By Pension and Benefits Editorial Staff
The Pension Benefit Guaranty Corporation (PBGC) has released a second set of regulations that make clarifications and codify policies for single-employer defined benefit plans involving the payment of lump sums, changes to benefit form, partial benefit distributions, and valuation of plan assets. The PBGC states that the amendments to the PBGC’s regulations on benefit payments, allocation of assets, and termination liability would increase transparency of PBGC benefits administration, clarify and simplify language, increase flexibility, codify practices, and harmonize regulatory provisions with statutory provisions.
Major changes. The PBGC has identified opportunities to improve benefits administration by making it more transparent — filling in gaps where guidance is needed, simplifying or removing language, codifying policies, and applying consistency in asset valuation. The proposed regulations would:
- Clarify that the PBGC’s rules on payment of a lump sum are unaffected by election of a lump-sum distribution before plan termination. Specifically, the proposed regulations would amend ERISA Reg. §4022.7(a) to make explicit (and consistent with the PBGC’s practice) that the PBGC prohibition on lump sums includes an optional lump sum elected by a plan participant but not paid before plan trusteeship, regardless of the reason for not paying the lump sum.
- Change wording in the regulations that refers to the dollar amount currently subject to cashout by statute ($5,000) so that it refers instead to the statutory provision that specifies that dollar amount.
- Clarify that a de minimis benefit of a participant who dies after plan termination will be paid as an amount due to a decedent, not as a qualified preretirement survivor annuity.
- Clarify that benefits will be paid to estates only as lump sums.
- Clarify that accumulated mandatory employee contributions may not be withdrawn if benefits are in pay status when a plan becomes trusteed.
- Clarify that the form of benefit in pay status when a plan becomes trusteed will not changed.
- Clarify that pre-trusteeship partial distributions are considered in determining benefits.
- Require that fair market value or fair value, as appropriate, be used for purposes of valuing assets to be allocated to participants’ benefits and in determining employer liability and net worth.
As to deceased participants with de minimis benefits, the PBGC proposes to amend the benefit payments regulation to make clear that in the case of a participant with a de minimis benefit who dies after the plan’s termination date and whose benefit is not yet in pay status, the PBGC will treat the benefit as payable under subpart F. If a participant is married, the PBGC will pay the full value of the participant’s de minimis benefit to the surviving spouse (not limited to the value of a qualified preretirement survivor annuity (QPSA)), with any interest owed. The PBGC proposes to clarify ERISA Reg. § 4022.93 of subpart F by providing the surviving spouse of a participant with a benefit that does not exceed the dollar amount specified in ERISA Sec. 203(e)(1), who dies after the termination date when the benefit is not yet in pay status, will receive the full value of the de minimis benefit of a deceased participant. Additionally, the PBGC proposes to clarify the form of the PBGC’s payment to a surviving spouse where the participant has a non-de minimis benefit. In proposed new ERISA Reg. § 4022.7(b)(1)(iv), if the deceased participant’s benefit exceeds the dollar amount specified in ERSA Sec. 203(e)(1), but the lump-sum value of annuity payments under the QPSA does not exceed that amount, and the benefit is not in pay status, the PBGC may pay the QPSA as a lump sum, or as an annuity, if available and elected by the surviving spouse.
As to accumulated mandatory employee contributions, the PBGC proposes to clarify that if a participant is not in pay status at the time the plan becomes trusteed, the participant may withdraw any accumulated mandatory employee contributions (AMECs) in a single lump sum at any time before going into pay status, if the plan would have permitted such a withdrawal. But if a participant is in pay status at the time the plan becomes trusteed, the PBGC will not allow the participant to change his or her benefit and elect a withdrawal of his or her AMECs.
For changes in benefit form and corrections, the PBGC proposes to make it clear that the benefit form may not be changed once payment of a benefit begins (at any point in time). However, the PBGC recognizes that it sometime makes mistakes in benefit estimates that result in participants and beneficiaries making benefit elections they might not had made if they had more accurate estimates. Therefore, the PBGC proposes to allow it to make limited exceptions to the rule prohibiting changes in benefit form for such errors. The PBGC also proposes to clarify the circumstances in which the PBGC would permit a change in form of benefit.
Concerning pre-trusteeship partial plan distributions, the proposed rule would clarify that the PBGC takes into account pre-trusteeship partial plan distributions (in lump-sum or annuity form) when determining a participant’s maximum guaranteeable benefit and the benefits assignable to the ERISA §4044(a) priority categories.
On the issue of valuation methodology, to conform the PBGC’s regulations to current practice, the PBGC has concluded that it would be appropriate to adopt the valuation methodologies of fair market value as defined in ERISA Reg. §4001.2 or fair value in accordance with U.S. GAAP (i.e., generally accepted accounting practices), as appropriate, for purposes of allocating assets, determining employer liability, and calculating net worth of liable persons. The PBGC proposes to amend its asset allocation and employer liability regulations to achieve this result.
Applicability. The proposed regulations would apply to plan terminations initiated on or after the effective date of the final regulations. However, the PBGC explains that most of the amendments codify policies and practices that it has followed for many years, and that the PBGC will continue to follow those policies and practices in the interim.
SOURCE: 84 FR 51494.
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