Pension & Benefits News PBGC proposed regs modify assumptions PBGC uses to determine de minimis lump-sum benefits
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Monday, October 21, 2019

PBGC proposed regs modify assumptions PBGC uses to determine de minimis lump-sum benefits

By Pension and Benefits Editorial Staff

The Pension Benefit Guaranty Corporation (PBGC) has issued proposed regulations that would modify the assumptions it uses to determine de minimis lump-sum benefits in PBGC-trusteed terminated single-employer defined benefit plans. The PBGC states that the changes are intended to modernize the methodology used to determine de minimis lump-sums in terminated underfunded single-employer plans. Specifically, under the proposed regulations, the PBGC would adopt the interest and mortality assumptions from Code Sec. 417(e)(3) for this purpose and would discontinue monthly calculation and publication of the PBGC’s lump-sum interest rate assumption. Because some private-sector plans use the PBGC’s lump-sum interest rates, the proposed regulations would provide a final interest rate set for private-sector plans to use for valuation dates on or after the effective date of the final rule.

Use of lump-sum assumptions. For PBGC-trusteed terminated single-employer plans, the PBGC calculates the present value of each participant’s benefit to determine whether it is de minimis (present value of $5,000 or less) and therefore may be paid as a lump sum. The PBGC issues monthly interest assumptions in two separate tables (one for PBGC-paid lump-sums and one for legacy interest rates used by the private sector) that consists of an “immediate” rate for discounting benefits for the period between the annuity starting date and each future payment date, and up to three “deferred” rates for discounting benefits during specified parts of the period leading up to the annuity starting date. The mortality assumption is the 1984 Unisex Pensioners Mortality Table.

According to the PBGC, it is aware that a relatively small number of plans use the PBGC’s interest rates as computed using its historical methodology (legacy interest rates) to determine the lump-sum equivalents of annuity benefits. The PBGC understands that these plans do so because, before 1994, under Code Sec. 417(e)(3), plans were required to use the PBGC’s legacy interest rates to determine the minimum permissible lump-sum equivalent of an annuity benefit. Since 1994, private-sector plans have not been required to use the PBGC’s lump-sum interest rates to determine the minimum lump-sum equivalents of annuity benefits. The PBGC states that anecdotal evidence suggests many, if not most, plans were amended to discontinue use of the PBGC’s legacy interest rates for calculating lump-sum equivalents of annuity benefits in favor of using the new interest assumption under Code Sec. 417(e)(3).

Proposed changes. The PBGC states that the immediate and deferred structure of the PBGC’s legacy interest rates has become increasingly obsolete since actuarial practice, with the help of technology, has moved toward a yield-curve approach where future benefits are discounted to the measurement date based on yields on bonds of similar duration. According to the PBGC, the methodology it uses to compute each month’s immediate and deferred interest rates is simplistic and typically results in interest rates significantly lower than the rates most private-sector plans use to determine lump sums. Therefore, the PBGC proposes to amend its benefit payments regulation to provide that the PBGC will use the “applicable interest rate” specified in Code Sec. 417(e)(3)(C) and ERISA Sec. 205(g)(3)(B)(ii) to calculate the present value of annuity benefits (for the purposes of determining if the benefit is de minimis and if so, the amount payable as a lump sum). The “applicable interest rate” is the spot segment rates published by the IRS each month. The PBGC also proposes to amend its benefit payments regulation to provide that the PBGC will use the “applicable mortality table” specified in Code Sec. 417(e)(3)(B) and ERISA Sec. 205(g)(3)(B)(i). The PBGC believes that the impact on participants and beneficiaries of plans it trustees will be small.

The PBGC has concluded that continued publication of the legacy interest rates for any use would be inappropriate, given that the legacy interest rates’ structure and methodology have become increasingly obsolete. However, the PBGC proposes to publish a final set of interest rates in appendix C for private-sector plans to use for valuation dates on or after the effective date of the final regulations equal to the average immediate and deferred rates for the 120-month period ending in July 2019, rounded to the nearest quarter percent. The PBGC notes that it does not have information on how plans that use the legacy interest rates refer to the interest rates in their documents. However, the PBGC states that any unclear plan provisions could be amended to specify the use of the interest rates in appendix C, provided that the resulting lump sum is no less than the minimum amount determined in accordance with Code Sec. 417(e)(3) and that any other applicable requirements are satisfied. Because the PBGC has incomplete information on private-sector plan use of its legacy interest rates, it is soliciting comments on which private-sector plans use these rates and what purpose, and whether setting the legacy interest rates at a 120-month average would cause any undue burden. The PBGC also seeks comment on whether other entities (e.g., insurance companies) use its legacy interest rates and for what purpose.

Applicability. The amendments affecting the PBGC’s calculation and payment of lump-sum benefits would apply to trusteed plans with termination dates on or after the effective date of the final regulations.

SOURCE:  84 FR 51490.

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