Title IV Treatment of Rollovers From Defined Contribution Plans To Defined Benefit Plans, 18483-18489 [2014-07323]

Agencies

• Pension Benefit Guaranty Corporation

[Federal Register Volume 79, Number 63 (Wednesday, April 2, 2014)]
[Proposed Rules]
[Pages 18483-18489]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-07323]


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PENSION BENEFIT GUARANTY CORPORATION

29 CFR Parts 4001, 4022, and 4044

RIN 1212-AB23


Title IV Treatment of Rollovers From Defined Contribution Plans 
To Defined Benefit Plans

AGENCY: Pension Benefit Guaranty Corporation.

ACTION: Proposed rule.

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SUMMARY: This proposed rule would amend PBGC's regulations on 
allocation of assets and benefits payable in terminated single-employer 
plans to clarify the treatment of benefits resulting from a rollover 
distribution from a defined contribution plan or other qualified trust 
to a defined benefit plan, if the defined benefit plan was terminated 
and trusteed by PBGC. This

[[Page 18484]]

proposed clarification of Title IV treatment of rollovers is part of 
PBGC's efforts to enhance retirement security by promoting lifetime 
income options.

DATES: Comments must be submitted on or before June 2, 2014.

ADDRESSES: Comments, identified by Regulatory Information Number (RIN 
1212-AB23) may be submitted to any by the following methods:
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the Web site instructions for submitting comments.
     Email: 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 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: Catherine B. Klion 
(klion.catherine@pbgc.gov), Assistant General Counsel, Office of the 
General Counsel, Pension Benefit Guaranty Corporation, 1200 K Street 
NW., Washington, DC 20005-4026; 202-326-4024. (TTY and TDD users may 
call the Federal relay service toll free at 1-800-877-8339 and ask to 
be connected to 202-326-4024.)

SUPPLEMENTARY INFORMATION: 

Background

    The Pension Benefit Guaranty Corporation (``PBGC'') administers the 
single-employer pension plan termination insurance program under Title 
IV of the Employee Retirement Income Security Act of 1974 (``ERISA''). 
The program covers private-sector, single-employer defined benefit 
plans, for which premiums are paid to PBGC each year. Covered plans 
that are underfunded may terminate either in a distress termination 
under section 4041(c) of ERISA or in an involuntary termination (one 
initiated by PBGC) under section 4042 of ERISA. When such a plan 
terminates, PBGC typically is appointed statutory trustee of the plan, 
and becomes responsible for paying benefits in accordance with the 
provisions of Title IV. At times, plans trusteed by PBGC include 
contributions made by employees that fund part of the benefit under the 
plan.

Mandatory Contributions

    A plan may be funded in whole or in part by mandatory 
contributions. Under section 4044(b)(6) of ERISA, the term ``mandatory 
contributions'' means amounts contributed to the plan by a participant, 
which are required as a condition of employment, as a condition of 
participation in such plan, or as a condition of obtaining benefits 
under the plan attributable to employer contributions. See also section 
411(c)(2)(C) of the Internal Revenue Code (``Code'') and section 
204(c)(2)(C) of ERISA.
    Section 411(c)(1) of the Code \1\ provides that an employee's 
accrued benefit derived from employer contributions as of any date is 
the excess, if any, of the accrued benefit for the employee as of that 
date over the accrued benefit derived from contributions made by the 
employee as of that date. Section 411(c)(2) of the Code provides the 
rules for determining an employee's accrued benefit derived from the 
employee's mandatory contributions to a defined benefit plan. Section 
411(c)(2)(B) provides that the accrued benefit derived from mandatory 
employee contributions is equal to the employee's contributions 
accumulated to normal retirement age using specified rates under 
section 411(c)(2)(C), and converted to an actuarially equivalent 
annuity commencing at normal retirement age, using an interest rate 
under section 417(e)(3) of the Code as of the determination date.\2\
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    \1\ References to the Code should be read to include the 
parallel provision under ERISA.
    \2\ Code section 417(e)(3) was amended in 1994 (Pub. L. 103-465) 
to specify an applicable mortality table, which is part of the 
determination of actuarial equivalence under IRS guidance. See Prop. 
Treas. Reg. Sec.  1.411(c)-1.
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    Typically, mandatory employee contributions are required under the 
plan as a percentage of the employee's compensation. They are withheld 
from the salary of the employee by the employer and deposited to the 
employee's credit in the defined benefit plan on an after-tax basis.\3\ 
Such mandatory contributions have generally been used to fund a portion 
of the participant's accrued benefit as determined under the plan's 
benefit formula and are required in order to receive the portion of the 
accrued benefit derived from employer contributions.
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    \3\ Generally, contributions by employees to defined benefit 
plans (whether mandatory or voluntary) are not deductible for 
federal income tax purposes. Under Code section 411(d)(5), voluntary 
contributions are treated in the same manner as employee 
contributions to a defined contribution plan for which a separate 
account is maintained; the accrued benefit derived from such 
contributions is generally determined as the amount of those 
contributions, plus income, expenses, and gains and losses 
attributable thereto.
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    When a plan terminates in a distress termination or an involuntary 
termination, each participant's plan benefit is assigned to one or more 
of six ``priority categories'' that are described in paragraphs (1) 
through (6) of section 4044(a) of ERISA.\4\ Participants' accrued 
benefits derived from mandatory employee contributions are assigned to 
PC2. Because benefits in PC2 have a higher claim on plan assets than 
nearly all other benefits under the plan, when an underfunded plan 
terminates, plan assets are usually (but not always) sufficient to pay 
accrued benefits derived from mandatory employee contributions.
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    \4\ Plan assets must be allocated to each priority category in 
succession, beginning with priority category one (PC1). The benefits 
assigned to each priority category under section 4044 of ERISA in 
general are as follows:
     PC1: The portion of a participant's accrued benefit 
derived from the participant's voluntary contributions.
     PC2: The portion of a participant's accrued benefit 
derived from the participant's mandatory contributions.
     PC3: The portion of a participant's benefit that was in 
pay status as of the beginning of the three-year period ending on 
the termination date (or bankruptcy filing date, if applicable), or 
that would have been in pay status at the beginning of such three-
year period if the participant had retired before the beginning of 
such three-year period, provided that the benefit was the lowest 
benefit payable under the plan provisions at any time during the 
five-year period ending on the termination date (or bankruptcy 
filing date, if applicable).
     PC4: All other guaranteed benefits.
     PC5: All other nonforfeitable benefits.
     PC6: All other benefits.
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    Although PBGC generally pays benefits only in annuity form, PBGC's 
regulations allow a return of mandatory employee contributions in a 
single installment (or a series of installments), provided certain 
conditions are met (see Sec.  4022.7(b)(2)).

