The Pension Benefit Guaranty Corporation (PBGC) has issued two proposed rules related to benefit payments.

One addresses Benefits Payable in Terminated Single-Employer Plans and Allocation of Assets in Single-Employer Plans, and the other concerns the assumptions PBGC uses to determine de minimis lump sum benefits in PBGC-trusteed terminated single-employer defined benefit (DB) pension plans.

Proposed changes to PBGC’s regulations on Benefits Payable in Terminated Single-Employer Plans and Allocation of Assets in Single-Employer Plans would make clarifications and codify policies involving payment of lump sums, changes to benefit form, partial benefit distributions, and valuation of plan assets.

Major provisions of the proposed rule would:

• Clarify that PBGC’s rules on payment of a lump sum are unaffected by election of a lump-sum distribution before plan termination.
• Change wording that refers to the dollar amount currently subject to cashout by statute ($5,000) so it refers instead to the statutory provision that specifies that dollar amount.
• Clarify that a de minimis benefit of a participant who dies after plan termination will be paid as an amount due a decedent, not as a qualified preretirement survivor annuity.
• Clarify that benefits will be paid to estates only as lump sums.
• Clarify that accumulated mandatory employee contributions may not be withdrawn if benefits are in pay status when a plan becomes trusteed.
• Clarify that the form of benefit in pay status when a plan becomes trusteed will not be changed.
• Clarify that pre-trusteeship partial distributions are considered in determining benefits.
• Require that fair market value or fair value, as appropriate, be used for purposes of valuing assets to be allocated to participants’ benefits and in determining employer liability and net worth.

The second proposed rule would modify the assumptions the 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.

The agency says it is aware that a relatively small number of defined benefit (DB) plans use its interest rates as computed using its historical methodology (legacy interest rates) to determine the lump sum equivalents of annuity benefits. It notes that 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, PBGC notes that the methodology it 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.

“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,” the proposed rule says. “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.”

The agency also warns plans sponsors that once the appendix C rates are no longer identical to the rates used by the 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,” the proposed rule states.