[Federal Register Volume 76, Number 210 (Monday, October 31, 2011)]
[Proposed Rules]
[Pages 67105-67118]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-28124]
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PENSION BENEFIT GUARANTY CORPORATION
29 CFR Parts 4001, 4022, 4041, and 4044
RIN 1212-AB17
Cash Balance Plans; Benefit Determinations and Plan Valuations
for Statutory Hybrid Plans; Pension Protection Act of 2006
AGENCY: Pension Benefit Guaranty Corporation.
Action: Proposed rule.
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SUMMARY: This proposed rule would implement provisions of the Pension
Protection Act of 2006 (PPA 2006) that change the rules for determining
benefits upon the termination of a statutory hybrid plan, such as a
cash balance plan. PPA 2006 provides that, when such a plan terminates,
a variable rate used under the plan to determine accrued benefits will
be equal to the average of the rates of interest used under the plan
during the five-year period ending on the termination date. Further,
the amount of the benefit payable in the form of an annuity payable at
normal retirement age will be determined using the interest rate and
mortality table specified under the plan for that purpose as of the
termination date (or an average interest rate if the plan rate is a
variable rate). For a plan terminated and trusteed by PBGC, the
proposed rule would amend PBGC's regulations to conform the rules for
determining the allocation of assets and the amount of benefits payable
under Title IV of ERISA to the PPA 2006 changes in the benefit
determination rules for statutory hybrid plans. The proposed rule would
also implement a PPA 2006 change for determining the present value of
the accrued benefit under a statutory hybrid plan. Finally, the
proposed rule would provide guidance on benefits payable under a
statutory hybrid plan that terminates in a standard termination.
DATES: Comments must be submitted on or before December 30, 2011.
ADDRESSES: Comments, identified by Regulatory Information Number (RIN
1212-AB17) may be submitted by any of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the Web site instructions for submitting comments.
E-mail: reg.comments@pbgc.gov.
Fax: (202) 326-4224.
Mail or Hand Delivery: Legislative and Regulatory
Department, Pension Benefit Guaranty Corporation, 1200 K Street, NW.,
Washington, DC 20005-4026.
Comments received, including personal information provided, will be
posted to http://www.pbgc.gov. Copies of comments may also be obtained
by writing to Disclosure Division, Office of the General Counsel,
Pension Benefit Guaranty Corporation, 1200 K Street, NW., Washington,
DC 20005-4026, or calling (202) 326-4040 during normal business hours.
(TTY and TDD users may call the Federal relay service toll free at 1-
(800) 877-8339 and ask to be connected to (202) 326-4040.)
FOR FURTHER INFORMATION CONTACT: John H. Hanley, Director, or Constance
Markakis, Attorney; Legislative and Regulatory Department, 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:
[[Page 67106]]
Background
When Pension Benefit Guaranty Corporation (PBGC) becomes trustee of
a plan that terminates in a distress termination under section 4041 of
the Employee Retirement Income Security Act of 1974, as amended
(ERISA), or an involuntary termination (one initiated by PBGC) under
section 4042 of ERISA, PBGC determines the amount of the annuity
benefit that will be paid to a participant or beneficiary and whether
the participant or beneficiary is eligible for a de minimis lump-sum
payment. Guaranteed benefit determinations are made under section 4022
of ERISA. PBGC also values the benefits payable under the plan for
purposes of allocating the plan's assets to priority categories in
accordance with section 4044 of ERISA, determines employer liability
under sections 4062 through 4064 of ERISA, and determines the amount of
any unfunded nonguaranteed benefits payable under section 4022(c) of
ERISA. These benefit determinations and plan valuations are generally
made as of the plan's termination date.\1\
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\1\ As described below, section 404 of PPA 2006 added sections
4022(g) and 4044(a)(3) of ERISA, which treat the date the sponsor's
bankruptcy petition was filed as the termination date of the plan
for specified purposes. These changes apply for plan terminations
that occur during the bankruptcy of the plan sponsor, if the
bankruptcy filing date is on or after September 16, 2006. For
convenience, this preamble generally refers to the plan's
termination date, although in some cases this reference will instead
apply to the bankruptcy filing date.
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The termination of a cash balance plan presents unique issues for
PBGC.\2\ In contrast to a traditional defined benefit plan, which
defines a participant's benefit under the plan as an annuity commencing
at normal retirement age, a cash balance plan defines a participant's
benefit as the balance of a hypothetical account maintained for the
participant. The balance of a participant's hypothetical account
consists generally of annual pay credits (e.g., a percentage of the
participant's pay for the year) and annual interest credits (i.e., the
hypothetical earnings on the account balance) at rates specified under
the plan. The plan also provides an interest rate and mortality table
(or factor) used for converting the participant's hypothetical account
balance into a benefit payable as an annuity. Upon the termination of a
cash balance plan (or an earlier freeze), the pay credits to a
participant's hypothetical account cease, but interest credits
generally continue to be added to the participant's hypothetical
account until the participant begins to receive benefits.
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\2\ Statutory hybrid plans other than cash balance plans, such
as pension equity plans, also raise unique issues. For convenience,
and because cash balance plans are the most common type of
underfunded statutory hybrid plan trusteed by PBGC, this preamble
generally refers to cash balance plans, although the regulatory
changes would apply to all statutory hybrid plans.
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If a cash balance plan uses a fixed interest rate as of the plan's
termination date to determine accrued benefits or the amount of a
benefit payable in the form of an annuity payable at normal retirement
age, PBGC uses the plan's fixed rate when calculating benefits for
valuation and payment purposes. PBGC has encountered difficult payment
and valuation issues, however, when a cash balance plan uses a variable
interest rate--e.g., a rate that changes annually under the plan based
on changes in an underlying index plus a margin. Many plans using
variable rates adopted the standard indices and associated margins set
forth in IRS Notice 96-8 (1996-1 C.B. 359)--which are based on the
yields on Department of the Treasury (Treasury) constant maturities of
various durations--to determine the plan's interest crediting rate or
annuity conversion rate.
Under PBGC's operating policy on cash balance plans (established
pre-PPA 2006), when PBGC performs its plan valuation under ERISA
section 4044 of ERISA (for plans that terminated before the effective
date of the relevant PPA 2006 changes), it fixes the plan's variable
index at the plan's termination date. To calculate the value, as of the
plan's termination date, of a participant's annuity commencing at the
expected retirement age, PBGC derives a fixed rate equal to the average
of the annual yields for 30-year Treasury constant maturities for the
month specified in the plan, decreased by the associated margin in IRS
Notice 96-8 for the variable index used by the plan, and adjusted by
any plan margin.\3\
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\3\ This policy applied only for plans that used a variable
interest rate based on an index specified in IRS Notice 96-8, and
that used either no plan margin or a plan margin that is constant.
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Under this operating policy, however, PBGC does not derive a fixed
interest rate from a variable rate to determine benefits for payment
purposes. Instead, PBGC pays a participant's pension benefit using the
actual interest crediting rates in effect under the plan's variable
index for periods after the plan's termination date. Until a
participant commences benefits, PBGC estimates annuity payments using
the most recent interest rate under the variable index used by the plan
to determine the participant's projected benefit. The fact that a
participant's exact benefit can be determined only when the participant
begins receiving benefits has frequently resulted in benefit
calculations for payment purposes that vary both from previously
provided estimates and from benefit calculations for valuation
purposes.
PBGC pays benefits in a single installment if the lump sum value of
a benefit payable by PBGC is de minimis (currently $5,000 or less). See
Sec. 4022.7(b). In the case of cash balance plans, the payment of de
minimis lump sums has posed difficult issues for PBGC due to PBGC's
policy of determining lump sums using a present value calculation of
the participant's benefit. Cash balance plans typically pay benefits in
the form of a lump sum and often pay an amount equal to the
hypothetical account balance.\4\ In contrast, in accordance with its
operating policy on cash balance plans, PBGC uses the present value
methodology in Sec. 4022.7(d) to determine the lump sum value of a
benefit, and, if either the present value or the participant's
hypothetical account balance (or accumulated percentage of final
average compensation) as of the termination date is de minimis, PBGC
generally pays the greater of the two amounts.
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\4\ Under IRS Notice 96-8, plans that use the standard indices
to determine their interest crediting rates were permitted to pay
the hypothetical account balance, even if this amount was less than
the present value of the participant's life annuity payable at
normal retirement age determined using the applicable interest rate
and the applicable mortality table under section 417(e) of the Code.
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Pension Protection Act of 2006
In the Pension Protection Act of 2006, Pub. L. 109-280 (PPA 2006),
which became law on August 17, 2006, Congress sought to address, among
other things, the problems encountered by terminating plans that use a
variable interest rate. Under sections 701(a)(1) and 701(b)(1) of PPA
2006, which added section 411(b)(5)(B)(vi) of the Internal Revenue Code
(Code) and section 204(b)(5)(B)(vi) of ERISA, an applicable defined
benefit plan must include the following provisions that would apply
upon termination of the plan:
If the interest crediting rate (or equivalent amount) is a
variable rate, the rate of interest used to determine accrued benefits
under the plan will equal the average of the rates of interest used
under the plan during the five-year period ending on the termination
date.
The interest rate and mortality table used to determine
the amount of any benefit under the plan payable in the form of an
annuity payable at normal retirement age is the rate and table
[[Page 67107]]
specified under the plan for such purpose as of the termination date.
If the interest rate is a variable rate, the rate used must be the
average of the rates used under the plan during the five-year period
ending on the termination date.
This change was intended to facilitate the calculation of benefits
and provide participants with greater certainty about their benefit
amounts when a plan terminates. This change is part of a more general
interest rate requirement imposed by sections 701(a)(1) and 701(b)(1)
of PPA 2006, which treats an applicable defined benefit plan as failing
to meet accrual requirements related to age if the terms of the plan
provide for an interest credit (or an equivalent amount) for any plan
year that is greater than a market rate of return.
