Lump Sum Payment Assumptions, 51490-51493 [2019-21087]

Agencies

• Pension Benefit Guaranty Corporation

[Federal Register Volume 84, Number 189 (Monday, September 30, 2019)]
[Proposed Rules]
[Pages 51490-51493]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-21087]


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PENSION BENEFIT GUARANTY CORPORATION

29 CFR Part 4022

RIN 1212-AB41


Lump Sum Payment Assumptions

AGENCY: Pension Benefit Guaranty Corporation.

ACTION: Proposed rule.

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SUMMARY: This proposed rule would modify the assumptions the Pension 
Benefit Guaranty Corporation (PBGC) uses to determine de minimis lump 
sum benefits in PBGC-trusteed terminated single-employer defined 
benefit pension plans and would discontinue monthly publication of 
PBGC's lump sum interest rate assumption.

DATES: Comments must be submitted on or before November 29, 2019 to be 
assured of consideration.

ADDRESSES: Comments may be submitted by any of the following methods:
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for sending comments.
     Email: [email protected]. Refer to RIN 1212-AB41 in 
the subject line.
     Mail or Hand Delivery: Regulatory Affairs Division, Office 
of the General Counsel, Pension Benefit Guaranty Corporation, 1200 K 
Street NW, Washington, DC 20005-4026.
    All submissions must include the agency's name (Pension Benefit 
Guaranty Corporation or PBGC) and the Regulation Identifier Number for 
this rulemaking (RIN 1212-AB41). Comments received will be posted 
without change to PBGC's website, https://www.pbgc.gov, including any 
personal information provided. 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 
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: Gregory Katz ([email protected]), 
Attorney, Regulatory Affairs Division, Office of the General Counsel, 
Pension Benefit Guaranty Corporation, 1200 K Street NW, Washington, DC 
20005-4026; 202-326-4400, extension 3829. TTY users may call the 
Federal relay service toll-free at 1-800-877-8339 and ask to be 
connected to 202-326-4400 extension 3829.

SUPPLEMENTARY INFORMATION:

Executive Summary--Purpose and Authority

    This rulemaking arises from PBGC's ongoing review of its 
regulations to ensure they are up-to-date, efficient, and satisfy 
existing needs with a minimum of burden. It is intended to modernize 
the methodology used to determine de minimis lump sums in terminated 
underfunded single-employer plans. Specifically, under this proposed 
rule, PBGC would adopt the interest and mortality assumptions from 
section 417(e)(3) of the Internal Revenue Code (Code) \1\ for this 
purpose.
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    \1\ Section 417(e)(3) of the Code and section 205(g)(3) of the 
Employee Retirement Income Security Act of 1974 (ERISA) are parallel 
provisions in ERISA and the Code.
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    It would also discontinue PBGC's monthly calculation and 
publication of the interest rates used for this purpose. Because some 
private-sector plans use PBGC's lump sum interest rates, the proposal 
would provide a final interest rate set for private-sector plans to use 
for valuation dates on or after the effective date of the final rule.
    Legal authority for this action comes from section 4002(b)(3) of 
the Employee Retirement Income Security Act of 1974 (ERISA), which 
authorizes PBGC to issue regulations to carry out the purposes of title 
IV of ERISA and section 4022 of ERISA (Single-Employer Plan Benefits 
Guaranteed).

Background

Use of Lump Sum Assumptions by PBGC

    The Pension Benefit Guaranty Corporation (PBGC) administers two 
insurance programs for private-sector defined benefit pension plans 
under title IV of the Employee Retirement Income Security Act of 1974 
(ERISA): A single-employer plan termination insurance program and a 
multiemployer plan insolvency insurance program. This proposed rule 
applies only to the single-employer program.
    Covered single-employer plans that are underfunded may terminate in

