[Federal Register Volume 84, Number 189 (Monday, September 30, 2019)]
[Proposed Rules]
[Pages 51490-51493]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-21087]
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PENSION BENEFIT GUARANTY CORPORATION
29 CFR Part 4022
RIN 1212-AB41
Lump Sum Payment Assumptions
AGENCY: Pension Benefit Guaranty Corporation.
ACTION: Proposed rule.
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SUMMARY: This proposed rule would modify the assumptions the Pension
Benefit Guaranty Corporation (PBGC) uses to determine de minimis lump
sum benefits in PBGC-trusteed terminated single-employer defined
benefit pension plans and would discontinue monthly publication of
PBGC's lump sum interest rate assumption.
DATES: Comments must be submitted on or before November 29, 2019 to be
assured of consideration.
ADDRESSES: Comments may be submitted by any of the following methods:
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for sending comments.
Email: [email protected]. Refer to RIN 1212-AB41 in
the subject line.
Mail or Hand Delivery: Regulatory Affairs Division, Office
of the General Counsel, Pension Benefit Guaranty Corporation, 1200 K
Street NW, Washington, DC 20005-4026.
All submissions must include the agency's name (Pension Benefit
Guaranty Corporation or PBGC) and the Regulation Identifier Number for
this rulemaking (RIN 1212-AB41). Comments received will be posted
without change to PBGC's website, https://www.pbgc.gov, including any
personal information provided. Copies of comments may also be obtained
by writing to Disclosure Division, Office of the General Counsel,
Pension Benefit Guaranty Corporation, 1200 K Street NW, Washington, DC
20005-4026, or calling 202-326-4040 during normal business hours. TTY
users may call the Federal relay service toll-free at 1-800-877-8339
and ask to be connected to 202-326-4040.
FOR FURTHER INFORMATION CONTACT: Gregory Katz ([email protected]),
Attorney, Regulatory Affairs Division, Office of the General Counsel,
Pension Benefit Guaranty Corporation, 1200 K Street NW, Washington, DC
20005-4026; 202-326-4400, extension 3829. TTY users may call the
Federal relay service toll-free at 1-800-877-8339 and ask to be
connected to 202-326-4400 extension 3829.
SUPPLEMENTARY INFORMATION:
Executive Summary--Purpose and Authority
This rulemaking arises from PBGC's ongoing review of its
regulations to ensure they are up-to-date, efficient, and satisfy
existing needs with a minimum of burden. It is intended to modernize
the methodology used to determine de minimis lump sums in terminated
underfunded single-employer plans. Specifically, under this proposed
rule, PBGC would adopt the interest and mortality assumptions from
section 417(e)(3) of the Internal Revenue Code (Code) \1\ for this
purpose.
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\1\ Section 417(e)(3) of the Code and section 205(g)(3) of the
Employee Retirement Income Security Act of 1974 (ERISA) are parallel
provisions in ERISA and the Code.
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It would also discontinue PBGC's monthly calculation and
publication of the interest rates used for this purpose. Because some
private-sector plans use PBGC's lump sum interest rates, the proposal
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.
Legal authority for this action comes from section 4002(b)(3) of
the Employee Retirement Income Security Act of 1974 (ERISA), which
authorizes PBGC to issue regulations to carry out the purposes of title
IV of ERISA and section 4022 of ERISA (Single-Employer Plan Benefits
Guaranteed).
Background
Use of Lump Sum Assumptions by PBGC
The Pension Benefit Guaranty Corporation (PBGC) administers two
insurance programs for private-sector defined benefit pension plans
under title IV of the Employee Retirement Income Security Act of 1974
(ERISA): A single-employer plan termination insurance program and a
multiemployer plan insolvency insurance program. This proposed rule
applies only to the single-employer program.
Covered single-employer plans that are underfunded may terminate in
[[Page 51491]]
either a distress termination under section 4041(c) of ERISA or in an
involuntary termination (one initiated by PBGC) under section 4042 of
ERISA. When such a plan terminates, PBGC typically is appointed
statutory trustee of the plan and becomes responsible for paying
guaranteed benefits in accordance with section 4022 of ERISA and PBGC's
regulation on Benefits Payable in Terminated Single-Employer Plans (29
CFR part 4022).\2\
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\2\ PBGC also pays non-guaranteed benefits when there are
sufficient plan assets or recoveries.