Sections 701(a)(2) and 701(b)(2) of PPA 2006 also create special
rules for computing benefits under an applicable defined benefit plan
by reference to the hypothetical account balance. Under new sections
411(a)(13)(A) of the Code and 203(f)(1) of ERISA, a plan is not treated
as failing to meet the present value requirements of sections 417(e) of
the Code or 205(g) of ERISA (and certain other vesting and accrued
benefit rules) if the present value of the accrued benefit of any
participant is equal to the amount expressed as the balance in the
hypothetical account or as an accumulated percentage of the
participant's final average compensation.
New sections 411(a)(13)(C) of the Code and 203(f)(3) of ERISA
define an ``applicable defined benefit plan'' as a defined benefit plan
under which the accrued benefit (or any portion thereof) for a
participant is calculated as the balance of a hypothetical account
maintained for the participant or as an accumulated percentage of the
participant's final average compensation. The term also describes any
plan that has an effect similar to an applicable defined benefit plan
under regulations issued by Treasury.
The changes to the plan termination requirements made by sections
701(a)(1) and 701(b)(1) of PPA 2006 are effective for years beginning
after December 31, 2007, unless the plan sponsor elects the earlier
application of such requirements for any period after June 29, 2005.\5\
A special rule for collectively bargained plans provides a delayed
effective date.\6\ The changes to the present value rules made by
sections 701(a)(2) and 701(b)(2) of PPA 2006 are effective for
distributions made after August 17, 2006.
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\5\ In the case of a new plan not in existence on June 29, 2005,
these requirements are effective for periods beginning on or after
June 29, 2005.
\6\ Section 701(e)(4) of PPA 2006 provides that, for a plan
maintained under one or more collective bargaining agreements
between employee representatives and one or more employers that is
ratified on or before August 17, 2006, the interest and three-year
vesting requirements will not apply to plan years before--
The earlier of the date on which the last of the
collective bargaining agreements terminates (determined without
regard to any extension made on or after August 17, 2006), or
January 1, 2008, or
January 1, 2010.
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Treasury issued final regulations on Hybrid Retirement Plans (2010
final Treasury regulations), 75 FR 64123 (Oct. 19, 2010), and
simultaneously issued proposed Additional Rules Regarding Hybrid
Retirement Plans (2010 proposed Treasury regulations), 75 FR 64197
(Oct. 19, 2010). These regulations provide guidance on changes made by
PPA 2006 under sections 411(a)(13) and 411(b)(5) of the Code.
The other PPA 2006 provisions relevant to this proposed rule are in
section 404, which added sections 4022(g) and 4044(e) of ERISA. These
provisions provide that, when an underfunded pension plan terminates
during the bankruptcy of the plan sponsor, the date that the sponsor's
bankruptcy petition was filed is treated as the plan's termination date
for purposes of determining (1) The amount of benefits PBGC guarantees,
and (2) the amount of benefits in priority category 3 in the section
4044 asset allocation. These changes apply for plan terminations that
occur during the bankruptcy of the plan sponsor, if the bankruptcy
filing date was on or after September 16, 2006. On June 14, 2011 (at 76
FR 34590), PBGC published a final rule on Bankruptcy Filing Date
Treated as Plan Termination Date for Certain Purposes that implements
section 404 of PPA 2006.
Overview of Proposed Rule
This proposed rule would amend PBGC's regulation on Benefits
Payable in Terminated Single-Employer Plans (29 CFR part 4022) to
implement the above-described changes made by PPA 2006 upon the
termination of a statutory hybrid plan. This proposed rule is intended
to be consistent with the proposed Treasury rules under section
411(b)(5) of the Code that apply upon termination of a statutory hybrid
plan (included in the 2010 proposed Treasury regulations at Treas. Reg.
1.411(b)(5)-1(e)(2)). No inference should be drawn from the language in
this proposed rule as to any changes that may be made to the Treasury
rules when the 2010 proposed Treasury regulations are issued as final
regulations. After the 2010 proposed Treasury regulations are
finalized, PBGC intends to take those final Treasury regulations into
account, so that the rules that finalize these proposed regulations are
consistent with the final rules in the Treasury regulations.
Under the proposed rule, PBGC would generally determine plan
benefits based on plan terms as of the plan's termination date; if,
however, the plan used a variable rate during the five-year period
ending on the termination date, PBGC would take into account the plan's
provisions for determining and applying an average rate of interest in
accordance with section 411(b)(5)(B)(vi) of the Code and proposed
Treas. Reg. 1.411(b)(5)-1(e)(2). In addition, the proposed rule sets
forth certain default rules that PBGC would apply to the extent that
the terms of the plan do not satisfy the plan termination requirements
under PPA 2006 or Treasury regulations thereunder, or fail to specify
provisions necessary to implement those requirements. Except in the
case of certain involuntary plan terminations, PBGC would generally
apply its rules to determine the benefits of any participant with an
annuity starting date after the plan's termination date or, in the case
of a distress termination under ERISA section 4041(c), the plan's
proposed termination date. The proposed rule also addresses the
interest crediting rules that apply to a plan that terminates during
the bankruptcy of the plan sponsor.
In addition, the proposed rule would amend PBGC's regulation on
Allocation of Assets in Single-Employer Plans (29 CFR part 4044) to
conform the rules for valuing benefits and allocating plan assets to
the changes in the benefit determination rules. Under the proposed
rule, certain benefits would be calculated differently for valuation
purposes than for payment purposes. For example, de minimis benefits
would continue to be calculated as annuities for valuation purposes, as
under the current regulation, but the method of calculating such
benefits for payment purposes would change under the proposed rule. The
proposed rule would also amend part 4044 to provide that the priority
category 3 benefits of a participant who is eligible but does not
retire three years before a plan's termination date (or bankruptcy
filing date, if applicable) would be determined based on the
participant's account balance and the interest rates under the plan as
if the participant had retired three years before the termination date
(or bankruptcy filing date, if applicable).
The proposed rule would amend PBGC's regulation on Termination of
[[Page 67108]]
Single-Employer Plans (29 CFR part 4041) to provide that, for purposes
of part 4041, a plan that terminates in a standard termination (or a
distress termination where the plan is sufficient for guaranteed
benefits) will be deemed to satisfy the plan termination requirements
under section 204(b)(5)(B)(vi) of ERISA and section 411(b)(5)(B)(vi) of
the Code and Treasury regulations if the plan calculates and pays
benefits consistent with the provisions for statutory hybrid plans
under part 4022.
A detailed discussion of the proposed rule follows.
Proposed Regulatory Changes
Definition of Statutory Hybrid Plan
Under section 411(a)(13)(C) of the Code,\7\ an ``applicable defined
benefit plan'' is a defined benefit plan under which the accrued
benefit (or any portion thereof) is calculated as the balance of a
hypothetical account maintained for the participant or as an
accumulated percentage of the participant's final average compensation;
the definition includes any plan that has an effect similar to an
applicable defined benefit plan. Treasury's final regulations on Hybrid
Retirement Plans use the term ``statutory hybrid plan'' to describe
plans that are subject to the provisions of sections 411(a)(13) and
411(b)(5)(B) of the Code. To maintain a uniform and consistent
application of PPA 2006 changes to the rules in this area, PBGC is
proposing to amend Sec. 4001.2 to add a definition of a ``statutory
hybrid plan'' that cross-references the definition of a statutory
hybrid plan under Treasury regulations.\8\
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\7\ References to Code provisions used hereinafter should be
read to include parallel provisions of ERISA.
\8\ Under Sec. 1.411(a)(13)-1(d), a statutory hybrid plan means
a defined benefit plan that contains a statutory hybrid benefit
formula, which is defined as a benefit formula used to determine all
or any part of a participant's accumulated benefit that is either a
lump sum-based benefit formula (under which the benefit is expressed
as the current balance of a hypothetical account maintained for the
participant or as the current value of an accumulated percentage of
the participant's final average compensation) or a benefit formula
that has an effect similar to a lump sum-based benefit formula.
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PBGC Benefit Determinations--In General
PBGC proposes to amend part 4022 to add a new subpart H that would
specifically address the determination of benefits payable under a
terminating statutory hybrid plan. Subpart H would supplement the
general rules in part 4022 for purposes of determining a participant's
benefit under the provisions of a statutory hybrid plan and the amount
and form of benefits guaranteed or otherwise payable under Title IV of
ERISA.
When PBGC trustees a terminated plan (including a statutory hybrid
plan), as a first step in determining the benefits payable under Title
IV, it determines a participant's benefit in accordance with the terms
of the plan on the termination date. As described in proposed new Sec.
4022.121, for statutory hybrid plans, this includes provisions relating
to the interest rate(s) and mortality table used by the plan, such as
the rate used to determine interest credits and the timing for
determining such rate, the frequency at which interest credits are
applied, and the interest rate and mortality table (or annuity
conversion factor) used to determine the participant's benefit payable
in the form of an annuity payable at normal retirement age--provided
the plan's provisions satisfy the requirements of section 204(b)(5)(B)
of ERISA and section 411(b)(5)(B) of the Code and implementing
regulations.
