Example 2: Retiree younger than 62 Video Transcript
Our next example is a participant who took 30 Year Retirement and was younger than age 62 and 1 month on July 31, 2009. This type of retirement requires at least 30 years of Credited Service and is payable at any age. And it provides a Basic Benefit, that is reduced until age 62 and 1 month, and unreduced thereafter, plus an Early Retirement Supplement that is payable until age 62 and 1 month.
Suppose this participant - let’s call her “Jane” - was born on January 1, 1955, and was hired on January 1, 1973. She worked for the company for 35 years ending her employment on December 31, 2007.
The Normal Retirement Age for the plan is 65 so Jane’s Normal Retirement Date is January 1, 2020. But Jane was eligible for the 30 Year Retirement, and she retired at age 53 on January 1, 2008, and chose the plan’s normal form of benefit for married participants - the Joint and 65% Survivor Pop-Up Annuity. On July 31, 2009, the plan terminated, and PBGC took over responsibility for the plan.
Once again, let's first consider what benefits the plan would pay if it hadn’t terminated.
Jane’s Basic Benefit as a Straight Life Annuity at her Normal Retirement Date, or age 65, would be $1,807.75 per month. Since she retired under the 30 Year Retirement, her basic benefit is reduced before age 62 and 1 month. Her reduced Basic Benefit as a Straight Life Annuity would be $883.99 per month.
Since Jane chose the 65% Survivor Coverage, the benefit is reduced by 5%, or $90.39, to $793.60 before age 62 and 1 month, and then $1,717.36 thereafter.
Since she took the 30 Year Retirement, Jane also gets the “Early Retirement Supplement” until age 62 and 1 month. The Early Retirement Supplement is based on a fixed dollar amount that depends on when you retire. The amount the supplement pays is the fixed dollar amount minus the basic benefit after it is reduced for early retirement but not for survivor coverage.
Since Jane retired in 2008, the fixed dollar amount for her Early Retirement Supplement is $3,020. Subtracting her reduced Basic Benefit as a Straight Life Annuity of $883.99, her Early Retirement Supplement is $2,136.01 per month until age 62 and 1 month.
So, here’s what the plan would have paid her: the Basic Benefit, reduced for her age and the survivor coverage, plus the Early Retirement Supplement, for a total of $2,929.61 per month until age 62 and 1 month, and the Basic Benefit, reduced for the survivor coverage but not reduced for her age, of $1,717.36 per month thereafter for the rest of her life.
Note that, although the supplement is based on a total benefit of $3,020 per month until age 62 and 1 month, that amount does not account for the reduction to the Basic Benefit for the survivor coverage. Since Jane’s Basic Benefit is reduced for the survivor coverage she will receive slightly less than the full $3,020.
Here is a diagram showing the two components and how they combine to form the total plan benefit. Before age 62 and 1 month, Jane's Basic Benefit pays $793.60 per month, and her supplement pays an additional benefit of $2,136.01 per month, for a total benefit of $2,929.61. From age 62 and 1 month on, her supplement stops, and her Basic Benefit pays $1,717.36 per month for the rest of her life.
Since Jane chose the Joint and 65% Survivor Pop-Up Annuity, the Basic Benefit will provide her spouse a benefit if she dies before him.The surviving spouse’s benefit would be 65% of the Basic Benefit amount payable to Jane after age 62 and 1 month, even if she dies before age 62. That is, it would pay 65% of the $1,717.36 benefit, or $1,116.28.
But, if her spouse should die before her, Jane’s benefit would pop up by the amount of the plan’s charge for the survivor benefit, or $90.39 in this case. That is, it would increase from $2,929.61 to $3,020 before age 62 and 1 month, and from $1,717.36 to $1,807.75 thereafter.
So far in this example, we have looked at the benefit the plan would have paid this participant if the plan had not terminated.
Now that the plan has terminated and PBGC has become the trustee of the plan, we have to apply the legal limitations 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 limits PBGC’s guarantee to the amount the plan would have paid if the participant had waited until her Normal Retirement Date (at age 65) to retire, and had chosen the Straight Life Annuity.