Rollover Benefits Under the Code and Treasury/IRS Guidance

    Section 401(a)(31) of the Code requires a qualified plan to permit 
a distributee of any eligible rollover distribution to elect a direct 
rollover of any part of the distribution to an eligible retirement 
plan.\5\ Payment in the form of

[[Page 18485]]

a direct rollover to a defined benefit plan is allowed only if the 
defined benefit plan accepts rollover contributions.\6\ Section 402(c) 
of the Code permits an individual receiving an eligible rollover 
distribution from a qualified plan, individual retirement plan, or 
certain other plans to elect to roll over any portion of that 
distribution within a specified time to an eligible retirement plan 
that accepts the rollover (including a defined benefit plan).
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    \5\ In general, an eligible rollover distribution is a lump sum 
distribution, or any other distribution of a participant's benefit, 
that is not one of a series of substantially equal periodic payments 
made at least annually for a period of 10 years or more. There are 
several exceptions to the types of distributions that are eligible 
to be rolled over. See Code section 402(c)(4). An election of a 
rollover requires a distributable event under the plan, such as the 
participant's severance from employment or the attainment of normal 
retirement age. The taxable portion of an eligible rollover 
distribution from a qualified plan is generally subject to 20 
percent mandatory withholding of Federal tax unless a direct 
rollover to an eligible retirement plan is made. See Code section 
3405(c).
    \6\ Code section 401(a)(31).
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    On February 21, 2012, the Department of the Treasury and the 
Internal Revenue Service (IRS) issued Rev. Rul. 2012-4, 2012-8 I.R.B. 
386,\7\ which clarified certain qualification requirements under 
section 401(a) of the Code for use of rollover amounts to provide an 
additional benefit under a defined benefit plan. Under the facts of the 
example provided in Rev. Rul. 2012-4, a qualified defined benefit plan 
provides that it will accept a direct rollover of a distribution from a 
qualified defined contribution plan maintained by the same employer for 
an employee or former employee of the employer who separates from 
service after age 55 with at least 10 years of service and elects to 
commence an immediate annuity of the employee's benefit under the plan 
(including the additional benefit resulting from the direct 
rollover).\8\
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    \7\ https://www.irs.gov/irb/2012-08_IRB/ar08.html. Footnote 1 of 
Rev. Rul. 2012-4 stated that PBGC was developing guidance on the 
Title IV treatment of benefits under a defined benefit plan 
resulting from a rollover. This proposed rule is part of the 
development of that guidance.
    \8\ Rev. Rul. 2012-4 states that if a plan's certified or 
presumed adjusted funding target attainment percentage under Code 
section 436(j)(2) were to drop below 60%, the plan would not be 
permitted to receive direct rollover contributions because such 
rollover contributions would give rise to additional benefit 
accruals that are not permitted under Code section 436(e).
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    Rev. Rul. 2012-4 treats the amounts rolled over as mandatory 
employee contributions for purposes of section 411(c) of the Code.\9\ 
The ruling states that the plan satisfies section 411(c)(2) of the Code 
with respect to the rollover because--
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    \9\ Rev. Rul. 2012-4 states that this contribution of the 
employee is required as a condition of receiving additional benefits 
under the defined benefit plan attributable to employer 
contributions. Thus, if the amount of the rollover is insufficient 
to provide for the benefit derived from mandatory employee 
contributions (for example, if the actual return on plan assets is 
less than the rate that was assumed in determining that benefit), 
the employer would be required to make additional contributions to 
fund that benefit.

