Example 3: Mutually Satisfactory Retirement - Hourly Video Transcript
Our last example is a participant who retired under the plan's Mutually Satisfactory Retirement when he was laid off after the plant where he worked closed in 2005.
This example may not apply to you if you took a Mutually Satisfactory Retirement under a Special Attrition Program in 2006 or 2007.
This type of retirement was available to participants who met certain age and service requirements and were either laid off or became disabled.
As we mentioned before, this retirement type provides an unreduced Basic Benefit plus a Temporary Supplement that's payable until age 62 and 1 month.
Suppose this participant (let’s call him “Jim”) was born on July 31, 1950, and was hired on August 1, 1985. He was then permanently laid off after working for the company for 20 years when his plant closed on July 31, 2005.
The Normal Retirement Age for the plan is 65, so his Normal Retirement Date is August 1, 2015. But he was eligible for the Mutual Retirement, so he retired with a Straight Life Annuity at age 55 on August 1, 2005. Four years later, on July 31, 2009, the plan terminated, and PBGC took over responsibility for it.
First, let's consider what benefits the plan would pay if it had not terminated.
Jim’s Basic Benefit at his Normal Retirement Date would be $1,033 per month. Since he retired under the Mutually Satisfactory Retirement, his Basic Benefit is not reduced for early payment at age 55.
Since he took the Mutual Retirement, he also gets a supplement, called the “Temporary Supplement,” until age 62 and 1 month. That supplement is $996 per month. When he reaches age 62 and 1 month, these payments stop, and he just gets the Basic Benefit from that point on.
So, the plan would have paid John a total of $2,029 per month until age 62 and 1 month, and $1,033 thereafter for the rest of his life.
Here is a diagram showing the two components and how they combine to form the total plan benefit.
Before age 62 and 1 month, Jim’s Basic Benefit pays $1,033 per month, and his supplement pays an additional benefit of $996 per month, for a total benefit of $2,029.
From age 62 and 1 month on, his supplement stops, and his Basic Benefit pays $1,033 per month for the rest of his life.
So far in this example, we've looked at the benefit the plan would have paid Jim if the plan had not terminated.
Now that the plan has terminated and PBGC has become the trustee, we have to apply the legal limitations we discussed earlier to the plan's benefits.
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 his Normal Retirement Date, at age 65, to retire, and had chosen the Straight Life Annuity.
If he had retired at age 65, Jim would have received his Normal Retirement Benefit, which provides only the unreduced Basic Benefit.
Jim’s unreduced Basic Benefit under the plan would pay $1,033 per month as a Straight Life Annuity, so his Accrued-at-Normal limit is $1,033 per month. That is, his PBGC guaranteed benefit cannot be more than $1,033 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, DoPT, PBGC does not guarantee any of the total benefit in excess of $1,033 per month. The Temporary Supplement payments are not guaranteed.
Next we have to consider Jim’s Maximum Guaranteeable Benefit, or MGB. The limit at age 65 is $4,500 per month as a Straight Life Annuity. Since he is under age 65 at DoPT, Jim’s Maximum Guaranteeable Benefit is reduced using PBGC’s age adjustment factors.
At age 59, his MGB is $2,745 per month as a Straight Life Annuity. Because Jim's benefit is being paid as a Straight Life Annuity, there's no further reduction to the MGB for his form of benefit.
As we mentioned earlier, the legal limits are applied in a specific order. First we apply the Accrued-at-Normal Limitation, then the MGB, and finally the Phase-In Limitation. Since his monthly benefit after the Accrued-at-Normal Limitation is less than his maximum guaranteeable amount of $2,745, his PBGC guaranteed benefit is not affected by the Maximum Guaranteeable Benefit.
The final legal limit we need to consider in order to determine the guaranteed benefit is the Phase-In Limitation. As we discussed, the Phase-In Limitation limits PBGC’s guarantee of benefit increases within the 5 years immediately before DoPT to the greater of 20% of the increase or $20 per month for each full year that the increase was in effect.
There were two increases to Jim’s benefit that were in effect for 4 full years before July 31, 2009.
Jim became eligible for the Mutual Retirement when he was laid off on July 31, 2005, 4 years before the date of plan termination. Since the Mutual Retirement provides increased benefits over what he would have been otherwise eligible for, this increase is subject to the Phase-in Limitation.
Also, the benefit rate used to calculate Jim’s Basic Benefit increased on October 1, 2004. This is more than 4 years but less than 5 before the plan terminated.
Since both of these increases were in effect for 4 full years before DoPT, the total increase to his benefit is guaranteed up to the greater of 80% of the increase or $80 per month.
To determine the amount of the increase, we must first determine his benefit before the increase.
To calculate Jim’s Basic Benefit before the increases to the benefit rate, we will use the rate in effect on July 31, 2004, 5 full years before the plan terminated. His unreduced Basic Benefit using the five-year-old plan benefit rate is $970 per month.
On the date that Jim retired, he was age 55 with 20 years of service. If he had not been eligible for the Mutual Retirement, he would have been eligible only for Deferred Vested Retirement. With Deferred Vested Retirement, the Basic Benefit is reduced for payment before age 65. At age 55, the plan would pay 42.8% of the unreduced Basic Benefit, or $415.16.
Since the Deferred Vested Retirement does not provide any supplement, the Accrued-at-Normal Limitation does not apply to this benefit. And since this monthly benefit is less than his age 59 Maximum Guaranteeable Benefit of $2,745, the MGB would not affect his Deferred Vested Retirement benefit either.
So his Deferred Vested Retirement benefit of $415.16 per month is fully guaranteed.
Let's see how his benefit increases using the benefit rate in effect on July 31, 2005, and the Mutual Retirement. Jim's unreduced Basic Benefit using this rate is $991, which is less than his Maximum Guaranteeable Benefit. The Mutual Retirement would also have paid him a supplement until age 61 and one month, but as we saw earlier, this supplement is subject to the Accrued-At-Normal Limitation and is not guaranteed. Now that we have applied the Accrued-At-Normal Limitation and the MGB to this benefit, we compare it to his guaranteed Deferred Vested Retirement benefit and see that his benefit increased by $575.84.
This increase to Jim’s benefit of $575.84 is guaranteed up to the greater of 80% of the increase or $80 per month. 80% of $575.84 is $460.67. This is the portion of the increase that is guaranteed.
There were two other increases to Jim’s benefit in the 5 years before DoPT
The benefit rate increase on October 1, 2005 was in effect for 3 full years before DoPT. The resulting increase to Jim’s benefit is guaranteed up to the greater of 60% of the increase or $60 per month. However, it only amounted to an additional $21 per month, so it's fully guaranteed.
Likewise, the rate increase on October 1, 2006 also resulted in an additional $21 per month. Since this was in effect for 2 full years before DoPT it is guaranteed up to the greater of 40% of the increase or $40 per month. So this increase of $21 is fully guaranteed.
Finally, adding the guaranteed portions of the three benefit increases to the Deferred Vested Retirement benefit of $415.16, we get Jim's PBGC guaranteed benefit of $917.83.