[Federal Register Volume 79, Number 227 (Tuesday, November 25, 2014)]
[Rules and Regulations]
[Pages 70090-70095]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-27826]
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PENSION BENEFIT GUARANTY CORPORATION
29 CFR Parts 4001, 4022, and 4044
RIN 1212-AB23
Title IV Treatment of Rollovers From Defined Contribution Plans
to Defined Benefit Plans
AGENCY: Pension Benefit Guaranty Corporation.
ACTION: Final rule.
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SUMMARY: In April 2014, PBGC proposed to amend its regulations to
clarify the treatment of benefits resulting from a rollover
distribution from a defined contribution plan to a defined benefit
plan, if the defined benefit plan was terminated and trusteed by PBGC.
Under the proposal, a benefit resulting from rollover amounts generally
would not be subject to PBGC's maximum guaranteeable benefit or phase-
in limitations and would be in the second highest priority category of
benefits in the allocation of assets. PBGC is now finalizing that
proposal. Except for making minor clarifications suggested by
commenters, the final regulation is the same as the proposed
regulation. This rulemaking is part of PBGC's efforts to enhance
retirement security by promoting lifetime income options.
DATES: Effective December 26, 2014. See Applicability in SUPPLEMENTARY
INFORMATION.
FOR FURTHER INFORMATION CONTACT: Catherine B. Klion
(klion.catherine@pbgc.gov), Assistant General Counsel, Office of the
General Counsel, Pension Benefit Guaranty Corporation, 1200 K Street
NW., Washington, DC 20005-4026; 202-326-4024. (TTY and TDD users may
call the Federal relay service toll free at 1-800-877-8339 and ask to
be connected to 202-326-4024.)
SUPPLEMENTARY INFORMATION:
Executive Summary
Purpose of the Regulatory Action
This regulatory action is needed to provide guidance on treatment
of benefits resulting from a rollover distribution from a defined
contribution plan to a defined benefit plan, where the defined benefit
plan is terminated and trusteed by the Pension Benefit Guaranty
Corporation (PBGC).
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, section 4022 of ERISA (Single-Employer Plan Benefits
Guaranteed), and section 4044 of ERISA (Allocation of Assets).
Major Provisions of the Regulatory Action
Under the final regulation, a benefit resulting from rollover
amounts generally will be in the second highest priority category among
various classes of benefits in the allocation of assets and generally
will not be subject to PBGC's maximum guaranteeable benefit or phase-in
limitations.
Background
PBGC administers the single-employer pension plan termination
insurance program under Title IV of ERISA. The program covers private-
sector, single-employer defined benefit plans, for which premiums are
paid to PBGC each year. Covered plans that are underfunded may
terminate either in 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 benefits in accordance with the provisions of Title IV. At
times, plans trusteed by PBGC include contributions made by employees
that fund part of the benefit under the plan.
Mandatory Contributions
A plan may be funded in whole or in part by mandatory
contributions. Under section 4044(b)(6) of ERISA, the term ``mandatory
contributions'' means amounts contributed to the plan by a participant
that are required as a condition of employment, as a condition of
participation in such plan, or as a condition of obtaining benefits
under the plan attributable to employer contributions.
Typically, mandatory employee contributions are required under the
plan as a percentage of the employee's compensation. They are withheld
from the salary of the employee by the employer and deposited to the
employee's credit in the defined benefit plan on an after-tax basis.\1\
Such mandatory employee contributions have generally been used to fund
a portion of the participant's accrued benefit as determined under the
plan's benefit formula and are required in order to receive the portion
of the accrued benefit derived from employer contributions.
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\1\ Generally, contributions by employees to defined benefit
plans (whether mandatory or voluntary) are not deductible for
federal income tax purposes.
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Section 411(c)(2)(B) of the Code \2\ provides that, in the case of
a defined benefit plan, the accrued benefit derived from mandatory
employee contributions is equal to the employee's contributions
accumulated to normal retirement age using specified rates under
section 411(c)(2)(C), and converted to an actuarially equivalent
annuity commencing at normal retirement age, using an interest rate
under section 417(e)(3) of the Code as of the determination date.
