IRS Issues Proposed Clarification of Form 5500 Instructions for Some DB Plans

The IRS has issued a clarification it proposes be added to the 2023 Form 5500 instructions.

Specifically, the clarification is proposed for Schedule SB, Line 26b - Schedule of Projection of Expected Benefit Payments. 

What Line 26b does. Line 26b of Schedule SB requires plans covered by Title IV of ERISA that have 1,000 or more total participants as of the valuation date to submit a schedule showing a 50-year projection of expected benefit payments. 

This projection shows expected benefit payments for active participants, terminated vested participants, and retired participants and beneficiaries receiving payments determined assuming:

1. No additional accruals,
2. Experience (e.g., termination, mortality, and retirement) is in line with valuation assumptions,
3. No new entrants, and
4. Benefits are paid in the form assumed for valuation purposes.

Using Schedule SB. If one is required to submit this schedule for a plan that uses the annuity substitution rule provided in Internal Revenue Code Section 430(d)-1(f)(4)(iii)(B) to determine the funding target instead of assuming benefits are paid in the form assumed for valuation purposes, one may assume benefits are paid as an annuity — that is, one may report the projected benefits that are used to determine the funding target.

Code Section 430. Section 430 applies to single-employer pension plans, including multiple employer plans as defined in Code Section 413(c)) that are subject to Code Section 412, but do not apply to multiemployer plans. 

PBGC too. The Pension Benefit Guaranty Corporation (PBGC) in August 2022 had proposed modifications to the 2023 Schedule SB.

Specifically, it proposed a change to the current instructions for the Schedule SB, line 26b attachment (projected benefit payments), to provide that, in situations where a plan assumes some, or all, benefits are paid in a lump sum, but uses the annuity substitution rule (26 CFR 1.430(d)–1(f)(4)(iii)(B)) to determine the funding target, the attachment may show projected benefits payable in the annuity form instead of in the form assumed for valuation purposes, as indicated in the current instructions. 

The PBGC noted that the instructions for the current line 26b attachment, which was added for the 2022 plan year, suggest that for such plans, the benefit projection be based on a different form of payment than what was used to determine the funding target.