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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.\3\ Assumptions used to value
benefits for this purpose are set forth in PBGC's benefit payments
regulation. The interest assumption, published each month, employs a
four-tiered structure to discount future benefit payments for
determining their lump sum equivalent. This structure 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 (e.g., first 7
years, next 8 years, and years beyond). The mortality assumption is the
1984 Unisex Pensioners Mortality Table.
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\3\ See 29 CFR 4022.7(b)(1)(i).
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Use of PBGC's Lump Sum Interest Rates by Private Sector
PBGC is aware that a relatively small number of plans use PBGC's
interest rates as computed using its historical methodology (legacy
interest rates) to determine the lump sum equivalents of annuity
benefits.\4\ It is PBGC's understanding that these plans do so because,
before 1994, under section 417(e)(3) of the Code, plans were required
to use PBGC's legacy interest rates to determine the minimum
permissible lump sum equivalent of an annuity benefit.\5\
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\4\ Some insurers may also use PBGC's legacy interest rates to
determine lump sums payable under a group annuity contract for a
pension plan that used such rates after it closed out in a standard
termination.
\5\ To determine the minimum lump sum equivalent of an annuity
benefit, plans used PBGC's lump sum interest rates for benefits
under $25,000 and used 120 percent of PBGC's lump sum interest rates
for benefits $25,000 and over. Section 417(e) of the Code (1988)
(amended 1994).
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The Retirement Protection Act of 1994, Public Law 103-465 (RPA `94)
changed the interest rate specified in section 417(e)(3) of the Code.
As a result, private-sector plans were no longer required to use PBGC's
lump sum interest rates to determine the minimum lump sum equivalents
of annuity benefits. Anecdotal evidence suggests many, if not most,
plans were amended to discontinue use of PBGC's legacy interest rates
for calculating lump sum equivalents of annuity benefits by adopting
the new interest assumption under section 417(e)(3) of the Code.
To preserve the possibility of a change in the way PBGC-paid lump
sums are determined without affecting private-sector plans that use
PBGC's legacy interest rates to determine lump sums, PBGC publishes two
separate tables of lump sum interest rates. Appendix B provides the
interest rates for PBGC-paid lump sums, and appendix C provides the
legacy interest rates for use by the private sector. To date, the
tables have always been identical.
PBGC first started publishing two sets of interest rates in 2000.
At that time, PBGC recommended that plan sponsors amend (or draft)
plans to explicitly reference ``PBGC's lump sum interest rates for
private-sector payments'' (i.e., appendix C) if they wanted to ensure
plans would not be affected by a future change to the way in which
PBGC-paid lump sums are determined.\6\
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\6\ See 65 FR 14753, 14755 (March 17, 2000).
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Proposed Regulatory Changes
Adopt Lump Sum Assumptions From Section 417(e)(3) of the Code
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. By
associating an interest rate with a specific time horizon, a yield
curve better approximates the present value of future benefits. As a
result, the immediate and deferred structure of PBGC's legacy interest
rates has become increasingly obsolete.
Additionally, the methodology PBGC uses to compute each month's
immediate and deferred interest rates, which was established at a time
when computing resources were limited, is simplistic and typically
results in interest rates significantly lower than the rates most
private-sector plans use to determine lump sums.
Taking into consideration modern structures and methods, PBGC
proposes to adopt the lump sum interest rate assumption from section
417(e)(3) of the Code. Specifically, PBGC proposes to amend its benefit
payments regulation to provide that PBGC will use the ``applicable
interest rate'' \7\ specified in section 417(e)(3)(C) of the Code and
section 205(g)(3)(B)(ii) of ERISA 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).
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\7\ The interest assumption in section 417(e)(3) of the Code was
updated by section 302(b) of the Pension Protection Act of 2006,
Public Law 109-280. The applicable interest rate is defined as the
spot segment rates published by the Internal Revenue Service each
month.