Because statutory hybrid plans use various methods for determining
a participant's annuity benefit, PBGC would follow the plan's terms for
this purpose. For example, a cash balance plan that defines the accrued
benefit as an annuity commencing at normal retirement age, and that--
for purposes of sections 411(a)(13) and 411(b)(5)--expresses the
accrued benefit as the balance of the participant's hypothetical
account, may under its terms determine the participant's annuity by
projecting interest credits to the participant's normal retirement
date. In that case, PBGC would add interest credits to the
participant's hypothetical account balance each interest crediting
period beginning after the plan's termination date through the
participant's normal retirement date (or the current date, if later)
and then use the conversion factors (or the interest rate and the
mortality table) specified under the plan as of the termination date to
determine the benefit payable as an annuity. Alternatively, if such
plan provides for the use of immediate annuity conversion factors, PBGC
would add interest credits to the participant's hypothetical account
balance through the participant's annuity starting date, then use the
conversion factors (or the interest rate and mortality table) specified
under the plan as of the termination date to determine the benefit
payable as an annuity at the participant's age on the annuity starting
date. In the case of a pension equity plan that provides for the use of
deferred annuity conversion factors (or an interest rate and mortality
table), PBGC would determine the current value of the accumulated
percentage of an active participant's final average compensation as of
the plan's termination date and apply the conversion factors specified
under the plan as of the termination date to determine the benefit
payable as an annuity at different future ages to the participant.
If the mortality table specified under the plan as of the
termination date used to determine the amount of any benefit payable in
the form of an annuity (i.e., the table used to convert a hypothetical
account balance to an annuity) is a table that is updated automatically
in future years to reflect expected improvements in mortality
experience (e.g., the applicable mortality table provided under Code
section 417(e)(3)), PBGC would determine benefits payable under the
plan based on the mortality table as of the termination date taking
into account future adjustments for expected mortality improvements
through the annuity starting date.
The provisions of proposed new subpart H would be used to determine
the benefits of any participant or beneficiary in a plan covered by the
subpart with an annuity starting date after the plan's termination date
or, in the case of a distress termination under ERISA section 4041(c),
after the proposed termination date. A plan administrator's failure to
apply an average interest rate as of the proposed termination date
would require benefits to be re-determined using an average rate of
interest. The proposed termination date would also be the relevant date
if a plan provides a notice of intent to terminate in a distress
termination and subsequently terminates under section 4042, and the
termination date is the same as the proposed termination date under
section 4041(c). If the proposed termination date is moved to a later
date in a distress termination case (or in a distress termination that
becomes an involuntary termination), benefits determined using an
average interest rate between the proposed termination date and the
final termination date would be recalculated using the interest rate
that would have applied under the plan prior to the plan's final
termination date.
Proposed new Sec. 4022.121(a)(3)(ii) provides a special rule for a
plan that terminates in an involuntary termination where the
termination date is earlier than the date on which PBGC institutes
termination proceedings pursuant to section 4042. In that
[[Page 67109]]
situation, in determining benefits under part 4022, PBGC generally
would not change the interest rate(s) (or the mortality table or
conversion factor) used by the plan under its provisions to calculate a
benefit payable for a participant or beneficiary whose annuity starting
date is after the termination date but on or before the date on which
PBGC institutes termination proceedings or who submits a completed
election for an annuity benefit during that time period. This would
protect benefit determinations and participant elections when a plan
operates in good faith in accordance with its terms prior to any notice
of termination proceedings. PBGC would have discretion not to follow
this special rule if warranted under the facts and circumstances, e.g.,
to avoid abuse.
Variable Rates
Paragraph (c) of proposed new Sec. 4022.121 describes the
averaging methodology PBGC would apply upon termination of a plan in
the case of a variable rate. In accordance with proposed Treas. Reg.
1.411(b)(5)-1(e)(2), if the interest crediting rate used to determine a
participant's accumulated benefit (or a portion thereof) has been a
variable rate during the interest crediting periods in the five-year
period ending on the plan's termination date (including a rate that was
not the same fixed rate during all such periods), PBGC would determine
an average of the interest crediting rates used under the plan during
the five-year period. For this purpose, the interest crediting rates
used under the plan would include each rate that applied under the
terms of the plan during an interest crediting period for which the
interest crediting date is within the five-year period ending on the
plan's termination date.\9\ The average rate would be determined as the
arithmetic average of the rates used, expressed as an annual rate.
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\9\ An interest crediting rate that applied under the terms of
the plan only with respect to a date that is distinct from the
plan's regular interest crediting date, such as the date of
separation from employment or plan termination, would not be
included in determining an average of the interest crediting rates
that applied under the terms of the plan during the five-year
period.
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PBGC would apply the plan's average interest crediting rate to
determine the participant's accumulated benefit \10\ under the plan
beginning after the plan's termination date through the participant's
normal retirement date (or annuity starting date, as applicable under
the plan). If the plan's termination date occurs in the middle of an
interest crediting period, PBGC would credit interest based on the
plan's interest crediting rate (on a pro rata basis) for the portion of
the interest crediting period ending on the plan's termination date;
such rate would not be included in the determination of the average
rate. For any subsequent partial interest crediting period (e.g., the
portion of the interest crediting period following the plan's
termination date), PBGC would credit a pro rata amount of the plan's
average interest crediting rate. This approach is consistent with the
statute and would simplify administration for PBGC.
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\10\ Under Treas. Reg. 1.411(a)(13)-1(d)(2), a participant's
accumulated benefit at any date means the participant's benefit, as
expressed under the terms of the plan, accrued to that date. Thus,
for example, for a cash balance plan the accumulated benefit is
expressed as the current balance of a hypothetical account, and for
a pension equity plan the accumulated benefit is expressed as the
current value of an accumulated percentage of the participant's
final average compensation.
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In the event that the plan used a variable rate during the five-
year period ending on the plan's termination date to determine the
amount of a participant's benefit payable in the form of an annuity
payable at normal retirement age, PBGC would determine the arithmetic
average of the interest rates (or tabular adjustment factors) that
applied during periods for which the date of each rate (or factor)
change was within the five-year period ending on the plan's termination
date.
Under Code section 411(b)(5)(B)(vi)(II), the average rate is used
to determine the amount of any benefit under the plan payable in the
form of an annuity payable at normal retirement age. PBGC would apply
an average rate to determine a benefit under the plan that is payable
in the form of a life annuity (i.e., an annuity that continues at least
as long as the life of the annuitant, such as a straight-life annuity,
joint-and-50%-survivor annuity, or 10-year certain and continuous
annuity) payable at normal retirement age. In the case of an immediate
annuity conversion plan that uses a variable interest rate to determine
the amount of a benefit, PBGC would apply an average rate to determine
a benefit under the plan payable in the form of a life annuity payable
at the annuity starting date. In either case, the averaging requirement
would apply only to determine the amount of the benefit in the
automatic PBGC form under Sec. 4022.8(b) of PBGC's regulation on
Benefits Payable in Terminated Single-Employer Plans, e.g., the form a
married participant or an unmarried participant (as applicable) would
be entitled to receive from the plan in the absence of an election. If
the participant or beneficiary elects an optional PBGC form under Sec.
4022.8(c), PBGC would convert the benefit amount from the automatic
PBGC form in accordance with that section.
Paragraph (c) of proposed new Sec. 4022.121 also provides that,
consistent with Treasury regulations, if the interest crediting rate in
any interest crediting period during the five-year period ending on the
termination date is based on a variable rate that is not described in
proposed Treas. Reg. 1.411(b)(5)-1(e)(2)(ii)(B) (e.g., the rate of
return on plan assets), PBGC would replace such rate with the third
segment rate under Code section 430(h)(2)(C)(iii) for the last calendar
month ending before the beginning of the interest crediting period for
purposes of determining the average interest crediting rate. In
accordance with proposed Treas. Reg. 1.411(b)(5)-1(e)(2)(ii)(C), PBGC
generally would adjust the third segment rate by any maximums or
minimums applicable to the interest crediting rate in the period under
the plan's terms, but would not adjust the third segment rate to
account for any other adjustments under the plan to the interest
crediting rate.
Default Rules and Other Rules
Paragraph (d) of proposed new Sec. 4022.121 describes the default
rules that PBGC would apply to the extent that plan provisions do not
satisfy section 204(b)(5)(B) of ERISA and section 411(b)(5)(B) of the
Code and implementing regulations, or that the plan fails to specify
provisions necessary to implement applicable statutory and regulatory
requirements. In the case of a plan that uses a variable rate but does
not provide for the determination of an average rate or an arithmetic
averaging methodology to be used upon termination of the plan, PBGC
would determine an arithmetic average in the manner described above. If
a plan does not specify a mortality table (or otherwise indicate the
table or annuity conversion factor to be used), PBGC would use the
mortality table provided under section 417(e) of the Code that would
apply if the annuity starting date were the plan's termination date
(i.e., future adjustments for expected mortality improvements under the
mortality table would not be taken into account). If a plan fails to
specify an interest crediting rate or annuity conversion interest rate
(or otherwise indicate the rate or factor to be used), PBGC would
compute an average rate as the arithmetic mean of the 30-year Treasury
Constant Maturity rates in effect for the calendar month in which the
plan terminates and for the same calendar month in each of the
preceding four years.
[[Page 67110]]
Under the proposed regulation, PBGC would apply a single average
interest crediting rate to determine the benefits of all similarly
situated participants under the plan (i.e., the same average interest
crediting rate would apply to the extent the same rates applied under
the plan to determine all participants' benefits). In the case of a
plan that terminates within five years after the effective date of the
PPA 2006 termination requirements with respect to the plan, PBGC would
determine the average rate by including interest crediting rates used
by the plan before the effective date but within the five-year period
ending on the termination date. In the case of a plan (or the statutory
hybrid benefit formula under a plan) that is in effect for less than
five years, PBGC would determine the average rate based on the interest
crediting periods during the time the plan (or the statutory hybrid
benefit formula) was in effect.
PPA 2006 Bankruptcy Terminations
Paragraph (e) of proposed new Sec. 4022.121 provides a special
rule for determining interest credits in the case of a plan that
terminates while the sponsor is in bankruptcy (a PPA 2006 bankruptcy
termination, as defined in Sec. 4001.2). PBGC would project the amount
of the participant's hypothetical account balance as of the bankruptcy
filing date using the following interest rates:
To credit interest beginning after the bankruptcy filing
date and ending on the plan's termination date, the actual interest
crediting rate(s) used under the plan during each interest crediting
period.