    1. The benefit resulting from the direct rollover is provided as 
an immediate annuity determined as the actuarial equivalent of the 
amount rolled over, where actuarial equivalence is determined using 
the applicable interest rate and mortality table under section 
417(e)(3) of the Code; and
    2. The plan further provides that, in the event payment is 
delayed after the rollover, interest on the rollover contribution is 
accumulated in accordance with the requirements of Code section 
411(c)(2)(C)(iii) and the benefit derived from the rollover is not 
forfeitable upon death prior to the annuity starting date.

    Under the ruling, an accrued benefit derived from mandatory 
employee contributions that is determined under the rules of section 
411(c)(2) of the Code does not fail to satisfy the nonforfeitability 
rules under section 411(a) of the Code and may be excluded from the 
participant's annual benefit for purposes of the maximum benefit 
limitation under section 415(b) of the Code.
    The ruling further provides that, if the plan provided an annuity 
with respect to the rollover in excess of the amount determined under 
the rules of section 411(c) of the Code, such as by using a more 
favorable actuarial conversion basis than required by those rules, the 
portion of the benefit resulting from the rollover amounts that 
exceeded the benefit derived from mandatory employee contributions as 
determined under section 411(c)(2) of the Code would be subject to the 
requirements applicable to a benefit attributable to employer 
contributions. The ruling notes that, in this case, the liability for 
the total benefit resulting from the rollover (including the portion of 
the accrued benefit considered to be derived from employer 
contributions because it exceeds the amount determined under section 
411(c)(2)(B)) would likely exceed the amounts rolled over, requiring 
additional funding by the employer, and the excess amount over the 
amount determined under section 411(c)(2)(B) would be included in the 
annual benefit for purposes of section 415(b) of the Code.
    Following clarification by Treasury and IRS of certain 
qualification requirements concerning rollovers in Rev. Rul. 2012-4, 
PBGC is proposing to amend its regulations to provide guidance on Title 
IV treatment of rollovers, both in anticipation of increased use of 
rollovers, and as part of its efforts to promote retirement security. 
The availability of a rollover of a participant's retirement savings in 
a 401(k) or other defined contribution plan to a defined benefit plan 
expands the opportunities for participants to elect lifetime annuity 
options.

Overview of Proposed Regulation

    PBGC is proposing to amend PBGC's regulations on Benefits Payable 
in Terminated Single-Employer Plans (29 CFR part 4022) and Allocation 
of Assets in Single-Employer Plans (29 CFR part 4044). The proposed 
amendments would establish or clarify the rules for treatment of 
rollovers in plans that terminate underfunded, the most important of 
which are:
     A benefit resulting from rollover amounts would be treated 
as an accrued benefit derived from mandatory employee contributions in 
PC2 (which has a higher claim on plan assets than nearly all other 
benefits under the plan), to the extent that the benefit is determined 
using the rules of Code section 411(c)(2)(B).
     Unlike other PC2 benefits, PC2 benefits resulting from 
rollover amounts would generally not be payable in lump sum form.
     The portion of any benefit resulting from rollover amounts 
that exceeds the accrued benefit derived from mandatory employee 
contributions (i.e., the portion derived from employer contributions) 
would be a guaranteeable benefit in PC3, PC4, or PC5, as applicable.
     The participant's accrued benefit resulting from rollover 
amounts generally would not be subject to PBGC's maximum guaranteeable 
benefit limitation under section 4022(b) of ERISA and thus would not be 
taken into account in applying that limitation. However, the maximum 
guaranteeable benefit limitation would apply to any benefit resulting 
from rollover amounts that exceeds the accrued benefit treated as 
derived from mandatory employee contributions.
     The participant's accrued benefit resulting from rollover 
amounts generally would not be subject to the five-year phase-in 
limitation on the guarantee of benefit increases. However, the phase-in 
limitation would apply to any benefit resulting from rollover amounts 
that exceeds the accrued benefit treated as derived from mandatory 
employee contributions, with the phase-in period beginning as of the 
date the rollover contributions were received by the plan.

A detailed discussion of the proposed regulation follows.

[[Page 18486]]