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PBGC also considered whether the lump sum mortality assumption,
i.e. the 1984 Unisex Pensioners Mortality Table, should be replaced in
this proposed rule. Although that table does not reflect recent
mortality improvements, the combination of using it with PBGC's legacy
interest rates results in lump sum amounts that are similar to amounts
determined using the interest and mortality assumptions under section
417(e)(3) of the Code. This would no longer hold true if PBGC were to
adopt the interest rates under section 417(e)(3) of the Code without
also revising its lump sum mortality assumption. Accordingly, to ensure
the amount of PBGC-paid lump sums remains relatively unaffected by this
change, PBGC proposes to amend its benefit payments regulation to
provide that PBGC will use the ``applicable mortality table'' specified
in section 417(e)(3)(B) of the Code and section 205(g)(3)(B)(i) of
ERISA.
PBGC expects that the proposed changes to adopt the interest and
mortality assumptions specified in section 417(e)(3) of the Code would
have a minimal effect on participants and beneficiaries of plans it
trustees because, as noted above, PBGC uses these assumptions only for
purposes of determining de minimis lump sum amounts. Also, because the
interest and mortality changes would generally have offsetting effects,
the net impact would be small. For example, using a participant aged 40
and the January 2019 interest rates to illustrate the impact, the lump
sum amount determined under the proposal would be within 1 percent of
the amount determined using current methods and assumptions.\8\ In
general, the proposed assumptions would result in slightly larger lump
sums for older participants and slightly smaller lump sums for younger
participants. The impact on any particular benefit would depend on
individual demographic factors and
[[Page 51492]]
assumptions in effect on the benefit's valuation date.
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\8\ Age 40 was used for this illustration because an analysis of
plans trusteed by PBGC in the past 10 years indicated that the
median age at plan termination of participants with de minimis
benefits was age 40.
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Discontinue Publication of Legacy Interest Rates
As noted in the background section, PBGC is aware that a relatively
small number of plans still use its legacy interest rates to determine
lump sums. In developing this proposal, PBGC considered whether to
continue calculating and publishing legacy interest rates in appendix C
for use by private-sector plans.\9\ Given that the legacy interest
rates' structure and methodology have become increasingly obsolete,
PBGC concluded that continued publication of the legacy interest rates
for any use would be inappropriate. Instead, 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
rule equal to the average immediate and deferred rates for the 120-
month period ending in July 2019, rounded to the nearest quarter
percent. Thus, for valuation dates on or after the effective date of
the final rule, appendix C would provide for an immediate rate of 1.5
percent for discounting benefits for the period between the annuity
starting date and each future payment date and a deferred rate of 4
percent for discounting benefits during the period leading up to the
annuity starting date.
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\9\ PBGC previously considered revising its methodology for
determining lump sum interest rates and discontinuing publication of
its legacy interest rates in 1998. See 63 FR 57228 (October 26,
1998); 65 FR 14753 (March 17, 2000).
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With respect to plans that use the legacy interest rates, PBGC does
not have information as to whether plan documents explicitly refer to
the interest rates for use by private-sector plans per appendix C or
whether they include more general references to PBGC's lump sum
interest rates or the rates PBGC ``uses.'' For a plan in the latter
category, once the appendix C rates are no longer identical to the
rates used by PBGC, the plan terms may have an ambiguity that should be
resolved. Resolving this ambiguity would not necessarily mean that such
a plan would have to start using the ``applicable interest rate'' for
that purpose (which could result in smaller lump sums). Rather, unclear
provisions in such a plan 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 section
417(e)(3) of the Code and that any other applicable requirements are
satisfied.\10\
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\10\ IRS has previously informed PBGC ``that a plan that refers
to PBGC lump sum interest rates for purposes of calculating the
amount of the distribution subject to Code section 417(e)(3) and
that is amended before the PBGC amends its regulations to provide
lump sum interest rates for PBGC payments that are no longer
identical to the lump sum interest rates for private-sector payments
will not fail to satisfy the `anti-cutback' rules of Code section
411(d)(6) merely because it is amended to clarify that the plan's
reference to PBGC lump sum interest rates means the lump sum
interest rates for private-sector payments.'' 65 FR 14753, 14755
(March 17, 2000).