Section 411(c)(1) of the Code provides that an employee's accrued
benefit derived from employer contributions as of any date is the
excess, if any, of the accrued benefit for the employee as of that date
over the accrued benefit derived from contributions made by the
employee as of that date.
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\2\ See also ERISA section 204(c)(2)(B). References to the Code
in this preamble should be read to include the parallel provision
under ERISA.
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PBGC Treatment of Mandatory Employee Contributions in Terminated Plans
When a plan terminates in a distress termination or an involuntary
termination, each participant's plan benefit is assigned to one or more
of six ``priority categories'' that are described in paragraphs (1)
through (6) of section 4044(a) of ERISA.\3\ Participants' accrued
[[Page 70091]]
benefits derived from mandatory employee contributions are assigned to
PC2. Because benefits in PC2 have a higher claim on plan assets than
nearly all other benefits under the plan, when an underfunded plan
terminates, plan assets are usually (but not always) sufficient to pay
accrued benefits derived from mandatory employee contributions.
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\3\ Plan assets must be allocated to each priority category in
succession, beginning with priority category one (PC1). The benefits
assigned to each priority category under section 4044 of ERISA in
general are as follows:
PC1: The portion of a participant's accrued benefit
derived from the participant's voluntary contributions.
PC2: The portion of a participant's accrued benefit
derived from the participant's mandatory contributions.
PC3: The portion of a participant's benefit that was in
pay status as of the beginning of the three-year period ending on
the termination date (or bankruptcy filing date, if applicable), or
that would have been in pay status at the beginning of such three-
year period if the participant had retired before the beginning of
such three-year period, provided that the benefit was the lowest
benefit payable under the plan provisions at any time during the
period beginning five years before the termination date (or
bankruptcy filing date, if applicable) and ending on the termination
date.
PC4: All other guaranteed benefits.
PC5: All other nonforfeitable benefits.
PC6: All other benefits.
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Although PBGC generally pays benefits only in annuity form, PBGC's
regulations allow a return of mandatory employee contributions in a
single installment (or a series of installments), provided certain
conditions are met (see Sec. 4022.7(b)(2)).
Rollover Benefits Under the Code and Treasury/IRS Guidance
Section 401(a)(31) of the Code requires a qualified plan to permit
a distributee of any eligible rollover distribution to elect a direct
rollover of any part of the distribution to an eligible retirement
plan. Section 402(c) of the Code permits an individual receiving an
eligible rollover distribution from a qualified plan to elect to roll
over any portion of that distribution within a specified time to an
eligible retirement plan that accepts the rollover (including a defined
benefit plan).
On February 21, 2012, the Department of the Treasury (Treasury) and
the Internal Revenue Service (IRS) issued Rev. Rul. 2012-4,\4\ which
clarified certain qualification requirements under section 401(a) of
the Code for use of rollover amounts to provide an additional benefit
under a defined benefit plan. Under the facts of the example provided
in Rev. Rul. 2012-4, a qualified defined benefit plan provides that it
will accept a direct rollover of a distribution from a qualified
defined contribution plan maintained by the same employer for an
employee or former employee of the employer who separates from service
after age 55 with at least 10 years of service and elects to commence
an immediate annuity of the employee's benefit under the plan
(including the additional benefit resulting from the direct rollover).
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\4\ 2012-8 I.R.B. 386, http://www.irs.gov/irb/2012-08_IRB/ar08.html.
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Rev. Rul. 2012-4 treats the amounts rolled over as mandatory
employee contributions for purposes of section 411(c) of the Code. The
revenue ruling further provides that, if the plan provided an annuity
with respect to the rollover in excess of the amount determined under
the rules of section 411(c) of the Code, such as by using a more
favorable actuarial conversion basis than required by those rules, the
portion of the benefit resulting from the rollover amounts that
exceeded the benefit derived from mandatory employee contributions as
determined under section 411(c)(2) of the Code would be subject to the
requirements applicable to a benefit attributable to employer
contributions. The revenue ruling states that in this case, the
liability for the total benefit resulting from the rollover (including
the portion of the accrued benefit considered to be derived from
employer contributions because it exceeds the amount determined under
section 411(c)(2)(B)) would likely exceed the amounts rolled over,
which means that the employer will become responsible for additional
funding costs.