Proposed Regulatory Changes

Benefits Payable in Terminated Single-Employer Plans

    This proposed rule would amend PBGC's benefit payments regulation 
to describe the calculation and payment of a benefit resulting from a 
distribution that is rolled over into a defined benefit plan that later 
terminates.\10\ Under the proposed rule, PBGC would treat the rollover 
amounts as mandatory employee contributions and would determine the 
employee's accrued benefit derived from mandatory employee 
contributions using the rules of section 411(c)(2)(B) of the Code. This 
proposed rule relates solely to a benefit resulting from the rollover 
of a distribution. It does not affect PBGC's treatment of any other 
contributions that may be used to fund benefits under a defined benefit 
plan or the employee's benefit derived from such contributions, 
regardless of the characterization of those contributions or benefits, 
or their tax treatment.
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    \10\ The facts of the example in Rev. Rul. 2012-4 involve an 
employee who separates from service after age 55 with at least ten 
years of service and elects to commence an immediate annuity. 
Although this example is used to illustrate the treatment of a 
direct rollover from a qualified plan into a defined benefit plan, 
rollovers are permitted in broader circumstances. This proposed rule 
is not limited to the facts in the example, but it is limited to 
rollovers that give rise to accrued benefits under a defined benefit 
plan formula.
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    PBGC's current regulation provides for the return of mandatory 
employee contributions in a single installment (or a series of 
installments) if a participant, or a beneficiary of a pre-retirement 
death benefit, so elects in accordance with the plan's provisions.\11\ 
If a participant (or a surviving spouse) elects a return of mandatory 
employee contributions prior to the annuity starting date in the form 
of a lump sum, instead of as an annuity, the lump sum benefit is 
determined under Sec.  4044.12(c)(2) as the amount of the participant's 
accumulated mandatory contributions.\12\ A withdrawal of the 
participant's accumulated mandatory employee contribution results in an 
accrued benefit under the plan derived solely from employer 
contributions.
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    \11\ In addition, PBGC will pay mandatory employee contributions 
in a lump sum under a plan's modified cash refund feature, which 
pays the excess of any accumulated mandatory employee contributions 
over the pension payments received by a participant upon his death, 
but only if this is the automatic form of benefit under the plan's 
provisions (or is in a form that has been elected by a participant 
who commenced benefits prior to the date of PBGC trusteeship and 
dies after such date).
    \12\ PBGC determines the amount of the lump sum benefit based on 
the participant's accumulated contributions--i.e., the employee's 
mandatory contributions credited with interest for the period 
through the plan's termination date (but not less than the minimum 
lump sum required under section 411(c) of the Code upon withdrawal 
of mandatory employee contributions). Interest on that sum is 
thereafter based on PBGC's late-payment interest rate until the 
participant's distribution date.
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    The proposed regulation generally would not permit participants to 
receive a lump sum return of mandatory employee contributions 
attributable to rollover amounts. PBGC would disregard a plan's 
provisions for the return of employee contributions in a lump sum and 
would make rollover amounts payable only in the form of an annuity. 
Because the participant had the chance to take the distribution from a 
defined contribution plan as a lump sum and chose to roll it into a 
defined benefit plan to obtain additional annuity benefits, it would 
seem anomalous to later allow the participant to convert the additional 
annuity back into a lump sum. Moreover, paying the additional benefit 
as an annuity is consistent with PBGC's policy of promoting retirement 
security through preserving lifetime retirement income.
    Under the proposed rule, the annuity resulting from rollover 
amounts would be payable at the same time, and in the same form, as the 
remainder of the participant's benefit under the plan to avoid 
administrative burden to PBGC.\13\ In the case of a plan that provides 
for a pre-retirement death benefit that returns the employee's 
mandatory contributions in a single installment, PBGC would not allow 
the spouse of a participant who dies after the plan terminates to elect 
to withdraw the mandatory contributions attributable to rollover 
amounts in a single installment; instead, PBGC would include such 
contributions in the value of the plan's qualified preretirement 
survivor annuity (QPSA) to the spouse.\14\ PBGC would determine whether 
a payment was de minimis (currently $5,000 or less under Sec.  
4022.7(b)(1)(i)), and if so would base the amount of the payment on the 
lump sum value of the participant's total benefit payable by PBGC (the 
benefit resulting from rollover amounts combined with the benefit 
excluding rollover amounts).
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    \13\ PBGC would disregard any plan provision that allows an 
additional annuity resulting from rollover amounts to have an 
annuity starting date that differs from the annuity starting date 
for the remainder of the participant's benefit under the plan.
    \14\ If no QPSA is payable, the mandatory contributions would be 
payable to a named beneficiary in a life annuity form that would 
commence at the same time as a QPSA could commence under PBGC's 
regulations. In the case of a cash refund annuity (i.e., a post-
retirement lump sum death benefit of the value of the participant's 
mandatory contributions in excess of the pension payments received 
by the participant at the time of death), PBGC would include the 
value of the mandatory contributions in the qualified joint and 
survivor annuity (QJSA) to the spouse or, if no QJSA is payable, 
would pay such amounts to a named beneficiary in a life annuity form 
that would commence at the same time as a QJSA could commence under 
PBGC's regulations.
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    Under section 4022 of ERISA, PBGC guarantees the payment of all 
nonforfeitable benefits provided by a plan, subject to two principal 
statutory limitations--the maximum guaranteeable benefit limitation and 
the five-year phase-in limitation.
    The amount of the maximum monthly guarantee is set by law and is 
updated each calendar year. The maximum guaranteeable benefit 
applicable to a plan is fixed as of that plan's termination date. Under 
the Pension Protection Act of 2006, if a plan terminates during a 
plan's sponsor's bankruptcy and the sponsor entered bankruptcy on or 
after September 16, 2006, the maximum guaranteeable benefit is fixed as 
of the date the sponsor entered bankruptcy.
    The five-year phase-in limitation generally applies to a benefit 
increase that has been in effect for less than five years. Generally, 
20 percent of a benefit increase is guaranteed after one year, 40 
percent after two years, etc., with full phase-in of the guarantee 
after five years. If the amount of the monthly benefit increase is 
below $100, the annual rate of phase-in is $20 rather than 20 percent. 
For this purpose, a benefit increase resulting from a plan amendment is 
deemed to be in effect on the later of the amendment's adoption date or 
its effective date. Under the Pension Protection Act of 2006, an 
unpredictable contingent event benefit is generally deemed to be in 
effect on the date the event occurred.\15\
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    \15\ See ERISA section 4022(b)(8) and PBGC's proposed rule on 
Benefits Payable in Terminated Single-Employer Plans; Limitations on 
Guaranteed Benefits, 76 FR 13304 (Mar. 11, 2011).
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    Historically, PBGC has interpreted the statutory limitations to 
apply to the participant's total nonforfeitable accrued benefit under a 
plan, including that portion of the benefit funded by traditional 
after-tax mandatory employee contributions. In the case of rollover 
amounts, however, PBGC proposes to exempt from these limitations the 
accrued benefit derived from mandatory employee contributions 
determined under the rules of Code section 411(c)(2)(B). The exemption 
would not apply to any benefit resulting from rollover amounts that 
exceeds the accrued benefit derived from employee contributions.
    Rollovers can help preserve participants' retirement savings until 
retirement. They provide a valuable means for participants to withdraw 
their benefits from one retirement plan and

