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).”
Under normal rules, according to Hassel, PC2 benefits can be paid in a lump sum when a plan is terminated. However, participants are not permitted to get the rollover amount in a lump sum. “The logic is the participant could have gotten the money in a lump sum from the DC plan rather than rolling it over into the DB plan, so why put it in the DB plan and then take it out?” she says. When a plan terminates, the benefit resulting from the direct rollover is determined as the actuarial equivalent of the amount rolled over, according to the background in the PBGC proposed rules.
The proposed rules provide protections for the rollover amounts derived from employee contributions from PBGC maximum benefit limitation rules. First, explains Hassel, when a plan terminates, the PBGC has a maximum benefit above which it will not pay. For plans terminating in 2014, that’s about $59,000 per year for a single-life annuity for a participant at age 65. The rollover benefit derived from employee contributions is not subject to that maximum, she says.
In addition, there is a five-year phase-in rule that says generally, if DB benefits have been increased in the five years before termination, the increase will be phased in over five years after termination. That does not apply to the rollover benefit derived from employee contributions, says Hassel.
Finally, the PBGC will not pay benefits that exceed the amount of a participant’s accrued benefit at normal retirement. Hassel explains that under the proposed rules, the “accrued-at-normal” limitation is increased to take into account the rollover, so the limitation will be slightly higher for those with rollovers.
The PBGC wants employees who have rollover options to move their benefits from DC plans to DB plans. “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,” it says in its proposal (see “PBGC Proposes Rulesfor DC Rollovers into Pensions”).