Enter to open, tab to navigate, enter to select
PBGC Issues Proposed Regulations on Guaranteed Benefits, Asset Allocation, and Interest Rate Assumptions
Practical Law Legal Update w-022-2266 (Approx. 6 pages)
PBGC Issues Proposed Regulations on Guaranteed Benefits, Asset Allocation, and Interest Rate Assumptions
by Practical Law Employee Benefits & Executive Compensation
| Published on 01 Oct 2019 • USA (National/Federal) |
The Pension Benefit Guaranty Corporation (PBGC) has issued proposed regulations that would amend the PBGC's regulations governing terminated, underfunded single-employer defined benefit plans, including its regulations concerning benefit payments, allocation of assets, and employers' liability to the PBGC. The PBGC issued a separate set of regulations that would modify the interest rate assumptions used in determining whether a benefit is de minimis, as required for the benefit to be paid in a lump sum. Public comments on both sets of regulations are due November 29, 2019.
On September 27, 2019, the Pension Benefit Guaranty Corporation (PBGC) issued two sets of proposed regulations that would amend the PBGC's rules governing terminated single-employer defined benefit plans that are covered by the PBGC (84 Fed. Reg. 51494 (Sept. 30, 2019); see Practice Notes, Defined Benefit Plans: Distress and Involuntary Terminations and Terminating Defined Benefit Plans: Role of the PBGC), including the provisions regarding:
- Benefit payments (29 C.F.R. Part 4022).
- Allocation of assets (29 C.F.R. Part 4044).
- Employers' liability to the PBGC (29 C.F.R. Part 4062).
The changes are intended to clarify the regulatory language and codify certain practices and policies employed when the PBGC is appointed trustee of a terminated plan.
The PBGC issued a second set of proposed regulations on the same day that would modify the interest rate assumptions it uses for determining whether a benefit owed by a terminated single-employer plan is de minimis (84 Fed. Reg. 51490 (Sept. 30, 2019)). If finalized, the PBGC would stop publishing its lump sum interest rate assumptions each month.
Public comments on both sets of proposed regulations are due by November 29, 2019.
Proposed Regulations on Benefit Payments, Asset Allocation, and Employer Liability
Benefit Payment Regulations
The proposed regulations would:
- Clarify that lump sum payments are prohibited even if the participant elects a lump sum and the lump sum is not paid before the PBGC is appointed trustee (29 C.F.R. § 4022.7(a)).
- Amend three provisions that refer to the current $5,000 de minimis lump sum limit to refer instead to ERISA Section 203(e)(1) (29 U.S.C. § 1053(e)(1)) so the provisions do not need to be amended each time Congress changes the limit (29 C.F.R. §§ 4022.7(b)(1)(i), (iii) and 4022.7(d)(1)).
- Clarify that in the case of a participant who dies after the plan's termination date, but whose benefit is not in pay status and is de minimis, the PBGC will treat the benefit as owed to the participant as of the date of death, and payment of the benefit will be made according to Subsection F of the benefit payment regulations (29 C.F.R. §§ 4022.91-4022.95). If there is a surviving spouse, the payment will not be limited to the value of the qualified preretirement survivor annuity (QPSA) (see Practice Note, Requirements for Qualified Retirement Plans: Spousal Death Benefits). Instead, the spouse will receive the full value of the benefit.
- Clarify that in the case of a participant who dies after the plan's termination date and whose benefit is not in pay status and is not de minimis, payment of the QPSA will be made as a lump sum or annuity, as elected by the surviving spouse, provided the value of the QPSA is less than the amount specified in ERISA Section 203(e)(1) (29 U.S.C. § 1053(e)(1)).
- Remove the life annuity option for the estate of a deceased participant or beneficiary. The estate would automatically receive a lump sum payment and would not be allowed to elect a life annuity. (29 C.F.R. § 4022.7(b)(1)(iv).)
- Clarify that participants who are in pay status when the PBGC is appointed trustee may not change their election to elect a lump sum distribution of their "accumulated mandatory employee contributions" (29 C.F.R. § 4022.7(b)(2)(ii)).
- Clarify that changes in the elected form of benefit are not allowed unless the benefit estimate the PBGC sent to the participant or beneficiary contained certain errors.
- Add a new provision that codifies the PBGC's practice of considering any partial plan distributions that occurred before it was appointed trustee when determining a participant's maximum guaranteeable benefit (29 C.F.R. § 4022.23).
Asset Allocation Regulations
Regarding asset allocation, the proposed regulations would:
- Add a new provision that codifies the PBGC's practice of considering any partial plan distributions that occurred before it was appointed trustee, for purposes of assigning benefits to priority categories (29 C.F.R. § 4044.10). Under this provision, a partial plan distribution reduces the participant's benefits in the order of benefits in the highest to lowest priority category.
- Amend PBGC Regulation Section 4044.41(b) (29 C.F.R. § 4044.41(b)) to provide that the PBGC may use either fair market value or, in certain cases, fair value, for purposes of allocating plan assets to benefits. The preamble notes that the PBGC already uses fair value when the fair market value of assets is difficult to determine.
Liability to the PBGC Regulations
The proposed regulations also would amend PBGC Regulation Section 4062.4(c) (29 C.F.R. § 4062.4(c)) to provide that the PBGC may use either fair market value or, in certain cases, fair value to determine the value of plan assets, for purposes of determining an employer's liability to the PBGC for the unfunded benefits. In the preamble, the PBGC states that the same methodology is appropriate for determining an employer's liability to the PBGC and allocating plan assets to benefits. For more information, see Practice Note, Defined Benefit Plans: Distress and Involuntary Terminations: Liability to the PBGC.
Comments
Public comments on the proposed regulations are due November 29, 2019.
Proposed Regulations on Interest Rate Assumptions for Lump Sum Payments
The PBGC's second set of proposed regulations would modify the assumptions used in determining whether a benefit is de minimis ($5,000 or less) for purposes of lump sum payments in PBGC-trusteed single-employer plans.
Currently, the PBGC publishes two lump sum interest rates tables each month: the interest rates it uses for PBGC-trusteed plans and the interest rates for use by private-sector plans that rely on the PBGC's legacy interest rates. In the preamble, the PBGC acknowledges that its methodology is outdated. Accordingly, the proposed regulations would:
- Adopt the interest rate assumptions in Internal Revenue Code (Code) Section 417(e)(3) (26 U.S.C. § 417(e)(3)).
- Amend the benefit payment regulation (29 C.F.R. § 4022.7) to specify that the PBGC will apply the "applicable mortality table" found in ERISA Section 205(g)(3)(B)(i) (29 U.S.C. § 1055(g)(3)(B)(i)) and Code Section 417(e)(3)(B) (26 U.S.C. § 417(e)(3)(B)).
- Include a final set of interest rates (Appendix C) for plans in the private sector that still rely on the PBGC's legacy interest rates.
If the proposed regulations are finalized, the PBGC would no longer publish its monthly interest rate tables. Public comments on these proposed regulations are due November 29, 2019.
Practical Implications
Defined benefit plan sponsors should be aware of the proposed regulations and monitor for potential finalization. If finalized, the proposed regulations may affect plan sponsors of ongoing defined benefit plans that use the PBGC legacy interest rates. Specifically with respect to interest rates, the PBGC is soliciting comments from private sector plans that use the PBGC legacy interest rates as well as any other entities (such as insurance companies) that use the legacy interest rates. Comments on both sets of proposed regulations are due November 29, 2019.