[[Page 18487]]

contribute them to another. Rollovers to defined benefit plans also 
provide lifetime-annuity protection at a competitive cost. Consistent 
with the Administration's initiative on retirement security, PBGC wants 
to encourage the rollover and annuitization of distributions from 
defined contribution plans by providing assurances to participants that 
their benefits attributable to rollover amounts to a defined benefit 
plan will largely be protected from the limitations that might 
otherwise apply if the plan terminates and is trusteed by PBGC.
    There are a number of reasons why PBGC views benefits resulting 
from the portion of rollover amounts treated as mandatory employee 
contributions differently from other benefits under a plan. Unlike 
other mandatory employee contributions, rollover benefits require an 
affirmative election by the participant to roll over a pension 
distribution to obtain an additional annuity from a defined benefit 
plan. If the benefit resulting from rollover amounts caused a 
participant's total benefit under the plan to exceed PBGC's maximum 
guaranteeable benefit, participants might be reluctant to roll over 
benefits from defined contribution plans to defined benefit plans. 
Applying the five-year phase-in limitation to benefits resulting from 
rollover amounts similarly might make rollovers unattractive.
    The limitations on PBGC's guarantee were designed to protect the 
pension insurance system from risk of loss. But rollovers do not 
present the same risk of loss to the insurance program as other 
benefits. A benefit derived from rollover amounts treated as mandatory 
employee contributions is considered under Rev. Rul. 2012-4 to be 
actuarially equivalent to the rollover amounts received by the defined 
benefit plan. Therefore, although a plan accepting a rollover becomes 
liable to pay additional benefits, it simultaneously receives 
additional funds of equivalent value. That is not true for most new 
benefit accruals. Accordingly, PBGC's proposal to exempt benefits, to 
the extent derived from the portion of a rollover treated as mandatory 
employee contributions, from the maximum guaranteeable benefit and 
phase-in limitations is a reasonable statutory interpretation.
    In accordance with PBGC's statutory interpretation, the proposed 
rule would amend Sec.  4022.22 to exempt the rollover benefit amount 
derived from mandatory employee contributions from the maximum 
guaranteeable benefit limitation. Thus, PBGC would exclude that amount 
from its determination of the participant's maximum guaranteeable 
benefit. However, any rollover benefit in excess of the benefit derived 
from employee contributions (i.e., any portion of the rollover benefit 
derived from employer contributions) would be combined with the annuity 
otherwise payable under the plan in determining the participant's 
maximum guaranteeable benefit.
    Similarly, the proposed rule would amend Sec.  4022.24 to exempt a 
participant's rollover benefit derived from mandatory employee 
contributions from the five-year phase-in limitation. The five-year 
phase-in limitation would, however, apply to the portion of any 
rollover benefit derived from employer contributions, with that benefit 
portion deemed to be in effect on the date the rollover amounts were 
received by the plan (i.e., when the rollover amounts were treated as 
providing additional benefit accruals under the plan).
    PBGC's regulations provide for a third guarantee limitation, the 
``accrued-at-normal'' limitation, which restricts PBGC's guarantee of 
temporary supplements. Under Sec.  4022.21, PBGC's guarantee cannot 
exceed the accrued benefit payable as a straight life annuity at normal 
retirement age. PBGC would include the annuity attributable to rollover 
amounts in the determination of the accrued-at-normal limitation, which 
would increase the limitation against which the participant's entire 
benefit is measured, and would apply the accrued-at-normal limitation 
to the entire benefit, including rollover amounts. This would generally 
have the effect of increasing the participant's guaranteeable benefit.

