PBGC Removes Five-Year Phase-In Period, Guarantee Limits for Rollovers to DB Plans

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By Sean Forbes

Nov. 24 — Defined contribution participants will find it easier to roll over their assets into defined benefit plans without worrying about the Pension Benefit Guaranty Corporation's maximum guarantee limits or the five-year phase-in period, the agency said in a final rule (RIN 1212-AB23).

The PBGC said this guidance makes it easier for plan participants to get lifetime income with annuities, a growing theme with the agency's sister agencies, the departments of Labor and Treasury. They are among a growing chorus of agencies seeking to expand the availability of retirement income options for retirees.

The PBGC “hopes to encourage people to get lifetime income by removing potential barriers to moving their benefits from defined contribution plans to defined benefit plans,” the agency said in a news release issued Nov. 24, when the final regulations were released. The final rule “removes the fear that the amounts rolled over would suffer under guarantee limits should PBGC step in and pay benefits,” the agency said.

Benefits also will be placed in the second highest priority category of benefits in the asset allocations, according to the final rules.

Other than including minor clarifications suggested by commenters, the final rules are identical to the proposed rules, which were issued in April.

Removal of Limits

The PBGC guarantees the payment of all nonforfeitable benefits provided by a plan up to a statutory limit that is updated each year. Generally, when a plan's benefit increase has been in effect for less than five years, the guarantee is also subject to a five-year phase-in limitation. Under that rule, 20 percent is the benefit increase guaranteed after one year, 40 percent after two years, and so on until full phase-in after five years.

The final rule removes both of those limitations for these rollover contributions. The PBGC will treat the rollover amounts as an accrued benefit deriving from mandatory employee contributions—which have a higher claim on plan assets than nearly all other benefits under the plan—and determine the accrued benefit using the rules of tax code Section 411(c)(2)(B).

The rule also generally will not permit participants to receive a lump-sum return of mandatory employee contributions attributable to rollover amounts.

“PBGC has undertaken a modest step to remedy a major problem: the loss of lifetime retirement income security in retirement plans,” Joshua Gotbaum, guest scholar in the economic studies program at the Brookings Institution, and former director of the PBGC, told Bloomberg BNA via e-mail Nov. 24. “Much more needs to be done, but that’s the responsibility” of the Department of Labor and the Department of Treasury, he said.

Series of Guidance

The Nov. 24 PBGC rules are the latest in a series of guidance from federal agencies focusing on lifetime income to help ensure retirees have a steady stream of money through retirement.

In October, the Internal Revenue Service issued Notice 2014-66, making it easier for plan sponsors to offer annuities in their plans through target date funds.

In July, the IRS and Treasury issued final regulations (T.D. 9673, RIN 1545-BK23) allowing for the purchase of deferred annuities that start at an advanced age, such as 80 or 85, by modifying the required minimum distribution rules. Treasury said the change makes it easier for retirees to consider using lifetime income options.

Meanwhile, the Labor Department's Employee Benefits Security Administration is considering a proposal that would require that pension benefit statements for defined contribution plans include lifetime income illustrations.

Under DOL's proposal, a pension benefit statement for defined contribution retirement plans would show the current balance of a participant's retirement account, as well as a projected account balance at retirement. The statements also would include two lifetime income illustrations that would be based on the current balance of a participant's retirement account and the participant's projected account balance “at normal retirement age,” the agency said in an advance notice of proposed rulemaking (RIN 1210-AB20).

The PBGC's final rules are scheduled to be published Nov. 25 in the Federal Register, and they are effective Dec. 26.

To contact the reporter on this story: Sean Forbes in Washington at sforbes@bna.com

To contact the editor responsible for this story: Sue Doyle at sdoyle@bna.com