Example 1: Retiree older than 62 - Hourly Video Transcript
Now let's look at the first example. Here, the participant retired under the plan’s Voluntary 60 & 10 Retirement. He was older than age 62 on July 31, 2009, and was no longer receiving a supplement when the plan terminated.
Voluntary 60 & 10 Retirement requires reaching age 60 while working for Delphi and at least 10 years of Credited Service.
As we mentioned before, this retirement type provides a Basic Benefit, which is permanently reduced for payment before age 62, plus an Interim Supplement that is payable until age 62 and 1 month.
Suppose this participant - let’s call him “John” - was born on July 31, 1946, and was first hired on August 1, 1986. After working for the company for 20 years, John left the company on July 31, 2006.
The Normal Retirement Age for the plan is 65, so his Normal Retirement Date is August 1, 2011. But he was eligible for the Voluntary 60 & 10 Retirement, so he retired with a Straight Life Annuity at age 60 on August 1, 2006. Three years later, on July 31, 2009, the plan terminated, and PBGC took over responsibility for the plan.
First, let's consider what benefits the plan would pay if it hadn't terminated. When John retired, his Basic Benefit from the plan, reduced for retirement at age 60, was $895.61 per month.
Since he took the Voluntary 60 & 10 Retirement, he also gets a supplement, called the “Interim Supplement,” until age 62 and 1 month. His Interim Supplement is $946 per month. When he reaches age 62 and 1 month, these Interim Supplement payments stop, and he just gets the reduced Basic Benefit from that point on.Since he chose the plan’s normal form of benefit for unmarried participants, the Straight Life Annuity, these benefits are payable only to John, with no survivor benefits paid upon his death.
So, the plan would have paid John a total of $1,841.61 per month until age 62 and 1 month, and $895.61 thereafter for the rest of his life.
Now let’s take a look at how the legal limits will affect John’s benefit now that the plan has terminated.
To determine the benefit PBGC can guarantee, we have to apply the legal limits we discussed earlier to the benefits under the plan.
These three limitations are applied in the order shown here; so, let’s begin with the Accrued-at-Normal Limitation.
As we mentioned earlier, the Accrued-at-Normal Limitation only affects participants who are still receiving supplements at the plan's termination. Since John is no longer receiving his supplement, his benefit is not affected.
Next we have to consider John's Maximum Guaranteeable Benefit. The limit at age 65 is $4,500 per month as a Straight Life Annuity.
Since he is under age 65 at DoPT, John’s Maximum Guaranteeable Benefit is reduced using PBGC’s adjustment factors. At age 63, his Maximum Guaranteeable Benefit is $3,870 per month. Since John is receiving his benefit as a Straight Life Annuity, there is no further reduction to the Maximum Guaranteeable Benefit, or MGB.
Since John’s monthly benefit of $895.61 is less than his maximum guaranteeable amount of $3,870, his PBGC guaranteed benefit is not affected by the MGB.
The final legal limit we need to consider in order to determine the guaranteed benefit is the Phase-In Limitation.
Benefit increases made within five years of the date of plan termination may not be fully guaranteed. The Phase-in Limitation limits PBGC's guarantee of such increases to the greater of 20% of the increase or $20 per month for each full year the increase was in effect.
As we mentioned earlier in this video, the benefit rates used to determine the Basic Benefit increased each year up through October 1, 2006. The increases to John’s benefit due to the increases to the benefit rate are subject to the Phase-In Limitation based on the number of full years the increase was in effect before July 31, 2009.
Let’s look at the increase on October 1, 2004. The benefit rate used to calculate John’s Basic Benefit went from $48.50 per year of service to $49.55. This $1.05 increase in the benefit rate resulted in an increase of $18.21 to John’s Basic Benefit, after the reduction for his age 60 retirement.
Since the increase was effective more than 4 years but less than 5 years before July 31, 2009, PBGC will guarantee that increase to John’s benefit up to the greater of 80% of the increase or $80 per month. Since the increase is less than $80 per month, the entire increase is guaranteed.
The same reasoning applies to each of the subsequent increases to John’s benefit, so each increase is fully guaranteed. John’s benefit is not affected by the Phase-In Limitation.
Since John’s benefit was not affected by any of the legal limits, PBGC will guarantee his full plan benefit of $895.61 per month. John’s benefit will not change.