To credit interest beginning after the plan's termination
date and ending on the participant's normal retirement date or, in some
cases, annuity starting date, the rate in effect under the plan as of
the plan's termination date, including the average interest crediting
rate as determined under subpart H if the plan used a variable rate
during the five-year period ending on the plan's termination date.
De Minimis Lump Sums
The proposed rule would add a new Sec. 4022.122 to describe how
PBGC would make determinations regarding de minimis lump sum payments
(currently $5,000 or less under Sec. 4022.7) under a statutory hybrid
plan. Consistent with section 411(a)(13)(A) of the Code, if a plan
provides for a single sum form of payment equal to the amount expressed
as the balance in a hypothetical account, PBGC generally would
determine whether the lump sum value of a benefit payable by PBGC is de
minimis based on the participant's hypothetical account balance as of
the plan's termination date, and, if so, would pay that amount to the
participant.
However, regardless of plan provisions, if after August 17, 2006, a
plan made lump sum payments based on participants' hypothetical account
balances without regard to the present value rules under section 417(e)
of the Code, or stated in writing its intent to make lump sum payments
on that basis (e.g., through communications to affected participants),
PBGC would make de minimis lump sum determinations on that same basis.
I.e., PBGC would treat the plan as if it had been amended to reflect
plan operation in accordance with section 411(a)(13)(A) of the Code,
pursuant to the amendatory period provided under section 1107 of PPA
2006. PBGC would also make de minimis lump sum determinations based on
the participants' hypothetical account balances without regard to the
section 417(e) rules if there is no single sum form of payment under
the plan or no description of the calculation for such a payment.
In the case of a plan that provides for use of section 417(e) of
the Code in determining lump sums and that, after August 17, 2006, has
not made lump sum payments based solely on participants' hypothetical
account balances or stated in writing its intent to make lump sum
payments on that basis (e.g., through communications to affected
participants), PBGC would make de minimis lump sum determinations in
accordance with Sec. 4022.7(d) and its operating policy on cash
balance plans.
Phase-In of Guarantee of Benefit Increases
The proposed rule would add a new Sec. 4022.123 to PBGC's
regulations to describe changes in the terms of a statutory hybrid plan
resulting in a benefit increase that would be subject to the phase-in
limitations on the PBGC guarantee (i.e., a benefit increase that has
been in effect for less than five years on the plan's termination
date). Such changes include, but are not limited to, a change in the
plan's mortality table, timing or method for crediting interest, or
basis for crediting interest or determining the annuity conversion
factor (e.g., a change from a fixed rate to a variable rate, or from
one variable index to another variable index).
The proposed regulation would clarify that certain adjustments in
the interest rate would not be subject to the phase-in limitations.
These include: (i) A change in the interest rate under a single
variable rate index (e.g., a change in the yield on 5-year Treasury
Constant Maturities from one date to another); (ii) a change that is
required to comply with the termination requirements of ERISA section
204(b)(5)(B)(vi) and Code section 411(b)(5)(B)(vi) (e.g., a change in
the plan's interest rate to an average rate of interest at
termination); (iii) a change in the plan's interest crediting rate that
is permitted, notwithstanding section 411(d)(6) of the Code, pursuant
to Treas. Reg. 1.411(b)(5)-1(e)(3) (e.g., an amendment to change under
certain circumstances to the long-term investment grade corporate bond
rate); (iv) a change permitted during the amendatory period under
section 1107 of PPA 2006 or any extension of the amendatory period
issued by the Treasury Department; and (v) an automatic future update
in a mortality table specified under the plan as of the termination
date that reflects expected improvements in mortality experience. PBGC
believes that excluding such changes from the phase-in rule is
warranted. Changes in rate due to the fluctuations of a variable index
or to the averaging under the termination requirements would just as
likely result in a benefit decrease as a benefit increase. Furthermore,
any increase in benefits that might result from the above changes would
be moderated by the requirement to average the plan's rates for the
five-year period ending on the termination date, and by the
substitution of the third segment rate for any variable rate that is
not described in proposed Treasury Regulation 1.411(b)(5)-
1(e)(2)(ii)(B) (e.g., the rate of return on plan assets) for purposes
of determining the average interest crediting rate. Lastly, updates
under a mortality table that automatically reflects age improvements
are an inherent aspect of the annuity conversion factor used; by
contrast, a change to the conversion factor (e.g., from a fixed
mortality table to one that updates automatically) by a plan would be
subject to phase-in.
Allocation of Assets--Distress and Involuntary Terminations
PBGC proposes to amend part 4044 by adding a new Sec. 4044.52(e)
to address the valuation of benefits under a terminating statutory
hybrid plan. The proposed regulation provides that benefits should be
valued consistent with the general valuation rules of part 4044 and the
provisions for the calculation and payment of benefits in subpart H of
part 4022.
In two situations, notwithstanding PBGC's calculation of benefits
for payment purposes, PBGC would value
[[Page 67111]]
the benefits under a cash balance plan in the same manner as all other
benefits are valued. First, although proposed new Sec. 4022.122
provides for the determination of de minimis lump sums in some cases on
the basis of the participant's hypothetical account balance, a benefit
payable as a de minimis lump sum would nevertheless be required to be
valued, for purposes of part 4044, in the form of a benefit payable as
an annuity in the absence of a valid election under the terms of the
plan (as is the case under current regulations). Second, despite the
special rule in proposed new Sec. 4022.121(a)(3)(ii) that would
generally require PBGC to use the plan's interest crediting rate and
annuity conversion interest rate to determine benefits commencing or
elected during the time period between the plan's termination date and
the date on which PBGC institutes termination proceedings, these
benefits would be valued, for purposes of part 4044, using the interest
rates in effect under the plan (including the five-year average rate,
if applicable) as of the plan's termination date.
Proposed new Sec. 4044.52(e)(4) describes the calculation of a
priority category 3 benefit under a statutory hybrid plan. Priority
category 3 benefits generally are benefits in pay status, or that could
have been in pay status, three years before the termination date;
priority category 3 benefits come ahead of guaranteed benefits in
priority category 4 in the section 4044 asset allocation. In a plan
termination that is not a PPA 2006 bankruptcy termination, the priority
category 3 benefit for a participant eligible to receive an annuity
(taking into account PBGC's rules on the Earliest PBGC Retirement Date
under Sec. 4022.10) before the beginning of the three-year period
ending on the termination date but not in pay status as of that date
would be determined based on the balance of the participant's
hypothetical account and the interest crediting rate and annuity
conversion factor under the plan had the participant retired three
years before the termination date.\11\ In the case of PPA 2006
bankruptcy termination, the bankruptcy filing date would substitute for
the termination date in determining whether a participant or
beneficiary is eligible for a priority category 3 benefit, and the
amount of benefits in priority category 3. A priority category 3
benefit would in no event exceed the benefit amount payable under the
terms of the plan as of the plan's termination date (determined by
applying the averaging rules under Sec. 4022.121 if the plan uses a
variable rate).
---------------------------------------------------------------------------
\11\ Benefits in priority category 3 are limited to the lowest
annuity benefit payable under the plan provisions at any time during
the five-year period ending on the termination date (or bankruptcy
filing date, if applicable). This limitation also affects the
benefits of participants who retired between three and five years
before the termination date (or bankruptcy filing date, if
applicable).
---------------------------------------------------------------------------
Standard and Distress Terminations
The termination requirements under section 411(b)(5)(B)(vi) of the
Code, added by PPA 2006, apply to any applicable defined benefit plan
upon the termination of the plan. Sections 4041.28(c) and 4041.50
provide that, in general, the plan administrator of a plan that
terminates in a standard termination or a distress termination where
the plan is sufficient for guaranteed benefits must close out the plan
``in accordance with all applicable requirements under the Code and
ERISA.'' These requirements include the new rules for cash balance
plans under section 411(b)(5)(B)(vi) of the Code and implementing
Treasury regulations.
The proposed rule would amend Sec. 4041.28(c) to provide that for
purposes of part 4041 the plan administrator of a statutory hybrid plan
would be deemed to satisfy the applicable Code and ERISA requirements
if it calculates and pays benefits consistent with the interest and
mortality provisions described in proposed new Sec. 4022.121.
Issues Not Addressed
This proposed rule does not address issues relating to plans in
which the interest crediting rate is determined by participant
direction, e.g., where the interest crediting rate depends upon choices
made by the participant. PBGC will provide further guidance as
appropriate.
Applicability
The proposed regulatory changes to implement the plan termination
requirements under section 411(b)(5)(B)(vi) of the Code would generally
apply to any plan with a termination date in a plan year beginning on
or after January 1, 2008. In addition, the proposed changes would apply
to any plan that was not in existence on June 29, 2005. Pursuant to
sections 701(e)(3) through (e)(5) of PPA 2006, if a plan elected to
have these statutory provisions apply for any period after June 29,
2005, and before the plan year beginning on or after January 1, 2008,
or if the statutory provisions are first effective for a plan after the
first plan year beginning on or after January 1, 2008 (e.g., a
collectively bargained plan), these regulatory changes would apply to
any plan with a termination date on or after such earlier effective
date elected by the plan, or such later effective date provided under
PPA 2006. For plans that terminate under part 4041 on or after the
effective date of these statutory provisions and pending the issuance
of final Treasury regulations, compliance with PPA 2006 would
constitute compliance with the new rules for Title IV purposes.\12\
---------------------------------------------------------------------------
\12\ The 2010 final Treasury regulations provide that, for
periods after the statutory effective date and before the regulatory
effective date, a plan is permitted to rely on the provisions of the
2010 final Treasury regulations, the 2010 proposed Treasury
regulations, the 2007 proposed regulations on Hybrid Retirement
Plans, 72 FR 73680, 48 (Dec. 28, 2007), and IRS Notice 2007-6 for
purposes of satisfying the requirements of sections 411(a)(13) and
411(b)(5) of the Code.