Rev. Rul. 2012-4 states (in footnote 1) that PBGC is developing
guidance on the Title IV treatment of benefits under a defined benefit
plan resulting from a rollover. This final rule is that guidance.\5\
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\5\ The facts of the example in Rev. Rul. 2012-4 involve an
employee who separates from service after age 55 with at least ten
years of service and elects to commence an immediate annuity and
rolls over a benefit from a defined contribution plan to a defined
benefit plan maintained by the same employer. However, rollovers are
permitted in broader circumstances. This final rule is not limited
to the facts in the example.
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PBGC is amending 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.
The availability of a rollover of a participant's retirement savings in
a 401(k) or other defined contribution plan to a defined benefit plan
expands the opportunities for participants to elect lifetime annuity
options.
Proposed Rule
On April 2, 2014 (at 79 FR 18483), PBGC published a proposed rule
on Title IV treatment of rollovers. PBGC received comments from the
American Federation of Labor and Congress of Industrial Organizations
(AFL-CIO), the American Council of Life Insurers (ACLI), and AARP.\6\
The commenters all supported the proposed rule and PBGC's efforts to
promote lifetime income options.
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\6\ The comments can be found at http://www.pbgc.gov/documents/Comments-to-PBGC-on-Title-IV-Rollover-Treatment.pdf.
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In response to the comments, the final regulation makes the
following clarifications:
The amendments in this final rule apply only to rollovers
from defined contribution plans. See Sec. 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 defined contribution plan, and
earnings on both. See Sec. 4001.2 (definition of rollover amounts).
The annuity benefit resulting from a rollover amount is a
pension benefit (and thus guaranteeable). See Sec. 4022.2 (definition
of pension benefit).
Except for these clarifications, the final regulation is the same
as the proposed regulation.
Overview of Final Regulation
PBGC is amending 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 amendments establish or
clarify the rules for treatment of rollovers from a defined
contribution plan to a defined benefit plan, when the defined benefit
plan later terminates in an underfunded status. Following are the most
important changes:
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 section 411(c)(2)(B).
Unlike other PC2 benefits, a PC2 benefit resulting from
rollover amounts will generally not be payable in lump sum form.
The portion of a 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.
A participant's accrued benefit resulting from rollover
amounts generally will not be subject to PBGC's maximum guaranteeable
benefit limitation under section 4022(b) of ERISA and thus will not be
taken into
[[Page 70092]]
account in applying that limitation. However, the maximum guaranteeable
benefit limitation will apply to any benefit resulting from a rollover
amount that exceeds the accrued benefit treated as derived from
mandatory employee contributions (i.e., the accrued benefit
attributable to employer contributions).
A 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 a rollover amount
that exceeds the accrued benefit treated as derived from mandatory
employee contributions, with the phase-in period beginning as of the
date the rollover contribution was received by the plan.
A detailed discussion of the final regulation follows.
Regulatory Changes
Guaranteed Benefits
Under section 4022 of ERISA, PBGC guarantees the payment of all
nonforfeitable benefits provided by a plan, subject to two principal
statutory limitations--the maximum guaranteeable benefit limitation and
the five-year phase-in limitation.
The amount of the maximum monthly guarantee is set by law and is
updated each calendar year. The maximum guaranteeable benefit
applicable to a plan is fixed as of that plan's termination date. Under
the Pension Protection Act of 2006, if a plan terminates during a plan
sponsor's bankruptcy and the sponsor entered bankruptcy on or after
September 16, 2006, the maximum guaranteeable benefit is fixed as of
the date the sponsor entered bankruptcy.
The five-year phase-in limitation generally applies to a benefit
increase that has been in effect for less than five years. Generally,
20 percent of a benefit increase is guaranteed after one year, 40
percent after two years, etc., with full phase-in of the guarantee
after five years. If the amount of the monthly benefit increase is
below $100, the annual rate of phase-in is $20 rather than 20 percent.
For this purpose, a benefit increase resulting from a plan amendment is
deemed to be in effect on the later of the amendment's adoption date or
its effective date.