Allocation of Assets in Single-Employer Plans

    The proposed rule would also amend PBGC's asset allocation 
regulation to set forth rules for PBGC treatment of rollover benefits 
when a defined benefit plan terminates with insufficient assets to pay 
all benefits.
    Proposed new Sec.  4044.12(b)(4) and (c)(4) describes the 
calculation of a participant's total annuity benefit resulting from 
rollover amounts. For participants and beneficiaries not yet in pay 
status as of the termination date, the rollover amounts would be 
credited with interest payable under plan provisions to the plan's 
termination date, and converted to an annuity benefit payable at the 
normal retirement age using the plan's interest rates and conversion 
factors in effect as of the plan's termination date for the conversion 
of such rollover amounts.
    Under the proposed rule, the portion of a participant's accrued 
benefit resulting from rollover amounts derived from mandatory employee 
contributions would be determined using the rules of section 411(c) of 
the Code. Specifically, the participant's accumulated mandatory 
employee contributions--the participant's rollover amounts credited 
with interest at 120% of the Federal mid-term rate from the date of the 
rollover to the plan's termination date--would be converted to an 
actuarially equivalent straight life annuity under the plan payable at 
the normal retirement age using the applicable interest rate and 
mortality table under section 417(e) of the Code as of the plan's 
termination date. Consistent with Rev. Rul. 2012-4, which defines this 
annuity amount as the actuarial equivalent of an employee's rollover 
amounts to a defined benefit plan, only an annuity benefit determined 
on this basis would be assigned to PC2.
    Rev. Rul. 2012-4 permits a qualified defined benefit plan to offer 
a subsidy with respect to a rollover by using a more generous annuity 
conversion factor than under the minimum rules for an actuarially 
equivalent annuity under section 411(c) of the Code, provided the 
additional qualification requirements applicable to a benefit derived 
from employer contributions are met. If, under the plan's provisions, 
the benefit resulting from rollover amounts exceeds the annuity derived 
from mandatory employee contributions determined under the rules of 
section 411(c)(2) of the Code--for example, because the plan uses more 
generous conversion factors than those under section 417(e) of the 
Code--the proposed rule would treat the portion of the benefit in 
excess of the annuity derived from mandatory employee contributions 
under the rules of section 411(c)(2) as a benefit derived from employer 
contributions for purposes of assigning the benefits to the priority 
categories under part 4044. The annuity benefit derived from employer 
contributions would be a guaranteeable benefit in PC3, PC4, or PC5, as 
applicable, because it is a nonforfeitable benefit (i.e., a benefit for 
which the participant has satisfied all plan conditions for entitlement 
as of the plan's termination date). Under section 4022(a) of ERISA, 
PBGC is required to guarantee all nonforfeitable benefits provided by a 
plan, subject to the limitations contained in section 4022(b).

Applicability

    The amendments made by this proposed rule would apply to 
terminations initiated on or after the effective date of the final 
rule. In the interim, PBGC will make determinations under the current 
regulations, consistent with IRS Rev. Rul. 2012-4, including

[[Page 18488]]

paying the return of employee contributions under a benefit resulting 
from rollover amounts in a single sum.

Compliance With Rulemaking Requirements

Executive Order 12866 ``Regulatory Planning and Review'' and Executive 
Order 13563 ``Improving Regulation and Regulatory Review''

    PBGC has determined, in consultation with the Office of Management 
and Budget, that this rule is not a ``significant regulatory action'' 
under Executive Order 12866.
    Executive Orders 12866 and 13563 direct agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). Executive 
Order 13563 emphasizes the importance of quantifying both costs and 
benefits, of reducing costs, of harmonizing rules, and of promoting 
flexibility. Executive Orders 12866 and 13563 require a comprehensive 
regulatory impact analysis be performed for any economically 
significant regulatory action, defined as an action that would result 
in an annual effect of $100 million or more on the national economy or 
which would have other substantial impacts. In accordance with OMB 
Circular A-4, PBGC has examined the economic and policy implications of 
this proposed rule and has concluded that the action's benefits justify 
its costs.
    Under Section 3(f)(1) of Executive Order 12866, a regulatory action 
is economically significant if ``it is likely to result in a rule that 
may . . . [h]ave an annual effect on the economy of $100 million or 
more or adversely affect in a material way the economy, a sector of the 
economy, productivity, competition, jobs, the environment, public 
health or safety, or State, local, or tribal governments or 
communities.'' PBGC has determined that this proposed rule does not 
cross the $100 million threshold for economic significance and is not 
otherwise economically significant.
    PBGC estimates that the annual economic impact of this proposed 
rule would be about $11,000,000. This is the amount PBGC estimates that 
participants who roll over benefits from defined contribution plans to 
defined benefit plans that subsequently terminate and are trusteed by 
PBGC in aggregate would gain (and PBGC would lose), as a result of the 
proposed regulatory change to exclude from the maximum guaranteeable 
benefit and phase-in limitations any benefit resulting from rollover 
amounts that does not exceed the accrued benefit derived from mandatory 
employee contributions.
    Since IRS has only recently provided guidance to defined benefit 
plans on calculating rollover amounts, PBGC has no historic data to 
draw upon in developing this estimate. Accordingly, PBGC made 
conservative assumptions based on its judgment about such factors as 
how many defined benefit plans would allow rollovers from defined 
contribution plans and how many participants in such plans would roll 
over benefits from defined contribution plans.
    Although it is difficult to predict with any certainty the annual 
economic impact of the proposed regulatory action, given that the 
estimate is so far below $100 million, PBGC has determined that the 
annual economic impact of the proposed rule would be less than $100 
million.