---------------------------------------------------------------------------
The proposed regulatory changes to implement the lump sum
provisions under section 411(a)(13) of the Code would apply to
distributions made from a terminated plan with a termination date in a
plan year beginning on or after January 1, 2008.
Regulatory Impact Analysis
Regulatory Procedures
Executive Order 12866 ``Regulatory Planning and Review'' and Executive
Order 13563 ``Improving Regulation and Regulatory Review''
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, 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, the Department has examined the economic and policy
implications of this proposed rule and has concluded that the action's
benefits justify its costs.
Under Section 3(f)(1) of Executive Order 12866, a proposed rule 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
[[Page 67112]]
the economy, productivity, competition, jobs, the environment, public
health or safety, or State, local, or tribal governments or
communities.'' PBGC has determined that this proposed rule does not
cross the $100 million threshold for economic significance and is not
otherwise economically significant.
The economic effect of the proposed rule is attributable almost
entirely to the economic effect of the PPA 2006 changes to terminating
cash balance plans. Accordingly, PBGC is basing its determination on
its experience with plans subject to these provisions.
PBGC estimates that, to date, the total economic effects of the PPA
2006 changes--in terms of lower benefits paid to participants and
associated savings--is less than $4 million. These effects are
primarily due to lower lump sum payments to some participants as a
result of the PPA 2006 provisions that allow payment of the
hypothetical account balance to participants. Because PBGC generally
pays lump sums only when the benefit is de minimis (currently $5,000 or
less), and because only a small percentage of participants in cash
balance plans trusteed by PBGC receive benefits in lump sum form, the
economic effects are relatively small.
PBGC estimates that there will be little if any economic effect
from PPA 2006's averaging provisions. As explained in the Background
section, before the PPA 2006 changes went into effect, if a cash
balance plan used a variable interest rate at plan termination to
determine accrued benefits, for payment purposes PBGC credited interest
to a participant's account using the plan's variable index from the
termination date until a participant's normal retirement date or
annuity starting date. PPA 2006 requires that a cash balance plan that
uses a variable rate for calculating benefits use the average of the
rates used under the plan during the five-year period ending on the
plan termination date. This change could result in larger benefits
payable to some participants and smaller benefits payable to other
participants as compared to the pre-PPA 2006 methodology, depending on
fluctuations in rates. PBGC believes that these losses and gains in
benefits for participants will be largely offsetting.
Although, PBGC cannot predict with certainty which cash balance
plans will terminate, the funding level of such plans, or the number of
participants that will be paid de minimis lump sum payments, given the
relatively low estimate of the effect of the statutory provisions to
date, PBGC has determined that the annual effect of the proposed rule
will be less than $100 million.
Regulatory Flexibility Act
PBGC certifies under section 605(b) of the Regulatory Flexibility
Act (5 U.S.C. 601 et seq.) that the amendments in this proposed rule
would not have a significant economic impact on a substantial number of
small entities. The amendments implement and in some cases clarify
statutory changes made in PPA 2006; they do not impose new burdens on
entities of any size. 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.
Paperwork Reduction Act
The amendments in the proposed rule would change the information
requirements approved by the Office of Management and Budget under the
Paperwork Reduction Act under OMB control number 1212-0036 (expires
December 31, 2013). PBGC is submitting the information requirements
relating to these amendments to part 4041 to the Office of Management
and Budget for review and approval under the Paperwork Reduction Act.
Copies of PBGC's request may be obtained free of charge by contacting
the Disclosure Division of the Office of the General Counsel of PBGC,
1200 K Street, NW., Washington, DC 20005, (202) 326-4040; the request
is also available on http://www.reginfo.gov.
PBGC estimates that 1,379 plan administrators will be subject to
the collection of information requirements under 1212-0036 each year,
and that the total annual burden of complying with these requirements
is 2,161 hours and $3,098,441. Much of the work associated with
terminating a plan is performed for purposes other than meeting these
requirements. (Detailed information on these burden estimates is
included in PBGC's request.)
Comments on the paperwork provisions under this proposed rule
should be sent to the Office of Information and Regulatory Affairs,
Office of Management and Budget, Attention: Desk Officer for Pension
Benefit Guaranty Corporation, via electronic mail at OIRA_DOCKET@omb.eop.gov or by fax to (202) 395-6974. Although comments may
be submitted through December 30, 2011, the Office of Management and
Budget requests that comments be received on or before November 30,
2011 to ensure their consideration. Comments may address (among other
things)--
Whether the proposed collection of information is needed
for the proper performance of PBGC's functions and will have practical
utility;
The accuracy of PBGC's estimate of the burden of the
proposed collection of information, including the validity of the
methodology and assumptions used;
Enhancement of the quality, utility, and clarity of the
information to be collected; and
Minimizing the burden of the collection of information on
those who are to respond, including through the use of appropriate
automated, electronic, mechanical, or other technological collection
techniques or other forms of information technology, e.g., permitting
electronic submission of responses.
List of Subjects
29 CFR Part 4001
Pensions.
29 CFR Part 4022
Pension insurance, Pensions.
29 CFR 4041
Pension insurance, Pensions, Reporting and recordkeeping
requirements.
29 CFR 4044
Pension insurance, Pensions.
For the reasons given above, PBGC proposes to amend 29 CFR parts
4001, 4022, 4041, and 4044 as follows.
PART 4001--TERMINOLOGY
1. The authority citation for part 4001 continues to read as
follows:
Authority: 29 U.S.C. 1301, 1302(b)(3).
2. In Sec. 4001.2, add a new definition in alphabetical order to
read as follows:
Sec. 4001.2 Definitions
Statutory hybrid plan means a cash balance plan or other statutory
hybrid plan under regulations issued by the Department of the Treasury.
PART 4022--BENEFITS PAYABLE IN TERMINATED SINGLE-EMPLOYER PLANS
3. The authority citation for part 4022 continues to read as
follows:
Authority: 29 U.S.C. 1302, 1322, 1322b, 1341(c)(3)(D), and
1344.
4. In Sec. 4022.2, amend the first paragraph by removing the words
``proposed termination date, substantial owner'' and adding in their
place ``proposed termination date, statutory hybrid plan, substantial
owner.''
5. Add a new subpart H to read as follows:
[[Page 67113]]
Subpart H--Calculation of Benefits Payable Under Statutory Hybrid
Plans
Sec. 4022.120 Purpose and scope.
(a) General. This subpart H supplements the general rules in part
4022. These rules apply for determining the benefit payable under the
provisions of a statutory hybrid plan and the amount of the benefit
that PBGC will guarantee or that is payable under title IV of ERISA. To
the extent the rules and procedures of this subpart H conflict with the
rules and procedures in subparts A through G of part 4022, the
provisions of subpart H govern.
(b) Statutory hybrid plan. In general, a statutory hybrid plan
(defined in Sec. 4001.2 of this chapter) includes a hybrid defined
benefit pension plan under the terms of which the accumulated benefit
of a participant (or any portion thereof) is expressed as the current
balance of a hypothetical account maintained for the participant (a
cash balance formula), as the current value of an accumulated
percentage of the participant's final average compensation (a pension
equity formula), or as a formula with an effect similar to a cash
balance or pension equity formula. This subpart H applies with respect
to all or any portion of a participant's benefit under a defined
benefit plan to the extent such benefit is determined under a statutory
hybrid benefit formula.
Sec. 4022.121 Interest and mortality assumptions and other plan
terms.
(a) In general. PBGC will determine a participant's benefit based
on the terms of the plan, including the interest rate and mortality
table otherwise applicable for determining that benefit under the plan,
as of the plan's termination date. Special rules apply under paragraph
(e) of this section for a PPA 2006 bankruptcy termination.
(1) Plan terms. PBGC will determine plan benefits using relevant
plan provisions in effect as of the plan's termination date (or, for
determining the average rate in the case of a variable rate, within the
5-year period ending on the plan's termination date). All relevant plan
provisions (including provisions that become applicable upon plan
termination) must be consistent with the requirements under section
204(b)(5)(B) of ERISA and section 411(b)(5)(B) of the Code and
regulations thereunder. Relevant plan provisions include, but are not
limited to, the following:
(i) The basis and the timing for determining the interest crediting
rate used by the plan for each plan year (or portion thereof).
(ii) The periodic frequency at which interest credits are applied
(monthly, quarterly, etc.).
(iii) The interest rate and mortality table (or conversion factor)
used to determine the amount of any benefit payable in the form of an
annuity payable at normal retirement age. If a plan uses a mortality
table as of the termination date that is updated automatically to
reflect expected improvements in mortality experience (e.g., the
applicable mortality table provided under Code section 417(e)(3)), PBGC
will take into account future adjustments under that table for expected
improvements in mortality experience through each participant's annuity
starting date.
(iv) The averaging methodology to be used, if the interest
crediting rate or the annuity conversion interest rate under the plan
is a variable rate, upon the termination of the plan.
(v) The method for determining a participant's annuity benefit.
Examples--
Example 1. Immediate annuity conversion plan. A cash balance
plan determines immediate annuity benefits by applying immediate
annuity conversion factors to the participant's hypothetical account
balance as of the annuity starting date. PBGC will add interest
credits to the participant's hypothetical account balance each
interest crediting period beginning after the plan's termination
date through the participant's annuity starting date and convert the
balance to an annuity using the immediate annuity conversion factors
(specified under the plan as of the termination date) at the
participant's age on the annuity starting date.
Example 2. Deferred annuity conversion plan. A pension equity
plan determines annuity benefits by applying deferred annuity
conversion factors to the accumulated percentage of the
participant's final average compensation at cessation of accruals.