Historically, PBGC has interpreted the statutory limitations to
apply to the participant's total nonforfeitable accrued benefit under a
plan, including that portion of the benefit funded by traditional
after-tax mandatory employee contributions. In the case of rollover
amounts, however, PBGC will exempt from these limitations the accrued
benefit derived from mandatory employee contributions determined under
the rules of Code section 411(c)(2)(B). The exemption will not apply to
any benefit resulting from rollover amounts that exceeds the accrued
benefit derived from mandatory employee contributions (i.e., the
accrued benefit attributable to employer contributions).
Rollovers can help preserve participants' retirement savings until
retirement. They provide a valuable means for participants to withdraw
their benefits from one retirement plan and contribute them to another.
PBGC believes that rollovers to defined benefit plans may provide
lifetime-annuity protection at a competitive cost. Consistent with the
Administration's initiative on retirement security, PBGC wants to
eliminate impediments to this form of annuitization of distributions
from defined contribution plans by providing assurances to participants
that their benefits attributable to rollover amounts to a defined
benefit plan will largely be protected from the limitations that might
otherwise apply if the plan terminates and is trusteed by PBGC.
There are a number of reasons why PBGC views benefits resulting
from the portion of rollover amounts treated as mandatory employee
contributions differently from other benefits under a plan. Unlike
other mandatory employee contributions, rollover benefits require an
affirmative election by the participant to roll over a pension
distribution to obtain an additional annuity from a defined benefit
plan. If the benefit resulting from rollover amounts caused a
participant's total benefit under the plan to exceed PBGC's maximum
guaranteeable benefit, participants might be reluctant to roll over
benefits from defined contribution plans to defined benefit plans.
Applying the five-year phase-in limitation to benefits resulting from
rollover amounts similarly might make rollovers unattractive.
The limitations on PBGC's guarantee were designed to protect the
pension insurance system from risk of loss. But rollovers do not
present the same risk of loss to the insurance program as other
benefits. A benefit derived from rollover amounts treated as mandatory
employee contributions is considered under Rev. Rul. 2012-4 to be
actuarially equivalent to the rollover amounts received by the defined
benefit plan. Therefore, although a plan accepting a rollover becomes
liable to pay additional benefits, it simultaneously receives
additional funds of equivalent value. That is not true for most new
benefit accruals. Accordingly, it is a reasonable statutory
interpretation to exempt from the maximum guaranteeable benefit and
phase-in limitations a benefit resulting from rollover amounts that
does not exceed the accrued benefit treated as derived from mandatory
employee contributions.
In accordance with PBGC's statutory interpretation, the final rule
amends Sec. 4022.22 to exempt the rollover benefit amount derived from
mandatory employee contributions from the maximum guaranteeable benefit
limitation. Thus, PBGC will exclude that amount from its determination
of the participant's maximum guaranteeable benefit. However, any
rollover benefit in excess of the portion of such benefit derived from
mandatory employee contributions (i.e., any portion of the rollover
benefit derived from employer contributions) will be combined with the
annuity otherwise payable under the plan in determining the
participant's maximum guaranteeable benefit.
Similarly, the final rule amends Sec. 4022.24 to exempt a
participant's rollover benefit derived from mandatory employee
contributions from the five-year phase-in limitation. The five-year
phase-in limitation will, however, apply to the portion of any rollover
benefit derived from employer contributions, with that benefit portion
deemed to be in effect on the date the rollover amounts were received
by the plan.
PBGC's regulations provide for a third guarantee limitation, the
``accrued-at-normal'' limitation, which restricts PBGC's guarantee of
temporary supplements. Under Sec. 4022.21, PBGC's guarantee cannot
exceed the accrued benefit payable as a straight life annuity at normal
retirement age. PBGC will include the annuity attributable to rollover
amounts in the determination of the accrued-at-normal limitation, which
will increase the limitation against which the participant's entire
benefit is measured, and will apply the accrued-at-normal limitation to
the entire benefit, including rollover amounts. This will generally
have the effect of increasing the participant's guaranteeable benefit.
Form of Payment
Before being amended by this final rule, PBGC's regulation provided
for the return of mandatory employee contributions in a single
installment (or a series of installments) if a participant, or a
beneficiary of a pre-retirement death benefit, so elected in accordance
with the plan's provisions. If a participant (or a surviving spouse)
[[Page 70093]]
elected a return of mandatory employee contributions prior to the
annuity starting date in the form of a lump sum, instead of as an
annuity, the lump sum benefit would have been determined under Sec.