Regulatory Flexibility Act

    The Regulatory Flexibility Act imposes certain requirements with 
respect to rules that are subject to the notice and comment 
requirements of section 553(b) of the Administrative Procedure Act and 
that are likely to have a significant economic impact on a substantial 
number of small entities. Unless an agency determines that a proposed 
rule is not likely to have a significant economic impact on a 
substantial number of small entities, section 603 of the Regulatory 
Flexibility Act requires that the agency present an initial regulatory 
flexibility analysis at the time of the publication of the proposed 
rule describing the impact of the rule on small entities and seeking 
public comment on such impact. Small entities include small businesses, 
organizations and governmental jurisdictions.
    For purposes of the Regulatory Flexibility Act requirements with 
respect to this proposed rule, PBGC considers a small entity to be a 
plan with fewer than 100 participants. This criterion is consistent 
with certain requirements in Title I of ERISA and the Internal Revenue 
Code, as well as the definition of a small entity that the Department 
of Labor has used for purposes of the Regulatory Flexibility Act.
    Further, while some large employers that terminate plans may have 
small plans that terminate along with larger ones, in general most 
small plans are maintained by small employers. Thus, PBGC believes that 
assessing the impact of the final rule on small plans is an appropriate 
substitute for evaluating the effect on small entities. The definition 
of small entity considered appropriate for this purpose differs, 
however, from a definition of small business based on size standards 
promulgated by the Small Business Administration (13 CFR 121.201) 
pursuant to the Small Business Act. PBGC therefore requests comments on 
the appropriateness of the size standard used in evaluating the impact 
on small entities of the amendments to the benefit payments regulation 
to implement this proposed rule.
    On the basis of its proposed definition of small entity, PBGC 
certifies under section 605(b) of the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.) that the amendments in this proposed rule would not 
have a significant economic impact on a substantial number of small 
entities. Virtually all, if not all, of the effect of this proposed 
rule will be on PBGC or persons who receive benefits from PBGC. 
Accordingly, as provided in section 605 of the Regulatory Flexibility 
Act (5 U.S.C. 601 et seq.), sections 603 and 604 do not apply.

List of Subjects

29 CFR Part 4001

    Pensions.

29 CFR Part 4022

    Pension insurance, Pensions.

29 CFR Part 4044

    Pension insurance, Pensions.

    For the reasons given above, PBGC proposes to amend 29 CFR parts 
4001, 4022, and 4044 as follows.

PART 4001--TERMINOLOGY

0
1. The authority citation for part 4001 continues to read as follows:

    Authority: 29 U.S.C. 1301, 1302(b)(3).

0
2. In Sec.  4001.2, add a definition for ``rollover amounts'' in 
alphabetical order to read as follows:


Sec.  4001.2  Definitions

* * * * *
    Rollover amounts means the dollar amount of all or any part of a 
distribution that is rolled over into a defined benefit plan in 
accordance with section 401(a)(31) or 402(c) of the Internal Revenue 
Code.
* * * * *

PART 4022--BENEFITS PAYABLE IN TERMINATED SINGLE-EMPLOYER PLANS

0
3. The authority citation for part 4022 continues to read as follows:


[[Page 18489]]


    Authority: 29 U.S.C. 1302, 1322, 1322(b), 1341(c)(3)(D), and 
1344.


Sec.  4022.7  [Amended]

0
4. Amend Sec.  4022.7 as follows:
0
a. In paragraph (b)(2)(i), add the phrase ``except as provided in 
paragraph (b)(2)(iii) of this section,''after the words 
``Notwithstanding any other provision of this part,'';
0
b. Add paragraph (b)(2)(iii); and
0
c. Revise paragraph (c)(2).
    The addition and revision read as follows:


Sec.  4022.7  Benefits payable in a single installment.

* * * * *
    (b) * * *
    (iii) Rollover amounts. The rule in paragraph (b)(2) of this 
section (dealing with return of employee contributions) does not apply 
to a participant's accumulated mandatory employee contributions 
resulting from rollover amounts (as determined under Sec.  
4044.12(c)(4)(i) of this chapter) or the benefit derived from such 
mandatory employee contributions.
* * * * *
    (c) * * *
    (2) Exception. Except in the case of accumulated mandatory employee 
contributions resulting from rollover amounts (as determined under 
Sec.  4044.12(c)(4)(i) of this chapter), upon the death of a 
participant the PBGC may pay in a single installment (or a series of 
installments) that portion of the participant's accumulated mandatory 
employee contributions that is payable under the plan in a single 
installment (or a series of installments) upon the participant's death.
* * * * *


Sec.  4022.8  Form of payment.