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Because PBGC has incomplete information on private-sector plan use
of its legacy interest rates, PBGC is soliciting comments on which
private-sector plans use these rates and for what purpose, and whether
setting the legacy interest rates at a 120-month average would cause
any undue burden. 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 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 rule.
Executive Orders 12866, 13563, and 13771
OMB has determined that this rulemaking is not a ``significant
regulatory action'' under Executive Order 12866. Accordingly, this
proposed rule is exempt from the requirements of Executive Order 13771
and OMB has not reviewed the rule under Executive Order 12866.
Executive Orders 12866 and 13563 direct agencies to assess all
costs and benefits of available regulatory alternatives and, if
regulation is necessary, to select regulatory approaches that maximize
net benefits (including potential economic, environmental, public
health and safety effects, distributive impacts, and equity).
Although this is not a significant regulatory action under
Executive Order 12866, PBGC has examined the economic implications of
this proposed rule and has concluded that the proposed changes would
have minimal impact on PBGC's payment of lump sum benefits. As
discussed above, applying the assumptions under section 417(e)(3) of
the Code to a benefit could slightly raise or lower a lump sum benefit
paid by PBGC. Additionally, with respect to plans terminating on or
after the effective date, some benefits that would have been considered
de minimis using the prior assumptions would not be de minimis using
the revised assumptions (and vice versa).
For the relatively small number of private-sector plans that use
PBGC's legacy interest rates to determine lump sums, PBGC expects that
most refer to appendix C. Because the final interest rate set is an
average of recent rates, the proposed change would have little to no
impact on these plans. Of plans referring generally to PBGC's lump sum
interest rates, PBGC expects that some of the affected plans would be
amended to refer to appendix C. However, some plans could pay smaller
lump sums and consequentially, some participants could receive smaller
lump sums.
Section 6 of Executive Order 13563 requires agencies to rethink
existing regulations by periodically reviewing their regulatory program
for rules that ``may be outmoded, ineffective, insufficient, or
excessively burdensome.'' These rules should be modified, streamlined,
expanded, or repealed as appropriate. PBGC has identified the
assumptions used for lump sums in its benefit payments regulation as
outmoded and the proposed amendment to remove these assumptions as
consistent with the principles for review under E.O. 13563.
Regulatory Flexibility Act
The Regulatory Flexibility Act imposes certain requirements with
respect to rules that are subject to the notice-and-comment
requirements of section 553(b) of the Administrative Procedure Act and
that are likely to have a significant economic impact on a substantial
number of small entities. Unless an agency determines that a proposed
rule is not likely to have a significant economic impact on a
substantial number of small entities, section 603 of the Regulatory
Flexibility Act requires that the agency present an initial regulatory
flexibility analysis at the time of the publication of the proposed
rule describing the impact of the rule on small entities and seeking
public comment on such impact. Small entities include small businesses,
organizations, and governmental jurisdictions.
For purposes of the Regulatory Flexibility Act requirements with
respect to this proposed regulation, PBGC considers a small entity to
be a plan with fewer than 100 participants. This is substantially the
same criterion PBGC uses in other regulations \11\ and is consistent
with certain requirements in
[[Page 51493]]
title I of ERISA \12\ and the Code,\13\ as well as the definition of a
small entity that the Department of Labor has used for purposes of the
Regulatory Flexibility Act.\14\
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\11\ See, e.g., special rules for small plans under part 4007
(Payment of Premiums).
\12\ See, e.g., section 104(a)(2) of ERISA, which permits the
Secretary of Labor to prescribe simplified annual reports for
pension plans that cover fewer than 100 participants.
\13\ See, e.g., section 430(g)(2)(B) of the Code, which permits
plans with 100 or fewer participants to use valuation dates other
than the first day of the plan year.
\14\ See, e.g., DOL's final rule on Prohibited Transaction
Exemption Procedures, 76 FR 66,637, 66,644 (Oct. 27, 2011).