[[Page 51491]]

either 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 
guaranteed benefits in accordance with section 4022 of ERISA and PBGC's 
regulation on Benefits Payable in Terminated Single-Employer Plans (29 
CFR part 4022).\2\
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    \2\ PBGC also pays non-guaranteed benefits when there are 
sufficient plan assets or recoveries.
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    PBGC calculates the present value of each participant's benefit to 
determine whether it is de minimis (present value of $5,000 or less) 
and therefore may be paid as a lump sum.\3\ Assumptions used to value 
benefits for this purpose are set forth in PBGC's benefit payments 
regulation. The interest assumption, published each month, employs a 
four-tiered structure to discount future benefit payments for 
determining their lump sum equivalent. This structure consists of an 
``immediate'' rate for discounting benefits for the period between the 
annuity starting date and each future payment date, and up to three 
``deferred'' rates for discounting benefits during specified parts of 
the period leading up to the annuity starting date (e.g., first 7 
years, next 8 years, and years beyond). The mortality assumption is the 
1984 Unisex Pensioners Mortality Table.
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    \3\ See 29 CFR 4022.7(b)(1)(i).
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Use of PBGC's Lump Sum Interest Rates by Private Sector

    PBGC is aware that a relatively small number of plans use PBGC's 
interest rates as computed using its historical methodology (legacy 
interest rates) to determine the lump sum equivalents of annuity 
benefits.\4\ It is PBGC's understanding that these plans do so because, 
before 1994, under section 417(e)(3) of the Code, plans were required 
to use PBGC's legacy interest rates to determine the minimum 
permissible lump sum equivalent of an annuity benefit.\5\
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    \4\ Some insurers may also use PBGC's legacy interest rates to 
determine lump sums payable under a group annuity contract for a 
pension plan that used such rates after it closed out in a standard 
termination.
    \5\ To determine the minimum lump sum equivalent of an annuity 
benefit, plans used PBGC's lump sum interest rates for benefits 
under $25,000 and used 120 percent of PBGC's lump sum interest rates 
for benefits $25,000 and over. Section 417(e) of the Code (1988) 
(amended 1994).
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    The Retirement Protection Act of 1994, Public Law 103-465 (RPA `94) 
changed the interest rate specified in section 417(e)(3) of the Code. 
As a result, private-sector plans were no longer required to use PBGC's 
lump sum interest rates to determine the minimum lump sum equivalents 
of annuity benefits. Anecdotal evidence suggests many, if not most, 
plans were amended to discontinue use of PBGC's legacy interest rates 
for calculating lump sum equivalents of annuity benefits by adopting 
the new interest assumption under section 417(e)(3) of the Code.
    To preserve the possibility of a change in the way PBGC-paid lump 
sums are determined without affecting private-sector plans that use 
PBGC's legacy interest rates to determine lump sums, PBGC publishes two 
separate tables of lump sum interest rates. Appendix B provides the 
interest rates for PBGC-paid lump sums, and appendix C provides the 
legacy interest rates for use by the private sector. To date, the 
tables have always been identical.
    PBGC first started publishing two sets of interest rates in 2000. 
At that time, PBGC recommended that plan sponsors amend (or draft) 
plans to explicitly reference ``PBGC's lump sum interest rates for 
private-sector payments'' (i.e., appendix C) if they wanted to ensure 
plans would not be affected by a future change to the way in which 
PBGC-paid lump sums are determined.\6\
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    \6\ See 65 FR 14753, 14755 (March 17, 2000).
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Proposed Regulatory Changes