4044.12(c)(2) as the amount of the participant's accumulated mandatory
contributions.\7\ A withdrawal of the participant's accumulated
mandatory employee contribution would have resulted in an accrued
benefit under the plan derived solely from employer contributions.
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\7\ PBGC determines the amount of the lump sum benefit based on
the participant's accumulated contributions--i.e., the employee's
mandatory contributions credited with interest for the period
through the plan's termination date (but not less than the minimum
lump sum required under section 411(c) of the Code upon withdrawal
of mandatory employee contributions). Interest on that sum is
thereafter based on PBGC's late-payment interest rate until the
participant's distribution date.
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Under the final regulation, PBGC generally will not pay
participants a lump sum return of mandatory employee contributions
attributable to rollover amounts. PBGC will disregard a plan's
provisions for the return of employee contributions in a lump sum and
will make rollover amounts payable only in the form of an annuity.
Because the participant had the chance to take the distribution from a
defined contribution plan as a lump sum and instead chose to roll it
into a defined benefit plan to obtain additional annuity benefits, it
would seem anomalous to later allow the participant to convert the
additional annuity back into a lump sum. Moreover, paying the
additional benefit as an annuity is consistent with PBGC's policy of
promoting retirement security through preserving lifetime retirement
income.
Under the final regulation, the annuity resulting from rollover
amounts will be payable at the same time, and in the same form, as the
remainder of the participant's benefit under the plan to avoid
administrative burden to PBGC.\8\ In the case of a plan that provides
for a pre-retirement death benefit that returns the employee's
mandatory contributions in a single installment, if a participant dies
after the plan terminates, PBGC will not allow the participant's spouse
to elect to withdraw the mandatory contributions attributable to
rollover amounts in a single installment. Instead, PBGC will include
such contributions in the value of the plan's qualified preretirement
survivor annuity (QPSA) to the spouse.\9\ PBGC will determine whether a
payment was de minimis (currently $5,000 or less under Sec.
4022.7(b)(1)(i)) and, if so, will base the amount of the payment on the
lump sum value of the participant's total benefit payable by PBGC (the
benefit resulting from rollover amounts combined with the benefit
excluding rollover amounts).
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\8\ PBGC will disregard any plan provision that allows an
additional annuity resulting from rollover amounts to have an
annuity starting date that differs from the annuity starting date
for the remainder of the participant's benefit under the plan.
\9\ If no QPSA is payable, the mandatory contributions would be
payable to a named beneficiary in a life annuity form that would
commence at the same time as a QPSA could commence under PBGC's
regulations. In the case of a cash refund annuity (i.e., a post-
retirement lump sum death benefit of the value of the participant's
mandatory contributions in excess of the pension payments received
by the participant at the time of death), PBGC will disregard this
plan provision. Instead, PBGC will include the value of the
mandatory contributions in the qualified joint and survivor annuity
(QJSA) to the spouse or, if no QJSA is payable, would pay such
amounts to a named beneficiary in a life annuity form that would
commence at the same time as a QJSA could commence under PBGC's
regulations.
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Allocation of Assets
The final rule also amends PBGC's asset allocation regulation to
set forth rules for PBGC treatment of rollover benefits when a defined
benefit plan terminates with insufficient assets to pay all benefits.
New Sec. Sec. 4044.12(b)(4) and (c)(4) describe the calculation of
a participant's total annuity benefit resulting from rollover amounts.
For participants and beneficiaries not yet in pay status as of the
termination date, the rollover amounts will be credited with interest
payable under plan provisions to the plan's termination date, and
converted to an annuity benefit payable at the normal retirement age
using the plan's interest rates and conversion factors in effect as of
the plan's termination date for the conversion of such rollover
amounts.