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Further, while some large employers operate small plans along with
larger ones, in general, most small plans are maintained by small
employers. Thus, PBGC believes that assessing the impact of the final
rule on small plans is an appropriate substitute for evaluating the
effect on small entities. The definition of small entity considered
appropriate for this purpose differs, however, from a definition of
small business based on size standards promulgated by the Small
Business Administration (13 CFR 121.201) pursuant to the Small Business
Act. PBGC therefore requests comments on the appropriateness of the
size standard used in evaluating the impact on small entities of the
amendments to the benefit payments regulation to implement this
proposed rule.
On the basis of its proposed definition of small entity, PBGC
certifies under section 605(b) of the Regulatory Flexibility Act (5
U.S.C. 601 et seq.) that the amendments in this proposed rule would not
have a significant economic impact on a substantial number of small
entities. The vast majority of the effect of this proposed rule would
be on PBGC or persons with very small benefits who will be receiving
their benefits from PBGC. Though an unknown number of plans use PBGC's
lump sum interest rates to calculate lump sums, it is unlikely that a
substantial number of small plans still use these rates as they have
not been required to do so since RPA `94 took effect over 20 years ago.
Accordingly, as provided in section 605 of the Regulatory Flexibility
Act, sections 603 and 604 do not apply.
List of Subjects in 29 CFR Part 4022
Employee benefit plans, Pension insurance, Reporting and
recordkeeping requirements.
For the reasons given above, PBGC proposes to amend 29 CFR part
4022 as follows:
PART 4022--BENEFITS PAYABLE IN TERMINATED SINGLE-EMPLOYER PLANS
0
1. The authority citation for part 4022 continues to read as follows:
Authority: 29 U.S.C 1302, 1322, 1322b, 1341(c)(3)(D), and 1344.
0
2. Amend Sec. 4022.7 by revising paragraphs (d)(2) and (e) to read as
follows:
Sec. 4022.7 Benefits payable in a single installment.
* * * * *
(d) * * *
(2) Actuarial assumptions. PBGC will calculate the lump sum value
of a benefit by valuing the monthly annuity benefits payable in the
form determined under Sec. 4044.51(a) of this chapter and commencing
at the time determined under Sec. 4044.51(b) of this chapter. The
actuarial assumptions used will be those described in Sec. 4044.52 of
this chapter, except as follows:
(i) Loading for expenses. There will be no adjustment to reflect
the loading for expenses.
(ii) Mortality assumption. The ``applicable mortality table''
specified in section 205(g)(3)(B)(i) of ERISA and section 417(e)(3)(B)
of the Code for the year containing the termination date will apply.
(iii) Interest rate assumption. The ``applicable interest rate''
specified in section 205(g)(3)(B)(ii) of ERISA and section 417(e)(3)(C)
of the Code for the month containing the termination date will apply.
(iv) Date for determining lump sum value. The date as of which a
lump sum value is calculated is the termination date, except that in
the case of a subsequent insufficiency it is the date described in
section 4062(b)(1)(B) of ERISA.
(e) Private-sector lump sum rates. PBGC provides lump sum interest
rates for private-sector payments in appendix C to this part.
Appendix A to Part 4022--[Removed and Reserved]
0
3. Remove and reserve appendix A.
Appendix B to Part 4022--[Removed and Reserved]
0
4. Remove and reserve appendix B.
0
5. In appendix C to part 4022, a final rate set is added at the end of
the table to read as follows:
Appendix C to Part 4022--Lump Sum Interest Rates for Private-Sector
Payments
* * * * *
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For plans with a valuation date Immediate Deferred annuities (percent)
Rate set ---------------------------------- annuity rate ------------------------------------------------------------------------------------
On or after Before (percent) i i i n n
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* * * * * * *
Final [EFFECTIV............... 1.50 4.00 4.00 4.00 7 8
OF FINAL RULE]
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Issued in Washington, DC.
Gordon Hartogensis,
Director, Pension Benefit Guaranty Corporation.
[FR Doc. 2019-21087 Filed 9-27-19; 8:45 am]
BILLING CODE 7709-02-P