Adopt Lump Sum Assumptions From Section 417(e)(3) of the Code

    Actuarial practice, with the help of technology, has moved toward a 
yield-curve approach where future benefits are discounted to the 
measurement date based on yields on bonds of similar duration. By 
associating an interest rate with a specific time horizon, a yield 
curve better approximates the present value of future benefits. As a 
result, the immediate and deferred structure of PBGC's legacy interest 
rates has become increasingly obsolete.
    Additionally, the methodology PBGC uses to compute each month's 
immediate and deferred interest rates, which was established at a time 
when computing resources were limited, is simplistic and typically 
results in interest rates significantly lower than the rates most 
private-sector plans use to determine lump sums.
    Taking into consideration modern structures and methods, PBGC 
proposes to adopt the lump sum interest rate assumption from section 
417(e)(3) of the Code. Specifically, PBGC proposes to amend its benefit 
payments regulation to provide that PBGC will use the ``applicable 
interest rate'' \7\ specified in section 417(e)(3)(C) of the Code and 
section 205(g)(3)(B)(ii) of ERISA to calculate the present value of 
annuity benefits (for the purposes of determining if the benefit is de 
minimis and if so, the amount payable as a lump sum).
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    \7\ The interest assumption in section 417(e)(3) of the Code was 
updated by section 302(b) of the Pension Protection Act of 2006, 
Public Law 109-280. The applicable interest rate is defined as the 
spot segment rates published by the Internal Revenue Service each 
month.
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    PBGC also considered whether the lump sum mortality assumption, 
i.e. the 1984 Unisex Pensioners Mortality Table, should be replaced in 
this proposed rule. Although that table does not reflect recent 
mortality improvements, the combination of using it with PBGC's legacy 
interest rates results in lump sum amounts that are similar to amounts 
determined using the interest and mortality assumptions under section 
417(e)(3) of the Code. This would no longer hold true if PBGC were to 
adopt the interest rates under section 417(e)(3) of the Code without 
also revising its lump sum mortality assumption. Accordingly, to ensure 
the amount of PBGC-paid lump sums remains relatively unaffected by this 
change, PBGC proposes to amend its benefit payments regulation to 
provide that PBGC will use the ``applicable mortality table'' specified 
in section 417(e)(3)(B) of the Code and section 205(g)(3)(B)(i) of 
ERISA.
    PBGC expects that the proposed changes to adopt the interest and 
mortality assumptions specified in section 417(e)(3) of the Code would 
have a minimal effect on participants and beneficiaries of plans it 
trustees because, as noted above, PBGC uses these assumptions only for 
purposes of determining de minimis lump sum amounts. Also, because the 
interest and mortality changes would generally have offsetting effects, 
the net impact would be small. For example, using a participant aged 40 
and the January 2019 interest rates to illustrate the impact, the lump 
sum amount determined under the proposal would be within 1 percent of 
the amount determined using current methods and assumptions.\8\ In 
general, the proposed assumptions would result in slightly larger lump 
sums for older participants and slightly smaller lump sums for younger 
participants. The impact on any particular benefit would depend on 
individual demographic factors and

[[Page 51492]]

assumptions in effect on the benefit's valuation date.
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    \8\ Age 40 was used for this illustration because an analysis of 
plans trusteed by PBGC in the past 10 years indicated that the 
median age at plan termination of participants with de minimis 
benefits was age 40.
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Discontinue Publication of Legacy Interest Rates

