PBGC final regs clarify treatment of benefits rolled over from DC plan if DB plan is terminated and trusteed by PBGC

The Pension Benefit Guaranty Corporation (PBGC) has issued final regulations that clarify the treatment of benefits rolled over from a defined contribution (DC) plan to a single-employer defined benefit (DB) plan if the DB plan is terminated and trusteed by the PBGC. Under the final regulations, a benefit resulting from rollover amounts generally will be in the second highest priority category (PC) of the asset allocation among various classes of benefits and will not be subject to the PBGC’s maximum guarantee or phase-in limitations. Except for making clarifications suggested by commenters, the final regulations are the same as the proposed regulations issued in April 2014.

The PBGC’s goal in issuing the final regulations is to promote lifetime income options for employees by removing the fear that the amounts that 401(k) or other DC plan participants rolled over to DB plans would be restricted under guarantee limits should the PBGC step in and pay benefits.

Covered plans that are underfunded may terminate either in a distress termination under ERISA §4041(c) or in an involuntary termination (one initiated by the PBGC) under ERISA §4042. When such a plan terminates, the PBGC typically is appointed statutory trustee of the plan, and becomes responsible for paying benefits in accordance with the provisions of Title IV. Each participant’s plan benefit is assigned to one or more of six PCs that are described in paragraphs (1) through (6) of ERISA §4044(a). At times, plans trusteed by the PBGC include contributions made by employees that fund part of the benefit under the plan, including mandatory contributions.

In February 2012, the IRS issued Rev. Rul. 2012-4, which described whether a DB plan that accepted a rollover from a DC plan, such as a 401(k) plan, maintained by the same employer, satisfied Code Sec. 411 and Code Sec. 415 where the DB plan provided an annuity resulting from the direct rollover. Following the clarifications of qualification requirements concerning rollovers in Rev. Rul. 2012-4, the PBGC proposed to amend its regulations to provide guidance on Title IV treatment of rollovers, both in anticipation of increased use of rollovers, and as part of its efforts to promote retirement security.

PBGC’s treatment of rollovers from DC plans

The PBGC final regulations amend its regulations on Terminology (29 CFR part 4001), Benefits Payable in Terminated Single-Employer Plans (29 CFR part 4022) and Allocation of Assets in Single-Employer Plans (29 CFR part 4044). The proposed amendments establish or clarify the rules for treatment of rollovers in plans that terminate underfunded, the most important of which are:

A benefit resulting from rollover amounts will be treated as an accrued benefit derived from mandatory employee contributions in PC2 (which has a higher claim on plan assets than nearly all other benefits under the plan), to the extent that the benefit is determined using the rules of Code Sec. 411(c)(2)(B).

Unlike other PC2 benefits, PC2 benefits resulting from rollover amounts will generally not be payable in lump-sum form.

The portion of any benefit resulting from rollover amounts that exceeds the accrued benefit derived from mandatory employee contributions (i.e., the portion derived from employer contributions) will be a guaranteeable benefit in PC3, PC4, or PC5, as applicable.

The participant’s accrued benefit resulting from rollover amounts generally will not be subject to the PBGC’s maximum guaranteeable benefit limitation under ERISA §4022(b) ($60,136 a year for a 65-year-old retiree in 2015) and, thus, will not be taken into account in applying that limitation. However, the maximum guaranteeable benefit limitation will apply to any benefit resulting from rollover amounts that exceeds the accrued benefit treated as derived from mandatory employee contributions.

The participant’s accrued benefit resulting from rollover amounts generally will not be subject to the five-year phase-in limitation on the guarantee of benefit increases. However, the phase-in limitation will apply to any benefit resulting from rollover amounts that exceeds the accrued benefit treated as derived from mandatory employee contributions, with the phase-in period beginning as of the date the rollover contributions were received by the plan.

Clarifications to regulations

In response to comments on the proposed regulations, the PBGC made the following clarifications in the final regulations:

The amendments in these final regulations apply only to rollovers from DC plans. See ERISA Reg. §4001.2 (definition of rollover amounts).

Rollover amounts include both salary deferral contributions made by the participant, any additional employer contributions provided for under the DC plan, and earnings on both. See ERISA Reg. §4001.2 (definition of rollover amounts).

The annuity benefit resulting from a rollover amount is a pension benefit (and thus guaranteeable). See ERISA Reg. §4022.2 (definition of pension benefit).

Except for these clarifications, the final regulations are the same as the proposed regulations.

Applicability

The amendments made by the final regulations are effective December 26, 2014 and apply to terminations initiated on or after December 26, 2014.

Source: 79 FR 70090, November 25, 2014.

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