Compliance October 20, 2017

IRS Issues Memorandum on Plan Loan Cure Periods

IRS says missed repayments can be addressed in the following quarter or that participants can refinance a loan, but that it will still be due on the original due date.

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The Internal Revenue Service (IRS) has issued a memorandum on defined contribution (DC) plan loan cure periods for participants who have failed to make installment payments.

On a regular basis the IRS notes that loans, as long as they are not for the purchase of a primary home, can be repaid in five years and that payments are due at the end of the month for the repayment term of the loan.

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But should a participant miss a payment, according to the memorandum, they can take care of that payment by the last day of the calendar quarter following the previous quarter in which the payment was due, the IRS says. They can also refinance a loan—but it will still be due on the original due date.

The IRS gave two scenarios in which a participant missed a payment. In the first instance, the participant made up for the lost payments and in the second instance, the participant refinanced the loan. In the first example, the participant missed their March 31, 2019, and April 30, 2019, payments but makes a payment on July 31, 2019, that is three times their normal payment—which means the participant has satisfied the conditions of his or her loan.

In the second example, the participant misses three payments in 2019, on October 31, November 30 and December 31—and decides to refinance the loan and replace it with a new loan on January 15, 2020. This new loan is still due within the original period, on December 31, 2022, the IRS says. “The participant’s missed installment payments do not violate the level amortization requirement,” the IRS says, “because the missed installment payments are cured within the applicable cure period by refinancing the loan.”

The IRS reminds plan sponsors that the statutory plan loan limit is the lesser of: $50,000, less any outstanding loan balance in the previous year, or the greater of half of the participant’s vested accrued benefit or $10,000.

The IRS’ memorandum about plan loans can be downloaded here.

Compliance October 20, 2017

Slight Increase in Mortality Gives Pension Plans a Break

With life expectancies declining slightly, pension plan obligations are reduced between 0.7% and 1.0%, the Society of Actuaries says.

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Between 2014 and 2015, mortality rates increased 1.2%, according to the Society of Actuaries’ (SOA’s) analysis of publicly available data from the Social Security Administration through 2013, and its analysis of preliminary 2014 and 2015 data. This MP-2017 finding is the first year-over-year mortality rate increase since 2005, SOA says.

As a result of the slight decline in life expectancies, pension plan obligations can be reduced between 0.7% to 1.0%, SOA says. SOA says that the increase in mortality is due to an increase in eight of the 10 causes of death, as reported by the Centers for Disease Control. For example, the life expectancy for a 65-year-old male pension plan participant in 2017 declined to 85.6 years, down from 85.8 in 2016. For women in that time period, their life expectancies dropped from 87.8 years to 87.6 years.

“The SOA is a data-driven organization committed to annually updating the mortality improvement scale as new data is available,” says Dale Hall, managing director of research for the SOA. “MP-2017 gives pension actuaries and plan sponsors current information to measure retirement obligations and make forward-looking mortality improvement assumptions. However, every plan is different, and it’s important for actuaries and plan sponsors to perform their own calculations and decide how to reflect the impact of emerging mortality changes in their own plan valuations.”

The full MP-2017 report can be downloaded here.

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