Compliance

Proposed Protections for DC to DB Rollovers

The Pension Benefit Guaranty Corporation (PBGC) recently proposed rules about the treatment of rollovers from defined contribution (DC) plans to defined benefit plans (DB).

By Rebecca Moore editors@strategic-i.com | April 11, 2014
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To fully understand the proposal, plan sponsors and advisers must have a good understanding of PBGC guaranteed benefit rules, Lonie Hassel, principal at Groom Law Group in Washington, D.C., tells PLANADVISER. “The rollover rules would only be relevant if the DB plan that DC assets were rolled into was later terminated, did not have enough assets to pay benefits, and was turned over to the PBGC,” she points out.

According to background discussion in the text of the agency’s proposed rule, a qualified DB plan will accept a direct rollover of a distribution from a qualified DC 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). The rollover amount is treated as a mandatory employee contribution.

Hassel explains that when a plan is handed over to the PBGC, to determine what to pay, the agency divides the DB benefits into six priority categories. The first, or PC1, is voluntary employee contributions; PC2 is mandatory employee contributions; PC3 is the benefits of people who were retired or could have retired at least three years before the plan termination date based on plan provisions in effect five years before termination; PC4 is generally all other guaranteed benefits; and PC5 and PC6 are unguaranteed benefits—these are not paid by the PBGC. Assets of the terminated plan then are used to fund each category in turn, until the plan assets are exhausted. The proposed rules say, “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).”