PBGC will determine the current value of the accumulated percentage
of an active participant's final average compensation as of the
plan's termination date and convert this value to an annuity using
the deferred annuity conversion factors specified under the plan as
of the termination date (followed by an adjustment, if necessary, in
the annuity using the plan's early retirement provisions to reflect
the participant's age on the annuity starting date) to determine the
benefit payable as an annuity at different future ages to the
participant.
Example 3. Projected annuity conversion plan. A cash balance
plan determines annuity benefits by reference to the accrued
benefit, which is determined by projecting the participant's
hypothetical account balance with interest credits to the plan's
normal retirement age. PBGC will add interest credits to the
participant's hypothetical account balance each interest crediting
period beginning after the plan's termination date through the
participant's normal retirement date (or the current date, if later)
and convert the balance to an annuity payable at that age using the
immediate conversion factors for that age (or the interest rate and
mortality table) specified under the plan as of the termination date
(followed by an adjustment, if necessary, in the annuity using the
plan's early retirement provisions to reflect the participant's age
on the annuity starting date).
(2) Fixed or variable interest rate and related terms. If, during
the 5-year period ending on the plan's termination date, the plan uses
the same fixed interest rate to determine a participant's accumulated
benefit or the amount of any benefit under the plan payable in the form
of an annuity payable at normal retirement age, PBGC will apply the
rules in paragraph (b) of this section. If, during the 5-year period
ending on the plan's termination date, the plan uses a variable rate
(as defined in paragraph (c)(4)) to determine a participant's
accumulated benefit or the amount of any benefit under the plan payable
in the form of an annuity payable at normal retirement age, PBGC will
apply the rules in paragraph (c) of this section. To the extent that
the terms of the plan do not satisfy section 204(b)(5)(B) of ERISA and
section 411(b)(5)(B) of the Code and implementing regulations, or that
the plan fails to specify provisions necessary to implement applicable
statutory and regulatory requirements, PBGC will determine plan
benefits using the rules under paragraph (d) of this section. In the
case of a PPA 2006 bankruptcy termination, PBGC will apply the interest
crediting rules in paragraph (e) of this section.
(3) Benefits affected. (i) General rule. The provisions of this
Sec. 4022.121 apply to determine the benefits of any participant or
beneficiary with an annuity starting date after the plan's termination
date. If the plan administrator issues a notice of intent to terminate
in a distress termination under ERISA section 4041(c), in compliance
with Sec. 4041.42 of this chapter, the plan administrator must apply
the provisions of this Sec. 4022.121 as of the proposed termination
date specified in the notice of intent to terminate under Sec.
4041.43. (If the plan fails to qualify for distress termination, in
accordance with Sec. 4041.42(d), benefits determined using an average
interest rate must be recalculated using the interest rate otherwise
applicable under the plan, disregarding the proposed termination date.)
(ii) Special rule for involuntary terminations. Notwithstanding
paragraph (a)(3)(i) of this section, if PBGC initiates termination
proceedings under ERISA section 4042 and the
[[Page 67114]]
termination date is earlier than the date on which PBGC institutes such
proceedings, PBGC generally will not change the interest rate(s), the
mortality table, or other conversion factor used by the plan (in
accordance with ongoing plan provisions) to calculate a benefit payable
to a participant or beneficiary whose annuity starting date is after
the termination date but on or before the date on which PBGC institutes
termination proceedings. PBGC also generally will not change the
interest rate(s), the mortality table, or other conversion factor used
by the plan to calculate the benefit of a participant or beneficiary
who submits a completed election for an annuity benefit during the
period between the termination date and the date on which PBGC
initiates termination proceedings. (This special rule does not apply in
the case of a plan that issues a notice of intent to terminate in a
distress termination under section 4041(c) and subsequently terminates
under section 4042, where the termination date is the same as the
proposed termination date under section 4041(c).) PBGC may in its
discretion apply the general rule in paragraph (a)(3)(i) instead of the
special rule in this paragraph (a)(3)(ii) if warranted under the facts
and circumstances (e.g., to avoid abuse).
(b) Fixed interest rate. If the interest crediting rate used to
determine the participant's accumulated benefit (or a portion thereof)
under the plan is the same fixed rate during each interest crediting
period for which the interest crediting date is within the 5-year
period ending on the plan's termination date, PBGC will use the fixed
rate to apply interest credits to a participant's hypothetical account
beginning after the termination date and ending on the participant's
normal retirement date or annuity starting date, as applicable. If the
interest rate (or tabular adjustment factor) used to determine the
amount of any benefit under the plan payable in the form of an annuity
payable at normal retirement age is the same fixed rate (or factor) for
the entire 5-year period ending on the termination date, PBGC will use
such fixed rate (or factor) to convert the participant's hypothetical
account to an annuity.
(c) Variable rate.
(1) Use of average rate for determining interest credits after
termination date.
(i) If the interest rate used by the plan to determine a
participant's accumulated benefit (or a portion thereof) under the plan
was a variable rate during the interest crediting periods in the 5-year
period ending on the plan's termination date, PBGC will use the average
of the interest crediting rates used under the plan during the 5-year
period ending on the termination date to apply interest credits to a
participant's hypothetical account balance beginning after the
termination date and ending on the participant's normal retirement date
or annuity starting date, as applicable.
(ii) For purposes of paragraph (c)(1)(i), the average is the
arithmetic average, expressed as an annual rate, of the interest
crediting rates that applied under the terms of the plan during any
interest crediting period for which the interest crediting date is
within the 5-year period ending on the termination date (excluding any
interest crediting date under the terms of the plan that is distinct
from the plan's regular interest crediting date, such as the date of
separation from employment or plan termination).
(2) Use of average rate for determining annuity amount. If the
interest rate (or tabular adjustment factor) used by the plan to
determine the amount of any benefit under the plan payable in the form
of an annuity payable at normal retirement age is a variable rate
during the 5-year period ending on the plan's termination date, PBGC
will determine the arithmetic average of the interest rates (or
factors) that applied under the terms of the plan during periods for
which the date of any rate (or factor) change was within the 5-year
period ending on the termination date. The average rate will apply to
determine the amount of any benefit under the plan payable in the form
of a life annuity (i.e., an annuity that continues at least as long as
the life of the annuitant) payable at normal retirement age, or, in the
case of an immediate annuity conversion plan that uses a variable rate
to determine the amount of a benefit, to determine the amount of any
benefit under the plan payable in the form of a life annuity payable at
the annuity starting date. In either case, the averaging requirement
will apply only to determine the amount of the benefit in the automatic
PBGC form under Sec. 4022.8(b) of PBGC's regulation on Benefits
Payable in Terminated Single-Employer Plans, e.g., the form a married
participant or an unmarried participant (as applicable) would be
entitled to receive from the plan in the absence of an election. If the
participant or beneficiary elects an optional PBGC form under Sec.
4022.8(c), PBGC will convert the benefit amount from the automatic PBGC
form in accordance with that section.
(3) Replacement with 3rd Segment Rate. If the interest crediting
rate in any interest crediting period during the 5-year period ending
on the termination date is a variable rate described in Sec.
1.411(b)(5)-1(d)(5) of the Treasury regulations or a variable rate that
is impermissible under Treasury regulations, PBGC will replace such
rate with the third segment rate under Code section 430(h)(2)(C)(iii)
for the last calendar month ending before the beginning of the interest
crediting period. Consistent with Treasury regulations, PBGC generally
will adjust the third segment rate to account for any maximums or
minimums to the interest crediting rate that applied in the period
under the plan's terms, but will not adjust the third segment rate with
regard to other reductions that applied in the period under the plan.
(4) Application of average interest rate. The average interest
crediting rate determined under paragraphs (c)(1), (c)(2), and (c)(3)
of this section will apply to determine the participant's accumulated
benefit beginning after the plan's termination date, and ending on the
participant's normal retirement date (or later annuity starting date),
or--depending on the terms of the plan--the participant's annuity
starting date. If the plan's termination date occurs in the middle of
an interest crediting period, the participant's hypothetical account
balance will be credited with a pro rata amount of the interest credit
the participant would have otherwise received under the terms of the
plan for the portion of the interest crediting period ending on the
plan's termination date (but this rate will not be included in the
average interest crediting rate determined under paragraphs (c)(1),
(c)(2), and (c)(3) of this section). For any subsequent partial
interest crediting period (e.g., a portion of the interest crediting
period following the plan's termination date), the participant's
hypothetical account balance will be credited with a pro rata amount of
the average interest crediting rate determined under paragraphs (c)(1),
(c)(2), and (c)(3).
(5) Definition of variable rate. A variable interest rate is a rate
of interest that is adjusted at least annually under the plan based on
a floating interest rate, yield, or rate of return, and that otherwise
satisfies the requirements of section 204(b)(5) of ERISA and section
411(b)(5) of the Code and regulations thereunder. It includes interest
credits determined under a plan based on the greater of 2 or more
different interest crediting rates (e.g., a fixed rate and a variable
rate); a floor applied to certain rates; and a rate that can never be
in excess of certain bond-based rates (see Treasury regulations Sec.
1.411(b)(5)-1(d)). Also, for purposes of the averaging rules described
in Sec. 4022.121(c), a variable rate includes any rate that was not
the
[[Page 67115]]
same fixed rate on any interest crediting date during the interest
crediting periods in the 5-year period ending on the plan's termination
date or, in the case of a variable annuity conversion rate (or factor),
on the date of any rate (or factor) change within the 5-year period
ending on the termination date.
(d) Default rules for determining benefits. To the extent that plan
provisions do not satisfy section 204(b)(5)(B) of ERISA and section
411(b)(5)(B) of the Code and implementing regulations, or that the plan
fails to specify provisions necessary to implement applicable statutory
or regulatory requirements (including requirements in paragraph (d)(5)
and (d)(6) of this section), PBGC will apply the rules in paragraphs
(d)(1) through (d)(6) of this section.
