PBGC proposed 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 proposed regulations that would clarify the treatment of benefits rolled over from a defined contribution plan (DC) to a single-employer defined benefit (DB) plan if the DB plan is terminated and trusteed by PBGC. Under the proposed rule, a benefit resulting from rollover amounts generally would be in the second highest priority category of the asset allocation among various classes of benefits and would not be subject to the PBGC’s maximum guarantee or phase-in limitations. Comments on the proposed rule are due June 2, 2014.

The PBGC’s goal in issuing the proposed regulations is to promote lifetime income options for employees by removing the fear that the amounts that 401(k) participants rolled over to DB plans would be restricted under guarantee limits should the PBGC step in and pay benefits. “What we’re doing will hopefully give people an incentive to choose a savings option that they can’t outlive or outspend,” said PBGC Director Josh Gotbaum. “Annuities always offer greater retirement security.”

Covered plans that are underfunded may terminate either in a distress termination under ERISA Sec. 4041(c) or in an involuntary termination (one initiated by the PBGC) under ERISA Sec. 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 “priority categories” that are described in paragraphs (1) through (6) of ERISA Sec. 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. 2012-4which 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 is proposing 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 is proposing to amend its regulations on 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 would 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 would be treated as an accrued benefit derived from mandatory employee contributions in priority category (PC) 2 (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 would 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) would be a guaranteeable benefit in PC3, PC4, or PC5, as applicable.
  • The participant’s accrued benefit resulting from rollover amounts generally would not be subject to the PBGC’s maximum guaranteeable benefit limitation under ERISA Sec. 4022(b) (currently, $59,381.16 a year for a 65-year-old retiree) and, thus, would not be taken into account in applying that limitation. However, the maximum guaranteeable benefit limitation would 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 would not be subject to the five-year phase-in limitation on the guarantee of benefit increases. However, the phase-in limitation would 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.

Applicability

The amendments made by this proposed rule would apply to terminations initiated on or after the effective date of the final rule. In the interim, the PBGC will make determinations under the current regulations, consistent with IRS Rev. Rul. 2012-4, including paying the return of employee contributions under a benefit resulting from rollover amounts in a single sum.

Source: PBGC proposed regulations, 79 FR 18483, April 2, 2014
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