If she had retired at age 65, with a Straight Life Annuity, Jane would have received her Normal Retirement Benefit, which provides only the unreduced Basic Benefit.
Jane’s unreduced Basic Benefit under the plan would pay $1,807.75 per month. This is her Accrued-at-Normal Limit. That is, her PBGC guaranteed benefit cannot be more than $1,807.75 per month.
Here is our diagram from before showing the total plan benefit.
And here is a diagram showing the total plan benefit after applying the Accrued-at-Normal Limitation. Notice that after the date of plan termination, PBGC does not guarantee any of the total benefit in excess of $1,807.75 per month. A portion of Jane’s Early Retirement Supplement payments are not guaranteed.
Next we have to consider Jane’s Maximum Guaranteeable Benefit, or MGB.
As we have seen, Jane’s benefits are different before and after she turns age 62 and 1 month. In order to determine if Jane’s benefit is affected by the MGB, we must consider what her benefit would be if it were paid at the same amount over time, that is, one that does not change at age 62 and 1 month. This is because the Maximum Guaranteeable Benefit is defined by law in terms of a level, non-changing amount – so we need to compare apples to apples.
To do this we apply what we call a level life factor. When we apply the level life factor to Jane’s benefit, we see that her non-level benefit after we apply the Accrued-at-Normal Limitation is equivalent to a level benefit of $1,757.40 if it's paid at the same amount over the life of the annuity.
As we stated earlier, the MGB for a retiree at age 65 with a Straight Life Annuity is $4,500. However, Jane was age 54 and 7 months when the plan terminated, and was receiving her benefit in the form of a Joint and 65% Survivor Pop-Up Annuity. So, we need to adjust the $4,500 limit using PBGC adjustment factors to account for her age and her form of benefit. After adjusting the MGB by the applicable factors, her Maximum Guaranteeable Benefit is $1,709.98.
When we compare Jane’s levelized benefit after the Accrued-at-Normal Limitation to her Maximum Guaranteeable Benefit, we see that $1,709.98 of the $1,757.40, or 97.3%, is guaranteeable.
So, we must now apply that percent to the benefit amounts we calculated after applying the Accrued-at-Normal Limitation: $1,807.75 until age 62 and 1 month, and $1,717.36 thereafter. We multiply those benefit amounts by the guaranteeable percentage of 97.3% to arrive at $1,758.94 per month until age 62 and 1 month, and $1,670.99 per month thereafter. This is Jane’s guaranteeable benefit after we apply the first two limitations.The final legal limit we need to consider is the Phase-In Limitation. As mentioned earlier, this limits PBGC’s guarantee of benefit increases within the 5 years before DoPT to the greater of 20% of the increase or $20 per month for each full year the increase was in effect.
The plan’s benefit rate used to calculate Jane’s Basic Benefit and the dollar amount used to calculate her Supplement increased three times in the 5 years before DoPT: in 2004, 2005 and 2006. These increases are guaranteed up to the greater of 80% of the increase or $80 per month, 60% of the increase or $60 per month, and 40% of the increase or $40 per month respectively. In Jane’s case, all of these increases are under the $80, $60 and $40 thresholds. Her benefit is not affected by the Phase-In Limitation.
So Jane’s PBGC Guaranteed Benefit will be the same amounts we arrived at after applying the Accrued-at-Normal and Maximum Guaranteeable Benefit limitations: $1,758.94 per month until age 62 and 1 month, and $1,670.99 per month thereafter. If she dies before her spouse, her spouse will receive 65% of her post-age 62 and 1 month benefit, or $1,086.14. If her spouse dies before her, her benefit will pop up by $87.99, but only after age 62 and 1 month. Jane’s pop-up amount will not be payable before age 62 and 1 month since her benefit before age 62 and 1 month was already at the full amount of the Accrued-at-Normal Limitation.