    As noted in the background section, PBGC is aware that a relatively 
small number of plans still use its legacy interest rates to determine 
lump sums. In developing this proposal, PBGC considered whether to 
continue calculating and publishing legacy interest rates in appendix C 
for use by private-sector plans.\9\ Given that the legacy interest 
rates' structure and methodology have become increasingly obsolete, 
PBGC concluded that continued publication of the legacy interest rates 
for any use would be inappropriate. Instead, PBGC proposes to publish a 
final set of interest rates in appendix C for private-sector plans to 
use for valuation dates on or after the effective date of the final 
rule equal to the average immediate and deferred rates for the 120-
month period ending in July 2019, rounded to the nearest quarter 
percent. Thus, for valuation dates on or after the effective date of 
the final rule, appendix C would provide for an immediate rate of 1.5 
percent for discounting benefits for the period between the annuity 
starting date and each future payment date and a deferred rate of 4 
percent for discounting benefits during the period leading up to the 
annuity starting date.
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    \9\ PBGC previously considered revising its methodology for 
determining lump sum interest rates and discontinuing publication of 
its legacy interest rates in 1998. See 63 FR 57228 (October 26, 
1998); 65 FR 14753 (March 17, 2000).
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    With respect to plans that use the legacy interest rates, PBGC does 
not have information as to whether plan documents explicitly refer to 
the interest rates for use by private-sector plans per appendix C or 
whether they include more general references to PBGC's lump sum 
interest rates or the rates PBGC ``uses.'' For a plan in the latter 
category, once the appendix C rates are no longer identical to the 
rates used by PBGC, the plan terms may have an ambiguity that should be 
resolved. Resolving this ambiguity would not necessarily mean that such 
a plan would have to start using the ``applicable interest rate'' for 
that purpose (which could result in smaller lump sums). Rather, unclear 
provisions in such a plan could be amended to specify the use of the 
interest rates in appendix C, provided that the resulting lump sum is 
no less than the minimum amount determined in accordance with section 
417(e)(3) of the Code and that any other applicable requirements are 
satisfied.\10\
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    \10\ IRS has previously informed PBGC ``that a plan that refers 
to PBGC lump sum interest rates for purposes of calculating the 
amount of the distribution subject to Code section 417(e)(3) and 
that is amended before the PBGC amends its regulations to provide 
lump sum interest rates for PBGC payments that are no longer 
identical to the lump sum interest rates for private-sector payments 
will not fail to satisfy the `anti-cutback' rules of Code section 
411(d)(6) merely because it is amended to clarify that the plan's 
reference to PBGC lump sum interest rates means the lump sum 
interest rates for private-sector payments.'' 65 FR 14753, 14755 
(March 17, 2000).
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    Because PBGC has incomplete information on private-sector plan use 
of its legacy interest rates, PBGC is soliciting comments on which 
private-sector plans use these rates and for what purpose, and whether 
setting the legacy interest rates at a 120-month average would cause 
any undue burden. PBGC also seeks comment on whether other entities 
(e.g., insurance companies) use its legacy interest rates and for what 
purpose.

Applicability

    The amendments affecting PBGC's calculation and payment of lump sum 
benefits would apply to trusteed plans with termination dates on or 
after the effective date of the final rule.

Executive Orders 12866, 13563, and 13771

    OMB has determined that this rulemaking is not a ``significant 
regulatory action'' under Executive Order 12866. Accordingly, this 
proposed rule is exempt from the requirements of Executive Order 13771 
and OMB has not reviewed the rule 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).
    Although this is not a significant regulatory action under 
Executive Order 12866, PBGC has examined the economic implications of 
this proposed rule and has concluded that the proposed changes would 
have minimal impact on PBGC's payment of lump sum benefits. As 
discussed above, applying the assumptions under section 417(e)(3) of 
the Code to a benefit could slightly raise or lower a lump sum benefit 
paid by PBGC. Additionally, with respect to plans terminating on or 
after the effective date, some benefits that would have been considered 
de minimis using the prior assumptions would not be de minimis using 
the revised assumptions (and vice versa).
    For the relatively small number of private-sector plans that use 
PBGC's legacy interest rates to determine lump sums, PBGC expects that 
most refer to appendix C. Because the final interest rate set is an 
average of recent rates, the proposed change would have little to no 
impact on these plans. Of plans referring generally to PBGC's lump sum 
interest rates, PBGC expects that some of the affected plans would be 
amended to refer to appendix C. However, some plans could pay smaller 
lump sums and consequentially, some participants could receive smaller 
lump sums.
    Section 6 of Executive Order 13563 requires agencies to rethink 
existing regulations by periodically reviewing their regulatory program 
for rules that ``may be outmoded, ineffective, insufficient, or 
excessively burdensome.'' These rules should be modified, streamlined, 
expanded, or repealed as appropriate. PBGC has identified the 
assumptions used for lump sums in its benefit payments regulation as 
outmoded and the proposed amendment to remove these assumptions as 
consistent with the principles for review under E.O. 13563.

