What Is the IRS 417(e) Mortality Table for Pensions?

The IRS 417(e) mortality table is a data set required for defined benefit pension plans to use when calculating the minimum value of a lump-sum payout. When an employee chooses to receive their pension as a single, immediate payment instead of monthly checks, the plan must convert that future stream of income into an equivalent amount today. This table provides the life expectancy data for that conversion.

The process ensures the single payment is at least as valuable as the lifetime of monthly payments the employee is forgoing. The data helps the plan estimate how long a person of a certain age is expected to live, and therefore, how many monthly payments they would have likely received.

The Role of Mortality Tables in Pension Valuations

A mortality table is a statistical tool showing the probability of a person surviving to each subsequent year of age, providing a snapshot of life expectancies from population data. For pension plans, this data is used for a “present value” calculation, which determines the worth of future payments in today’s dollars. To offer a lump sum, a plan must calculate the total value of all monthly payments an individual is projected to receive throughout their retirement.

The mortality table provides the “how long” part of this equation by estimating the number of years a retiree is expected to draw benefits. This process provides a uniform basis for converting a promised future benefit into a current, tangible amount.

Key Components for Calculating a Lump-Sum Payout

Applicable Mortality Table

The IRS mandates that defined benefit plans use a specific “applicable mortality table” when calculating minimum lump-sum values. This is not just any mortality table, but a specific one published by the IRS. The mandate ensures plans use current, standardized data reflecting realistic life expectancies, preventing them from using outdated tables that might underestimate how long retirees will live.

The IRS periodically updates these tables to account for increasing longevity. The required tables are based on the Pri-2012 mortality table, which is adjusted annually by the IRS to reflect mortality improvements.

Applicable Interest Rates

The mortality table is only one of two main components. The IRS also specifies a set of “applicable interest rates” that must be used in the present value calculation. These are not a single rate but a series of three “segment rates” that apply to different time horizons: payments expected in the first five years, those expected between five and 20 years, and those expected beyond 20 years.

These rates are derived from high-quality corporate bond yields and represent the investment return a plan could theoretically earn on the lump-sum amount. The IRS publishes these segment rates monthly, and their combination with the mortality data forms the basis for the minimum lump-sum calculation.

The Lump-Sum Calculation Explained

The interaction between the mortality table and the interest rates determines the size of a lump-sum payout. A change in either one can significantly impact the final amount. The calculation discounts the total expected future payments back to a present-day value.

When the IRS issues a new mortality table that reflects longer life expectancies, the plan assumes it will be making monthly payments for more years. This increase in the expected payout period leads to a larger calculated lump sum. A longer life requires a larger principal amount to fund the extended stream of payments.

Conversely, the applicable interest rates have an inverse effect. If mandated interest rates are low, the plan assumes the lump-sum principal will generate less investment income over time. To compensate, the initial principal must be larger to ensure it can cover all future promised payments, resulting in a higher lump sum.

When interest rates are high, the plan assumes it can earn more from investing the principal. This higher anticipated growth means a smaller initial lump sum is needed to fund the same stream of future monthly payments. Therefore, rising interest rates generally lead to smaller lump-sum payouts.

Plan-Specific Considerations and Variations

The rules under Internal Revenue Code Section 417(e) establish a floor, not a ceiling, for lump-sum payouts. A pension plan may use its own mortality table or interest rates if the calculation results in a more generous lump sum. This provision ensures the federal requirements serve as a minimum protective standard for the employee.

The timing of when interest rates are determined is an important detail. Plans use a “lookback” period, selecting rates from a specific prior month or quarter, rather than from the exact month of retirement. These selected rates are then applied for a “stability period,” which is often a full calendar year. This practice provides predictability for both the plan and its participants, as the rates are known in advance.

To understand the precise methodology, a participant must consult their plan’s Summary Plan Description (SPD). This document is the guide to the plan’s operations and will detail the specific mortality table used. It also specifies the lookback month for determining interest rates and the stability period during which those rates apply.