Under the final regulation, the portion of a participant's accrued
benefit resulting from rollover amounts derived from mandatory employee
contributions will be determined using the rules of section 411(c) of
the Code. Specifically, the participant's accumulated mandatory
employee contributions--the participant's rollover amounts credited
with interest at 120% of the Federal mid-term rate from the date of the
rollover to the plan's termination date--will be converted to an
actuarially equivalent straight life annuity under the plan payable at
the normal retirement age using the applicable interest rate and
mortality table under section 417(e) of the Code as of the plan's
termination date. Consistent with Rev. Rul. 2012-4, which defines this
annuity amount as the actuarial equivalent of an employee's rollover
amounts to a defined benefit plan, only an annuity benefit determined
on this basis will be assigned to PC2.
Rev. Rul. 2012-4 permits a qualified defined benefit plan to offer
a subsidy with respect to a rollover by using a more generous annuity
conversion factor than under the minimum rules for an actuarially
equivalent annuity under section 411(c) of the Code, provided the
additional qualification requirements applicable to a benefit derived
from employer contributions are met. If, under the plan's provisions,
the benefit resulting from rollover amounts exceeds the annuity derived
from mandatory employee contributions determined under the rules of
section 411(c)(2) of the Code--for example, because the plan uses more
generous conversion factors than those under section 417(e) of the
Code--the final regulation treats the portion of the benefit in excess
of the annuity derived from mandatory employee contributions under the
rules of section 411(c)(2) as a benefit derived from employer
contributions for purposes of assigning the benefits to the priority
categories under part 4044. The annuity benefit derived from employer
contributions will be a guaranteeable benefit in PC3, PC4, or PC5, as
applicable, because it is a nonforfeitable benefit (i.e., a benefit for
which the participant has satisfied all plan conditions for entitlement
as of the plan's termination date). Under section 4022(a) of ERISA,
PBGC is required to guarantee all nonforfeitable benefits provided by a
plan, subject to the limitations contained in section 4022(b).
Applicability
The amendments made by this final rule will apply to terminations
initiated on or after December 26, 2014.
Compliance With Rulemaking Requirements
Executive Order 12866 ``Regulatory Planning and Review'' and Executive
Order 13563 ``Improving Regulation and Regulatory Review''
This final rule is not a ``significant regulatory action'' 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). Executive
Order 13563 emphasizes the importance of quantifying both costs and
benefits, of reducing costs, of harmonizing rules,
[[Page 70094]]
and of promoting flexibility. Executive Orders 12866 and 13563 require
a comprehensive regulatory impact analysis be performed for any
economically significant regulatory action, defined as an action that
would result in an annual effect of $100 million or more on the
national economy or which would have other substantial impacts. In
accordance with OMB Circular A-4, PBGC has examined the economic and
policy implications of this final rule and has concluded that the
action's benefits justify its costs.
Under Section 3(f)(1) of Executive Order 12866, a regulatory action
is economically significant if ``it is likely to result in a rule that
may . . . [h]ave an annual effect on the economy of $100 million or
more or adversely affect in a material way the economy, a sector of the
economy, productivity, competition, jobs, the environment, public
health or safety, or State, local, or tribal governments or
communities.'' PBGC has determined that this final rule does not cross
the $100 million threshold for economic significance and is not
otherwise economically significant.
PBGC estimates that the annual economic impact of this final rule
will be about $11,000,000. This is the amount PBGC estimates that
participants who roll over benefits from defined contribution plans to
defined benefit plans that subsequently terminate and are trusteed by
PBGC in aggregate would gain (and PBGC would lose), as a result of the
regulatory change to exclude from the maximum guaranteeable benefit and
phase-in limitations any benefit resulting from rollover amounts that
does not exceed the accrued benefit derived from mandatory employee
contributions.
Since IRS has only recently provided guidance to defined benefit
plans on calculating rollover amounts, PBGC has no historic data to
draw upon in developing this estimate. Accordingly, PBGC made
conservative assumptions based on its judgment about such factors as
how many defined benefit plans would allow rollovers from defined
contribution plans and how many participants in such plans would roll
over benefits from defined contribution plans.
Although it is difficult to predict with any certainty the annual
economic impact of the regulatory action, given that the estimate is so
far below $100 million, PBGC has determined that the annual economic
impact of the final rule will be less than $100 million.
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
or final 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 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 final rule, PBGC considers a small entity to be a plan
with fewer than 100 participants. This criterion is consistent with
certain requirements in Title I of ERISA and the Internal Revenue Code,
as well as the definition of a small entity that the Department of
Labor has used in similar circumstances for purposes of the Regulatory
Flexibility Act.