0
5. In Sec.  4022.8, add paragraph (f) to read as follows:
* * * * *
    (f) Rollover amounts. The annuity benefit resulting from rollover 
amounts (as determined under Sec.  4044.12(c)(4)) is combined with any 
other benefit under the plan and paid in the same form and at the same 
time as the other benefit.


Sec.  4022.22  Maximum guaranteeable benefit.

0
6. In Sec.  4022.22, add paragraph (d) to read as follows:
* * * * *
    (d) Rollover amounts. Any portion of a benefit derived from 
mandatory employee contributions resulting from rollover amounts (as 
determined under Sec.  4044.12(c)(4)(i) of this chapter) is disregarded 
in applying the provisions of Sec. Sec.  4022.22 and 4022.23. However, 
any portion of a benefit derived from employer contributions resulting 
from rollover amounts (as determined under Sec.  4044.12(c)(4)(ii) of 
this chapter) is combined with any other benefit under the plan for 
purposes of determining the maximum guaranteeable benefit under 
Sec. Sec.  4022.22 and 4022.23. For example, assume that a participant 
has an $80,000 total annual plan benefit at age 65, of which $15,000 is 
derived from mandatory employee contributions resulting from rollover 
amounts and $5,000 is derived from employer contributions resulting 
from rollover amounts. The $15,000 benefit derived from employee 
contributions resulting from rollover amounts would be excluded in the 
determination of the participant's maximum guaranteeable amount. The 
participant's remaining $65,000 benefit (including the $5,000 benefit 
derived from employer contributions resulting from rollover amounts) 
would be subject to the maximum guaranteeable benefit limitation. 
Assuming a PBGC maximum guaranteeable benefit of $59,000 for a straight 
life annuity at age 65 (the approximate level for 2014), the 
participant's maximum guaranteeable benefit would effectively be 
increased by the $15,000 benefit derived from employee contributions 
resulting from rollover amounts, resulting in total guaranteed benefits 
of $74,000. (The $59,000 maximum guaranteeable benefit limitation would 
apply to the participant's benefit derived from employer contributions; 
as a result, $6,000 of the participant's benefit derived from employer 
contributions would not be guaranteed by PBGC.)


Sec.  4022.24  Benefit increases.

0
7. In Sec.  4022.24, add paragraph (g) to read as follows:
* * * * *
    (g) Rollover amounts. Any portion of a benefit derived from 
mandatory employee contributions resulting from rollover amounts (as 
determined under Sec.  4044.12 (c)(4)(i) of this chapter) is 
disregarded in applying the provisions of Sec. Sec.  4022.24 through 
4022.26. However, any portion of a benefit derived from employer 
contributions resulting from rollover amounts (as determined under 
Sec.  4044.12 (c)(4)(ii) of this chapter) is combined with any other 
benefit under the plan in applying the provisions of Sec. Sec.  4022.24 
through 4022.26. In such case, the benefit increase is deemed to be in 
effect on the date the rollover amounts are received by the plan.

PART 4044--ALLOCATION OF ASSETS IN SINGLE-EMPLOYER PLANS

0
8. The authority citation for part 4044 continues to read as follows:

    Authority: 29 U.S.C. 1301(a), 1302(b)(3), 1341, 1344, and 1362.
0
9. In 4044.12, paragraphs (b)(4) and (c)(4) are added to read as 
follows:


Sec.  4044.12  Priority category 2 benefits.

* * * * *
    (b) * * *
    (4) Rollover amounts. In the case of a benefit resulting from 
rollover amounts, notwithstanding the provisions of paragraph (b)(2) of 
this section, the interest rates and conversion factors in Sec.  
4044.12(c)(4) are used to determine the portion of the accrued benefit 
derived from the employee's contributions and, if any, the portion of 
the accrued benefit derived from employer contributions.
    (c) * * *
    (4) Special rules for benefit resulting from rollover amounts. (i) 
Mandatory employee contributions. Notwithstanding paragraphs (c)(1) 
through (3) of this section, in the case of a benefit resulting from 
rollover amounts, the accrued benefit derived from mandatory employee 
contributions is determined using the interest rates and conversion 
factors under section 411(c)(2)(B) and (C) of the Code for purposes of 
computing an employee's accrued benefit derived from the employee's 
contributions. The annuity benefit and the pre-retirement death 
benefit, as determined on this basis, is the benefit resulting from 
rollover amounts in priority category 2.
    (ii) Employer contributions. Any portion of a participant's accrued 
benefit resulting from rollover amounts that is in excess of the 
accrued benefit derived from mandatory employee contributions 
determined in accordance with paragraph (c)(4)(i) of this section 
(i.e., the accrued benefit derived from employer contributions) is a 
guaranteeable benefit in priority category 3, priority category 4, or 
priority category 5, as applicable under this part.

    Issued in Washington, DC, this 26th day of March 2014.
Joshua Gotbaum,
Director, Pension Benefit Guaranty Corporation.
[FR Doc. 2014-07323 Filed 4-1-14; 8:45 am]
BILLING CODE 7709-02-P