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PBGC Updates Assumptions for Determining De Minimis Lump Sum Benefits in PBGC-Trusteed Single-Employer Plans

Government Affairs
The Pension Benefit Guaranty Corporation (PBGC) on Sept. 8 announced that it is modernizing the assumptions it uses to determine de minimis lump sum benefits in PBGC-trusteed single-employer plans.
 
The PBGC says that it is taking into consideration modern structures and methods and intends this rule to modernize the methodology used to determine de minimis lump sums in terminated underfunded single-employer plans. Specifically, it is adopting the interest and mortality assumptions from Internal Revenue Code Section 417(e)(3) for this purpose; it also is discontinuing the PBGC’s monthly calculation and publication of interest rate assumptions. 
 
The Proposed Rule
 
On Sept. 30, 2019, the PBGC published a proposed rule to modernize the assumptions it uses to determine de minimis lump sum benefits; it also proposed to discontinue monthly publication of the interest rates used for this purpose and to provide a final interest rate set for use by private-sector plans. PBGC received seven comments on the proposal. 
 
Applicable interest rate. The PBGC proposed to amend its benefit payments regulation to provide that it will use the “applicable interest rate” Section 417(e)(3)(C) specifies for the month containing a plan’s termination date to calculate the present value of annuity benefits (for the purposes of determining if a benefit is de minimis and, if it is, the amount payable as a lump sum).
 
Lump sum mortality. In developing the proposal, the PBGC also considered whether the lump sum mortality assumption should be replaced. Although that table does not reflect recent mortality improvements, the combination of using it with the PBGC’s legacy interest rates typically results in lump sum amounts that are similar to amounts determined using the interest and mortality assumptions under Section 417(e)(3). But this would not be the case if it adopts Section 417(e)(3) interest rates without also revising its lump sum mortality assumption, the PBGC says, so it also proposed amending its benefit payments regulation to provide that it will use the “applicable mortality table” Section 417(e)(3)(B) specifies.
 
Legacy interest rates. The PBGC says that it is aware that a relatively small number of plans still use its legacy interest rates to determine lump sums. In developing the proposed rule, the PBGC considered whether to continue calculating and publishing legacy interest rates in Appendix C for use by private-sector plans. The PBGC says that since the legacy interest rates’ structure and methodology have become increasingly obsolete, it proposed discontinuing publication of those rates and publishing 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. Under the proposal, the final interest rate set was equal to the average immediate and deferred rates for the 120-month period ending in July 2019, rounded to the nearest quarter percent.
 
The Final Rule
 
The PBGC says that the only notable change from the proposed rule relates to its proposal to provide a fixed set of “immediate and deferred” interest rates for use by the relatively few private-sector plans that use the PBGC legacy lump sum interest rates.
 
To address concerns commenters on the proposed rules expressed about fixed rates, the final rule provides a table that will enable plans to determine immediate and deferred interest rates in accordance with the PBGC’s historical methodology, which vary as the interest rate environment changes. So instead of continuing to determine and publish the legacy interest rates each month, the final rule provides a table in appendix C that replicates the PBGC’s methodology by associating any given applicable external bond rate with the set of immediate and-deferred rates the methodology would have yielded. 
 
The PBGC says that it agrees with those who commented on the proposed rule that a delayed effective date could be helpful for communicating and implementing the change regarding use of legacy interest rates. The PBGC will continue to publish monthly legacy interest rates for both appendix B and appendix C through December 2020 and is providing a delayed effective date of Jan. 1, 2021. 
 
Effects for Practitioners
 
The PBGC says that publishing a table in appendix C instead of continuing to determine and publish the legacy interest rates each month will allow practitioners to determine which set of legacy interest rates applies for any month indefinitely. In addition, practitioners will be able to look up the rates themselves as soon as the applicable external bond rate is published, instead of having to wait for the PBGC to publish the legacy rates each month.
 
With the final rule providing that the PBGC’s legacy interest rates will continue to be in appendix C, the PBGC says that participants in plans that use appendix C rates will not see significant changes in lump sum amounts, and there will be no incentive for participants to retire sooner than planned — and therefore no need for a delayed effective date. 
 
Publication and Effective Date
 
The PBGC said that it will publish the rule on Sept.9, 2020. The changes are effective Jan. 1, 2021.