Further, while some large employers that terminate plans may have
small plans that terminate 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. Therefore, in the proposed rule,
PBGC requested comments on the appropriateness of the size standard
used in evaluating the impact on small entities of the amendments to
the benefit payments regulation. No comments were received on this
point.
On the basis of this 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 final rule will not have a
significant economic impact on a substantial number of small entities.
Virtually all, if not all, of the effect of this final rule will be on
PBGC or persons who receive benefits from PBGC. Accordingly, as
provided in section 605 of the Regulatory Flexibility Act (5 U.S.C. 601
et seq.), sections 603 and 604 do not apply.
List of Subjects
29 CFR Part 4001
Pensions.
29 CFR Part 4022
Pension insurance, Pensions.
29 CFR Part 4044
Pension insurance, Pensions.
For the reasons given above, PBGC is amending 29 CFR parts 4001,
4022, and 4044 as follows.
PART 4001--TERMINOLOGY
0
1. The authority citation for part 4001 continues to read as follows:
Authority: 29 U.S.C. 1301, 1302(b)(3).
0
2. In Sec. 4001.2, add a definition for ``rollover amounts'' in
alphabetical order to read as follows:
Sec. 4001.2 Definitions.
* * * * *
Rollover amounts means the dollar amount of all or any part of a
distribution that is rolled over from a defined contribution plan into
a defined benefit plan in accordance with section 401(a)(31) or 402(c)
or similar provisions under the Internal Revenue Code. Rollover amounts
include salary deferral contributions made by the participant, any
additional employer contributions provided for under the defined
contribution plan, and earnings on both.
* * * * *
PART 4022--BENEFITS PAYABLE IN TERMINATED SINGLE-EMPLOYER PLANS
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3. The authority citation for part 4022 continues to read as follows:
Authority: 29 U.S.C. 1302, 1322, 1322(b), 1341(c)(3)(D), and
1344.
Sec. 4022.2 [Amended]
0
4. In Sec. 4022.2, the definition of ``pension benefit'' is amended by
adding at the end ``An annuity benefit resulting from a rollover amount
is a pension benefit.''
0
5. Amend Sec. 4022.7 as follows:
0
a. In paragraph (b)(2)(i), add the phrase ``except as provided in
paragraph (b)(2)(iii) of this section,'' after the words
``Notwithstanding any other provision of this part,'';
0
b. Add paragraph (b)(2)(iii); and
0
c. Revise paragraph (c)(2).
The addition and revision read as follows:
Sec. 4022.7 Benefits payable in a single installment.
* * * * *
[[Page 70095]]
(b) * * *
(2) * * *
(iii) Rollover amounts. The rule in paragraph (b)(2) of this
section (dealing with return of employee contributions) does not apply
to a participant's accumulated mandatory employee contributions
resulting from rollover amounts (as determined under Sec.
4044.12(c)(4)(i) of this chapter) or the benefit derived from such
mandatory employee contributions.
* * * * *
(c) * * *
(2) Exception. Except in the case of accumulated mandatory employee
contributions resulting from rollover amounts (as determined under
Sec. 4044.12(c)(4)(i) of this chapter), upon the death of a
participant the PBGC may pay in a single installment (or a series of
installments) that portion of the participant's accumulated mandatory
employee contributions that is payable under the plan in a single
installment (or a series of installments) upon the participant's death.
* * * * *
0
6. In Sec. 4022.8, add paragraph (f) to read as follows:
Sec. 4022.8 Form of payment.
* * * * *
(f) Rollover amounts. The annuity benefit resulting from rollover
amounts (as determined under Sec. 4044.12(c)(4) of this chapter) is
combined with any other benefit under the plan and paid in the same
form and at the same time as the other benefit.
0
7. In Sec. 4022.22, add paragraph (d) to read as follows:
Sec. 4022.22 Maximum guaranteeable benefit.