(1) Averaging requirement or averaging methodology. If the plan
uses a variable rate to determine the participant's accumulated benefit
or the amount of any benefit payable as an annuity at normal retirement
age, PBGC will determine a participant's benefits using the arithmetic
average of the rates of interest used under the plan, as described in
paragraph (c).
(2) Mortality table. With respect to the mortality table to be
used, PBGC will use the mortality table provided under Code section
417(e) that would apply if the annuity starting date were the plan's
termination date (i.e., no future projections to the mortality table).
(3) Interest crediting rate. Solely with respect to a plan's
failure to specify the interest crediting rate to be used, PBGC will
compute an average interest crediting rate as the arithmetic mean of
the 30-year Treasury Constant Maturity rates in effect for five
calendar months: the calendar month in which the plan terminates, and,
for each of the preceding four years, the calendar month that is the
same as the calendar month in which the plan terminates. For example,
if a plan terminates in July 2009, the relevant months would be July
2009, July 2008, July 2007, July 2006, and July 2005.
(4) Annuity conversion interest rate. With respect to an annuity
conversion interest rate or conversion factor to be used, PBGC will
compute an average annuity conversion interest rate as the arithmetic
mean of the 30-year Treasury Constant Maturity rates in effect for five
calendar months: the calendar month in which the plan terminates, and,
for each of the preceding four years, the calendar month that is the
same as the calendar month in which the plan terminates. For example,
if a plan terminates in July 2009, the relevant months would be July
2009, July 2008, July 2007, July 2006, and July 2005.
(5) Five-year period includes plan years before 2008. PBGC will
take into account the interest rates used under the plan prior to the
first plan year beginning on or after January 1, 2008 (or the earlier
or later effective date described in sections 701(e)(3)-(5) of PPA
2006), if these plan years are part of the 5-year averaging period, for
purposes of calculating an average rate of interest. For plans in
existence on June 29, 2005, the rates used before the 2008 plan year
(or other PPA 2006 effective date for a plan) during the 5-year
averaging period are not subject to the requirements of section
204(b)(5)(B) of ERISA and section 411(b)(5)(B) of the Code (except as
otherwise provided under Treasury regulations) although PBGC will apply
the rules in paragraph (c)(2) of this section to such rates.
(6) Statutory hybrid benefit formula in effect less than five
years. If the statutory hybrid benefit formula under the plan was in
effect for less than five years, PBGC will use the interest rates used
under the plan, modified in accordance with this section, during the
period the statutory hybrid benefit formula was in effect to calculate
the average rate of interest.
(7) Examples of application of averaging rules.
Example 1. Projected annuity conversion plan with replacement of
3rd segment rate. Upon the termination of a cash balance plan, the
plan provides a variable index for purposes of determining the
interest crediting rate. The plan credits interest annually at the
end of each calendar year through the participant's normal
retirement date (or the current date, if later). The plan's
termination date is June 30, 2015. For the two immediately preceding
interest crediting dates within the 5-year period ending on the
termination date, December 31, 2014, and December 31, 2013, the plan
used the annual rate of return on plan assets as of the end of the
preceding plan year as its interest crediting rate. For the three
preceding interest crediting dates within the 5-year period, the
plan used the rates under a Treasury bond index described in Treas.
Reg. Sec. 1.411(b)(5)-1(d)(4) as of the end of the preceding plan
year as its interest crediting rate. Based on these rates, the plan
used interest crediting rates of 8.00%, -3.00%, 4.50%, 5.50%, and
6.00%, respectively, for the interest crediting periods ending
December 31, 2014, December 31, 2013, December 31, 2012, December
31, 2011, and December 31, 2010. When calculating the average rate
of interest, PBGC would replace the rate of return on plan assets
with the third segment rate for the last calendar month ended before
the beginning of each interest crediting period. Assume these third
segment rates are 6.40% and 6.70%, respectively. PBGC would replace
the 8.00% interest rate with 6.40% and the -3.00% interest rate with
6.70%. PBGC would then calculate the average rate of interest as the
arithmetic average of 6.40%, 6.70%, 4.50%, 5.50%, and 6.00%, which
equals 5.82% ((6.40 + 6.70 + 4.50 + 5.50 + 6.00)/5). PBGC thus would
use a pro rata amount of the annual rate of return on plan assets
for the period ending December 31, 2014, to credit a participant's
hypothetical account balance for the period from January 1, 2015
through June 30, 2015, and a rate of 5.82% to apply interest credits
to a participant's hypothetical account balance each year for the
period from July 1, 2015, through the participant's normal
retirement date (pro rated for any partial interest crediting
period).
Example 2. Immediate annuity conversion plan with fixed tabular
conversion factor. The interest crediting rate is the same as in
Example 1, except that the plan credits interest through the
participant's retirement date and provides for immediate annuity
conversion factors at any age. Assume a participant has a
hypothetical account balance equal to $100,000 as of the plan's
termination date on June 30, 2015; this balance includes annual pay
credits through December 31, 2014, and a pro rata interest credit
through June 30, 2015, based on the plan's interest crediting rate.
The participant retires on November 1, 2020, at age 55. PBGC would
determine the participant's hypothetical account balance on November
1, 2020, by applying interest credits to the participant's $100,000
hypothetical account balance at an annual rate of 5.82%, credited on
December 31 of each year and pro rated for any partial crediting
period. The resulting hypothetical account balance at the
participant's retirement is $135,216 ($100,000 x 1.0582 \5.33333\)
(this includes pro rata credit for the periods July 1, 2015 through
December 31, 2015, and January 1, 2020 through October 31, 2020).
PBGC would then determine the amount of the participant's benefit
payable as an annuity by converting the hypothetical account balance
to an immediate annuity using the plan's immediate annuity
conversion factor at age 55. The plan provides for an immediate
annuity conversion factor of 14.2 at age 55. Therefore, the
resulting monthly annuity benefit for the participant at age 55 is
$794 ($135,216/(14.2 x 12)).
Example 3. Immediate annuity conversion plan with variable
conversion interest rate. The facts are the same as in Examples 1
and 2, except that the plan used a variable annuity conversion rate
based on the rates under a Treasury bond index described in Treas.
Reg. Sec. 1.411(b)(5)-1(d)(4) at the beginning of each plan year.
The plan's average annuity conversion rate would include rates on
the date of each rate change that occurred within the 5-year period
from July 1, 2010 through June 30, 2015. Assume these rates are
5.25%, 4.75%, 5.50%, 4.50%, and 5.50%, respectively, for the date of
each rate change on January 1, 2015, January 1, 2014, January 1,
2013, January 1, 2012, and January 1, 2011. PBGC would calculate the
arithmetic average of 5.25%, 4.75%, 5.50%, 4.50%, and 5.50%, which
equals 5.10% ((5.25 + 4.75 + 5.50 + 4.50 + 5.50)/5). The plan
defines the mortality table used to convert account balances to
monthly annuity
[[Page 67116]]
benefits to be GAR94. PBGC would then use 5.10% and mortality table
GAR94 to calculate an annuity conversion factor of 14.4198 at age
55. Therefore, the resulting monthly annuity benefit for the
participant at age 55 is $781 ($135,216/(14.4198 x 12)).
(e) PPA 2006 bankruptcy termination. In the case of a PPA 2006
bankruptcy termination, PBGC will apply interest credits to a
participant's hypothetical account balance determined as of the
bankruptcy filing date by using the following interest rates:
(i) The interest rate(s) in effect under the plan for the period
beginning after the bankruptcy filing date and ending on the plan's
termination date.
(ii) The interest rate as of the plan's termination date--or if the
interest rate under the plan is a variable rate as of the termination
date, the average rate of interest as determined under paragraphs (c)
or (d) of this section--for the period beginning after the termination
date and ending on the participant's normal retirement date (or later
annuity starting date), or--depending on the terms of the plan--on the
participant's annuity starting date.
Sec. 4022.122 Lump sum payment.
(a) Lump sum as hypothetical account balance under the plan.
Notwithstanding Sec. 4022.7 of this part, if the plan provides for a
single sum payment equal to the balance of the hypothetical account of
the participant (or the value of the accumulated percentage of the
participant's final average compensation), PBGC will determine whether
the benefit is payable as a de minimis lump sum payment and the amount
of the lump sum payment based on the participant's hypothetical account
balance (or the accumulated percentage of final average compensation)
as of the plan's termination date, to the extent payable under title IV
of ERISA.
(b) Lump sum based on section 417(e) under the plan.
(1) In general. If paragraph (a) of this section does not apply
(e.g., the plan provides that the present value rules of section 417(e)
of the Code apply in calculating the amount of a single sum payment),
PBGC will use the methodology in Sec. 4022.7 of this part to determine
the lump sum value of the benefit. If either this amount or the
participant's hypothetical account balance (or accumulated percentage
of final average compensation), as of the termination date, is $5,000
or less, PBGC will pay the greater of the two amounts as a de minimis
lump sum payment, except as provided in paragraph (b)(2) of this
section.
(2) Exception. If, on or after August 18, 2006, the plan has made
any lump sum payments based on the hypothetical account balance (or the
current value of the accumulated percentage of the participant's final
average compensation) without regard to the present value rules of
section 417(e) of the Code, or stated in writing its intent to make
lump sum payments on that basis, PBGC will calculate the lump sum value
of a benefit, to determine whether the benefit is payable as a lump sum
and, if so, the amount of the payment, in accordance with paragraph (a)
of this section.
(c) Plan does not describe determination of lump sum amount. If the
plan does not provide for a single sum payment or de minimis lump sum
payment, or does not describe the calculation of such a payment, PBGC
will calculate the lump sum value of a benefit, to determine whether
the benefit is payable as a lump sum and, if so, the amount of the
payment, in accordance with paragraph (a) of this section.