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 regulation, PBGC considers a small entity to 
be a plan with fewer than 100 participants. This is substantially the 
same criterion PBGC uses in other regulations \11\ and is consistent 
with certain requirements in

[[Page 51493]]

title I of ERISA \12\ and the Code,\13\ as well as the definition of a 
small entity that the Department of Labor has used for purposes of the 
Regulatory Flexibility Act.\14\
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    \11\ See, e.g., special rules for small plans under part 4007 
(Payment of Premiums).
    \12\ See, e.g., section 104(a)(2) of ERISA, which permits the 
Secretary of Labor to prescribe simplified annual reports for 
pension plans that cover fewer than 100 participants.
    \13\ See, e.g., section 430(g)(2)(B) of the Code, which permits 
plans with 100 or fewer participants to use valuation dates other 
than the first day of the plan year.
    \14\ See, e.g., DOL's final rule on Prohibited Transaction 
Exemption Procedures, 76 FR 66,637, 66,644 (Oct. 27, 2011).
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    Further, while some large employers operate small plans 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. The vast majority of the effect of this proposed rule would 
be on PBGC or persons with very small benefits who will be receiving 
their benefits from PBGC. Though an unknown number of plans use PBGC's 
lump sum interest rates to calculate lump sums, it is unlikely that a 
substantial number of small plans still use these rates as they have 
not been required to do so since RPA `94 took effect over 20 years ago. 
Accordingly, as provided in section 605 of the Regulatory Flexibility 
Act, sections 603 and 604 do not apply.

List of Subjects in 29 CFR Part 4022

    Employee benefit plans, Pension insurance, Reporting and 
recordkeeping requirements.

    For the reasons given above, PBGC proposes to amend 29 CFR part 
4022 as follows:

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

0
1. 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.

0
2. Amend Sec.  4022.7 by revising paragraphs (d)(2) and (e) to read as 
follows:


Sec.  4022.7   Benefits payable in a single installment.

* * * * *
    (d) * * *
    (2) Actuarial assumptions. PBGC will calculate the lump sum value 
of a benefit by valuing the monthly annuity benefits payable in the 
form determined under Sec.  4044.51(a) of this chapter and commencing 
at the time determined under Sec.  4044.51(b) of this chapter. The 
actuarial assumptions used will be those described in Sec.  4044.52 of 
this chapter, except as follows:
    (i) Loading for expenses. There will be no adjustment to reflect 
the loading for expenses.
    (ii) Mortality assumption. The ``applicable mortality table'' 
specified in section 205(g)(3)(B)(i) of ERISA and section 417(e)(3)(B) 
of the Code for the year containing the termination date will apply.
    (iii) Interest rate assumption. The ``applicable interest rate'' 
specified in section 205(g)(3)(B)(ii) of ERISA and section 417(e)(3)(C) 
of the Code for the month containing the termination date will apply.
    (iv) Date for determining lump sum value. The date as of which a 
lump sum value is calculated is the termination date, except that in 
the case of a subsequent insufficiency it is the date described in 
section 4062(b)(1)(B) of ERISA.
    (e) Private-sector lump sum rates. PBGC provides lump sum interest 
rates for private-sector payments in appendix C to this part.

Appendix A to Part 4022--[Removed and Reserved]

0
3. Remove and reserve appendix A.

Appendix B to Part 4022--[Removed and Reserved]

0
4. Remove and reserve appendix B.
0
5. In appendix C to part 4022, a final rate set is added at the end of 
the table to read as follows:

Appendix C to Part 4022--Lump Sum Interest Rates for Private-Sector 
Payments

* * * * *

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                  For plans with a  valuation date     Immediate                                Deferred annuities  (percent)
    Rate set     ----------------------------------   annuity rate  ------------------------------------------------------------------------------------
                    On or after         Before         (percent)            i                i                i                n                n
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                                                                      * * * * * * *
        Final             [EFFECTIV...............           1.50             4.00             4.00             4.00                7                8
                  OF FINAL RULE]
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    Issued in Washington, DC.
Gordon Hartogensis,
Director, Pension Benefit Guaranty Corporation.
[FR Doc. 2019-21087 Filed 9-27-19; 8:45 am]
BILLING CODE 7709-02-P