* * * * *
(d) Rollover amounts. Any portion of a benefit derived from
mandatory employee contributions resulting from rollover amounts (as
determined under Sec. 4044.12(c)(4)(i) of this chapter) is disregarded
in applying the provisions of Sec. Sec. 4022.22 and 4022.23. However,
any portion of a benefit derived from employer contributions resulting
from rollover amounts (as determined under Sec. 4044.12(c)(4)(ii) of
this chapter) is combined with any other benefit under the plan for
purposes of determining the maximum guaranteeable benefit under
Sec. Sec. 4022.22 and 4022.23. For example, assume that a participant
has an $80,000 total annual plan benefit at age 65, of which $15,000 is
derived from mandatory employee contributions resulting from rollover
amounts and $5,000 is derived from employer contributions resulting
from rollover amounts. The $15,000 benefit derived from employee
contributions resulting from rollover amounts would be excluded in the
determination of the participant's maximum guaranteeable amount. The
participant's remaining $65,000 benefit (including the $5,000 benefit
derived from employer contributions resulting from rollover amounts)
would be subject to the maximum guaranteeable benefit limitation.
Assuming the plan terminated in 2014, the participant's maximum
guaranteeable benefit of approximately $59,000 for a straight life
annuity at age 65 would effectively be increased by the $15,000 benefit
derived from employee contributions resulting from rollover amounts,
resulting in total guaranteeable benefits of approximately $74,000.
(The maximum guaranteeable benefit limitation would apply to the
participant's benefit derived from employer contributions; as a result,
$6,000 of the participant's benefit derived from employer contributions
would not be guaranteeable by PBGC.)
0
8. In Sec. 4022.24, add paragraph (g) to read as follows:
Sec. 4022.24 Benefit increases.
* * * * *
(g) Rollover amounts. Any portion of a benefit derived from
mandatory employee contributions resulting from rollover amounts (as
determined under Sec. 4044.12 (c)(4)(i) of this chapter) is
disregarded in applying the provisions of Sec. Sec. 4022.24 through
4022.26. However, any portion of a benefit derived from employer
contributions resulting from rollover amounts (as determined under
Sec. 4044.12(c)(4)(ii) of this chapter) is combined with any other
benefit under the plan in applying the provisions of Sec. Sec. 4022.24
through 4022.26. In such case, the benefit increase is deemed to be in
effect on the date the rollover amounts are received by the plan.
PART 4044--ALLOCATION OF ASSETS IN SINGLE-EMPLOYER PLANS
0
9. The authority citation for part 4044 continues to read as follows:
Authority: 29 U.S.C. 1301(a), 1302(b)(3), 1341, 1344, and 1362.
0
10. In 4044.12, paragraphs (b)(4) and (c)(4) are added to read as
follows:
Sec. 4044.12 Priority category 2 benefits.
* * * * *
(b) * * *
(4) Rollover amounts. In the case of a benefit resulting from
rollover amounts, notwithstanding the provisions of paragraph (b)(2) of
this section, the interest rates and conversion factors in paragraph
(c)(4) of this section are used to determine the portion of the accrued
benefit derived from the employee's contributions and, if any, the
portion of the accrued benefit derived from employer contributions.
(c) * * *
(4) Special rules for benefit resulting from rollover amounts. (i)
Mandatory employee contributions. Notwithstanding paragraphs (c)(1)
through (3) of this section, in the case of a benefit resulting from
rollover amounts, the accrued benefit derived from mandatory employee
contributions is determined using the interest rates and conversion
factors under section 411(c)(2)(B) and (C) of the Code for purposes of
computing an employee's accrued benefit derived from the employee's
contributions. The annuity benefit and the pre-retirement death
benefit, as determined on this basis, is the benefit resulting from
rollover amounts in priority category 2.
(ii) Employer contributions. Any portion of a participant's accrued
benefit resulting from rollover amounts that is in excess of the
accrued benefit derived from mandatory employee contributions
determined in accordance with paragraph (c)(4)(i) of this section
(i.e., the accrued benefit derived from employer contributions) is a
guaranteeable benefit in priority category 3, priority category 4, or
priority category 5, as applicable under this part.
Issued in Washington, DC, this 18 day of November, 2014.
Alice C. Maroni,
Acting Director, Pension Benefit Guaranty Corporation .
[FR Doc. 2014-27826 Filed 11-24-14; 8:45 am]
BILLING CODE 7709-02-P