Sec. 4022.123 Phase-in of guarantee of benefit increases.
(a) Changes subject to phase-in limitation. For purposes of
applying Sec. 4022.24 and the phase-in limitations on the guarantee
under Sec. 4022.25, except as otherwise provided in subsection (b) of
this section, a benefit increase as defined under Sec. 4022.2
includes, but is not limited to, a benefit increase that results from a
change in the plan's--
(i) Timing or method for crediting interest;
(ii) Fixed mortality table to another fixed mortality table;
(iii) Fixed mortality table to a mortality table that updates
automatically in future years to reflect expected improvements in
mortality experience (or such updated mortality table to a fixed
mortality table), or other change in the basis on which a participant's
hypothetical account balance is converted into a benefit payable as an
annuity;
(iv) Fixed interest rate to another fixed interest rate; or
(v) Basis for crediting interest to a participant's hypothetical
account or for determining the interest factor used to convert a
hypothetical account to an annuity. Such a change includes, but is not
limited to, a change from a fixed rate basis to a variable rate basis
(or vice versa) or a change from one variable index to another variable
index.
(b) Changes not subject to phase-in limitation. Changes resulting
in a benefit increase under a plan that will not be treated as a
benefit increase under Sec. 4022.2 include--
(i) A change that is required to comply with the termination
requirements of ERISA section 204(b)(5)(B)(vi) and Code section
411(b)(5)(B)(vi) (e.g., a change in the plan's interest rate to an
average rate of interest);
(ii) A change in the interest crediting rate that is permitted,
notwithstanding section 411(d)(6) of the Code, pursuant to Treasury
regulations (e.g., a change that is permitted under Treas. Reg.
1.411(b)(5)-1(e)(3), including a change under certain circumstances to
the long-term investment grade corporate bond rate);
(iii) A change in the interest crediting rate that is permitted
during the amendatory period under section 1107 of PPA 2006, or any
extension of the amendatory period issued by the Department of the
Treasury;
(iv) An adjustment in the interest rate under a specified variable
rate index used by the plan; and
(v) An automatic future update in a mortality table specified under
the plan as of the termination date that reflects expected improvements
in mortality experience (e.g., the applicable mortality table provided
under Code section 417(e)(3)).
PART 4041--TERMINATION OF SINGLE-EMPLOYER PLANS
6. The authority citation for part 4041 continues to read as
follows:
Authority: 29 U.S.C. 1302(b)(3), 1341, 1344, 1350.
7. In Sec. 4041.2, amend the first paragraph by removing the words
``standard termination, termination date'' and adding in their place
``standard termination, statutory hybrid plan, termination date''.
8. In Sec. 4041.28, amend paragraph (c) by redesignating paragraph
(4) as paragraph (5), redesignating paragraph (3) as paragraph (4), and
adding a new paragraph (3) to read as follows:
Sec. 4041.28. Closeout of plan.
* * * * *
(c) * * *
* * * * *
(3) Statutory hybrid plans. This paragraph (c)(3) applies only for
purposes of this part. The plan administrator is deemed to comply with
section 204(b)(5)(B)(vi) of ERISA and section 411(b)(5)(B)(vi) of the
Code and implementing regulations issued by the Department of the
Treasury if the plan administrator distributes plan assets in
satisfaction of plan benefits consistent
[[Page 67117]]
with the provisions in Sec. 4022.121 of this chapter.
9. In Sec. 4041.42, amend paragraph (c) by adding a sentence at
the end to read as follows: ``The plan administrator of a statutory
hybrid plan must do so consistent with the provisions under part 4022,
subpart H, of this chapter.''
PART 4044--ALLOCATION OF ASSETS IN SINGLE-EMPLOYER PLANS
10. The authority citation for part 4044 continues to read as
follows:
Authority: 29 U.S.C. 1301(a), 1302(b)(3), 1341, 1344, 1362.
11. In Sec. 4044.2, amend paragraph (a) by removing the words
``single-employer plan, substantial owner'' and adding in their place
``single-employer plan, statutory hybrid plan, substantial owner''.
12. In Sec. 4044.52, add a new paragraph (e) to read as follows:
Sec. 4044.52 Valuation of Benefits.
* * * * *
(e) Statutory hybrid plans.
(1) In general. Except as provided in paragraphs (e)(2) through
(e)(4) of this section, benefits must be valued under a terminating
statutory hybrid plan consistent with the general valuation rules of
this subpart B of part 4044, and the provisions for the calculation and
payment of benefits described in subpart H of part 4022 of this
chapter.
(2) De minimis lump sum exception. If a benefit is payable as a de
minimis lump sum under Sec. 4022.122, the form to be valued is the
benefit payable as an annuity in the absence of a valid election under
the terms of the plan, at the expected retirement age, in accordance
with Sec. Sec. 4044.51 through 4044.57 of this part.
(3) Involuntary termination exception. If a benefit payment is
calculated pursuant to Sec. 4022.121(a)(3)(ii), the benefit will be
valued based on the interest crediting rate and the annuity conversion
rate in effect under the plan as of the plan's termination date
(subject to the rules of Sec. Sec. 4022.121 through 4022.123,
disregarding Sec. 4022.121(a)(3)(ii)), at the expected retirement age,
in accordance with Sec. Sec. 4044.51 through 4044.57 of this part.
(4) Priority category 3 benefits. The amount of the priority
category 3 benefit under Sec. 4044.13 of this part with respect to a
participant who was eligible to receive a priority category 3 benefit
will be determined in accordance with paragraphs (e)(4)(i) through
(iii) of this section.
(i) In the case of a termination that is not a PPA 2006 bankruptcy
termination, the priority category 3 benefit of a participant who is
eligible to receive an annuity before the beginning of the 3-year
period ending on the termination date, but whose benefit was not in pay
status as of that date, will be determined based on the balance of the
participant's hypothetical account, the interest crediting rate, and
the annuity conversion factor that the plan would have used had the
participant retired three years before the termination date (on the
same day and month as the termination date). The interest rates as so
determined will be used to apply interest credits from such date
through the plan's normal retirement age, and to convert the
participant's hypothetical account balance to an annuity. (If the plan
provides for immediate annuity conversion factors, the amount of the
account balance is determined and converted to an annuity as of the
date three years before the termination date, based on the rates in
effect as of that date.) The benefits in priority category 3 are
generally based on the lowest annuity benefit payable under the plan
provisions during the 5-year period ending on the termination date.
(ii) In the case of a PPA 2006 bankruptcy termination, the priority
category 3 benefit of a participant who is eligible to receive an
annuity before the beginning of the 3-year period ending on the
bankruptcy filing date, but whose benefit was not in pay status as of
that date, will be determined based on the balance of the participant's
hypothetical account, the interest crediting rate, and the annuity
conversion rate that the plan would have used had the participant
retired three years before the bankruptcy filing date (on the same day
and month as the bankruptcy filing date). The interest rates as so
determined will be used to apply interest credits from such date
through the plan's normal retirement age, and to convert the
participant's hypothetical account balance to an annuity. (If the plan
provides for immediate annuity conversion factors, the amount of the
account balance is determined and converted to an annuity as of the
date three years before the bankruptcy filing date, based on the rates
in effect as of that date.) The benefits in priority category 3 are
generally based on the lowest annuity benefit payable under the plan
provisions during the 5-year period ending on the bankruptcy filing
date.
(iii) In accordance with Sec. 4044.10, the benefit assigned to
priority category 3, as determined under paragraphs (e)(4)(i) or
(e)(4)(ii), may not exceed the amount of the benefit determined as of
the plan's termination date under the plan provisions as of the
termination date (including the use of an average rate of interest in
the case of a variable rate under Sec. 4022.121).
(5) Example: The plan termination is a PPA 2006 bankruptcy
termination with a bankruptcy filing date on August 31, 2008. Because
Participant A had reached his Earliest PBGC Retirement Date, as defined
in Sec. 4022.10, based on plan provisions in effect on August 31,
2005, on the same day and month as the bankruptcy filing date but three
years earlier, Participant A has benefits in priority category 3. The
plan used the 1-year Treasury Constant Maturity rate of 3.64% for the
calendar month prior to the bankruptcy filing date (July 2005) to
determine both the interest crediting rate and the annuity conversion
rate on August 31, 2005. PBGC would determine Participant A's priority
category 3 benefit based on the balance of Participant A's hypothetical
account as of August 31, 2005, by using the interest rate used under
the plan on August 31, 2005, to apply interest credits from August 31,
2005, through the normal retirement age (as provided under the plan's
terms) and convert the participant's hypothetical account balance to an
annuity. The participant's priority category 3 benefit would be limited
to the amount of the participant's plan benefit as of the termination
date, in accordance with Sec. 4044.10, determined by applying interest
credits based on the interest rate(s) in effect under the plan for the
period from the bankruptcy filing date through the plan's termination
date, and the interest rate as of the plan's termination date
(including the average of the rates of interest under a variable index
used by the plan during the 5-year period ending on the termination
date) for the period from the termination date to the normal retirement
age.
13. Add new Sec. 4044.76 to subpart B to read as follows:
Sec. 4044.76 Statutory hybrid plans.
(a) Valuation. This section supplements the general rules in part
4044 for the valuation of benefits payable in a terminated statutory
hybrid plan.
(b) Interest and mortality assumptions. In determining benefits
under the plan, the plan administrator must value benefits consistent
with the provisions in Sec. 4022.121 of this chapter.
[[Page 67118]]
Issued in Washington, DC, this 24th day of October 2011.
Joshua Gotbaum,
Director, Pension Benefit Guaranty Corporation.
[FR Doc. 2011-28124 Filed 10-28-11; 8:45 am]
BILLING CODE 7709-01-P