretary of the Treasury's approval for changes in actuarial assumptions used to determine the funding target for certain defined benefit plans when those changes have a significant impact on the plan's funding status.

This requirement exists because, under Section 430(h)(5), such changes require approval to prevent plan sponsors from manipulating actuarial assumptions to artificially decrease their required contributions. Specifically, Section 430(h)(5) applies if the plan is a defined benefit plan subject to Title IV of the Employee Retirement Income Security Act of 1974 (ERISA), and the aggregate unfunded vested benefits of the plan exceeded $50 million at the close of the preceding year. Furthermore, the change in assumptions must result in a decrease in the funding shortfall exceeding $50 million, or exceeding $5 million and at least 5% of the funding target before the change.

The IRS provides further guidance on this issue in Treasury Regulation 1.430(d)-1(f)(8). This regulation clarifies when and how large plans must seek IRS approval for significant changes in actuarial assumptions. It generally requires that assumptions represent the actuary's best estimate of anticipated experience under the plan. Changes exceeding the thresholds described above are not permitted without a formal ruling from the Commissioner. The Joint Board for the Enrollment of Actuaries (JBEA) regulations also come into play, setting forth performance standards for actuarial services under ERISA. In particular, the actuary must determine that the actuarial assumptions are reasonable.

IRS Analysis: Validating the Actuarial Logic

The IRS scrutinized the specific changes to the taxpayer's actuarial assumptions. For instance, the taxpayer adjusted the assumed retirement age for terminated vested participants from 62 to 65, based on an experience study covering 2018-2023. The IRS's review also included an examination of the qualifications and competence of the actuaries who conducted the underlying experience study. The IRS determined that the revised assumptions "better match Taxpayer's actual experience." In its assessment, the IRS also analyzed whether the plan qualified as an "affected plan" under Treasury Regulation Section 1.430(d)-1(f) and considered the plan's eligibility for the exception described in Section 1.430(d)-1(f)(8)(iii). Having determined the assumptions were reasonable and the methodology sound, the IRS formally granted approval for the change in actuarial assumptions as required under Section 430(h)(5), which dictates when changes in actuarial assumptions require IRS approval.

Implications for Plan Sponsors

As the IRS granted approval for this change in actuarial assumptions, plan sponsors should take note of the IRS's stance. Although Private Letter Rulings (PLRs) under Section 6110(k)(3) of the tax code, which governs public inspection of written determinations, specify that they cannot be used or cited as precedent, this ruling offers valuable insight into the IRS's current thinking. It signals a willingness to approve significant assumption changes—even those with substantial funding impacts (in this case, exceeding $50 million)—provided they are demonstrably supported by a robust, multi-year experience study. In this instance, the study covered six years of actual plan experience.

Plan sponsors of large defined benefit plans subject to Employee Retirement Income Security Act (ERISA) Title IV, and facing potentially significant changes to their funding targets, should carefully document the rationale and data supporting any proposed changes to actuarial assumptions. Section 430(h)(5), which governs the actuarial assumptions used to determine the "funding target" of single-employer defined benefit pension plans, requires IRS approval for assumption changes if (1) the aggregate unfunded vested benefits exceed $50,000,000 and (2) the proposed change would decrease the funding shortfall by more than $50,000,000, or more than $5,000,000 and at least 5% of the funding target. Rigorous, well-documented experience studies are crucial to securing such approval.