98-28626. Lump Sum Payment Assumptions  

  • [Federal Register Volume 63, Number 206 (Monday, October 26, 1998)]
    [Proposed Rules]
    [Pages 57228-57229]
    From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
    [FR Doc No: 98-28626]
    
    
    
    [[Page 57227]]
    
    _______________________________________________________________________
    
    Part V
    
    
    
    
    
    Pension Benefit Guaranty Corporation
    
    
    
    
    
    _______________________________________________________________________
    
    
    
    29 CFR Parts 4022 and 4044
    
    
    
    Lump Sum Payment Assumptions; Proposed Rule
    
    
    
    Valuation of Benefits; Use of Single Set of Assumptions for All 
    Benefits; Proposed Rule
    
    Federal Register / Vol. 63, No. 206 / Monday, October 26, 1998 / 
    Proposed Rules
    
    [[Page 57228]]
    
    
    
    PENSION BENEFIT GUARANTY CORPORATION
    
    29 CFR Parts 4022 and 4044
    
    RIN 1212-AA92
    
    
    Lump Sum Payment Assumptions
    
    AGENCY: Pension Benefit Guaranty Corporation.
    
    ACTION: Notice of intent to propose rulemaking.
    
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    SUMMARY: The PBGC is considering: Discontinuing use of its existing 
    lump sum assumptions for payment purposes and replacing them with a 
    modified version of its existing annuity assumptions, effective 
    sometime after December 2000, and discontinuing calculation and 
    publication of its existing lump sum interest rates at, or sometime 
    after, the time the PBGC discontinues their use. Because this may raise 
    issues for plans and participants, the PBGC is specifically soliciting 
    public comment on: the assumptions the PBGC should use to value its 
    lump sums after 2000, how long the PBGC should continue to calculate 
    and publish its existing lump sum interest rates, if it were to 
    discontinue their use, and any potential actions that the PBGC could 
    take to lessen the potential consequences that would arise if the PBGC 
    were to discontinue use--or calculation and publication as well as 
    use--of its existing lump sum interest rates. The Internal Revenue 
    Service has requested that the PBGC solicit public comments on its 
    behalf concerning the qualification issues that may arise in the 
    context of possible changes to the PBGC interest rates.
    
    DATES: Comments must be received on or before December 28, 1998.
    
    ADDRESSES: Comments to the PBGC may be mailed to the Office of the 
    General Counsel, Pension Benefit Guaranty Corporation, 1200 K Street, 
    NW., Washington, DC 20005-4026, or delivered to Suite 340 at the above 
    address. Comments to the PBGC also may be sent by Internet e-mail to 
    reg.comments@pbgc.gov. Comments to the PBGC will be available for 
    public inspection at the PBGC's Communications and Public Affairs 
    Department, Suite 240. Comments to the Internal Revenue Service may be 
    sent by mail to: Internal Revenue Service, PO Box 7604, Ben Franklin 
    Station, Attn: CC:EBEO:BR1(REG-209759-95), Room 5226, Washington, DC 
    20044; or may be hand delivered between the hours of 8 a.m. and 5 p.m. 
    to CC:DOM:CORP:R (REG-209759-95), Courier's Desk, Internal Revenue 
    Building, 1111 Constitution Avenue NW, Washington, DC. Alternatively, 
    comments to the Internal Revenue Service may be submitted via the 
    Internet at http://www.irs.ustreas.gov/prod/tax__regs/comments.html. 
    Comments to the Internal Revenue Service will be available for public 
    inspection at the Freedom of Information Reading Room, Room 1621, 
    Internal Revenue Building, 1111 Constitution Ave., NW., Washington, DC.
    
    FOR FURTHER INFORMATION CONTACT: Harold J. Ashner, Assistant General 
    Counsel, or James L. Beller, Attorney, Pension Benefit Guaranty 
    Corporation, Office of the General Counsel, Suite 340, 1200 K Street, 
    NW., Washington, DC 20005-4026, 202-326-4024. (For TTY/TTD users, call 
    the Federal relay service toll-free at 1-800-877-8339 and ask to be 
    connected to 202-326-4024.)
    
    SUPPLEMENTARY INFORMATION:
    
    Background
    
        When a plan terminates in a distress or involuntary termination, 
    the PBGC values the plan's benefits in order to allocate assets to 
    benefits in accordance with the priority categories established under 
    section 4044 of ERISA. This allocation affects the amount of the PBGC's 
    employer liability claim (representing the entire plan underfunding) 
    and participant benefit entitlements beyond guaranteed benefits (i.e., 
    nonguaranteed benefits that are funded either by plan assets or, 
    pursuant to ERISA section 4022(c), by PBGC recoveries on its employer 
    liability claims). The PBGC also values each benefit to determine 
    whether it is de minimis and therefore payable as a lump sum (and, if 
    so, in what amount) under ERISA section 4022 and 29 CFR part 4022. The 
    assumptions used to value benefits for purposes of sections 4022 and 
    4044 are in part 4044 of the PBGC's regulations.
        The PBGC has historically derived its interest rate assumptions by 
    surveying private sector annuity prices and selecting a valuation 
    interest rate (or rates) that, when combined with the PBGC's mortality 
    assumptions, accurately replicates the price structure reflected in the 
    survey. When the PBGC updated its assumptions in 1993 (58 FR 50812 
    (September 28, 1993)), it noted that its historical interest rates--
    derived based on UP-84 mortality assumptions--were lower than they 
    would have been under the more current GAM-83 mortality assumptions 
    then in use by many private sector insurers. The PBGC stated, ``Even 
    though the combination of mortality and interest assumptions accurately 
    replicates private sector group annuity prices, the disparity between 
    the PBGC's low interest rates and familiar private sector rates has 
    resulted in public confusion over the PBGC's interest rate 
    assumptions.'' 58 FR 5128, 5129 (January 19, 1993).
        The PBGC updated its assumptions in 1993 to reflect, among other 
    things, the more current GAM-83 mortality assumptions (thereby 
    increasing the PBGC's derived interest rates), but only for benefits 
    that must be paid as annuities. The PBGC did not extend the updated 
    assumptions to benefits payable as lump sums because Congress had set 
    the PBGC lump sum interest rates as the interest rate ceiling (and thus 
    the value floor) for private-sector lump sums. The use of the more 
    current GAM-83 mortality assumptions would have increased the lump sum 
    interest rates and thereby decreased private sector lump sum values.
        The PBGC stated that it would defer updating its lump sum 
    assumptions pending legislative action. See 58 FR 5130-31 (January 19, 
    1993); 58 FR 50812, 50814 (September 28, 1993). The Retirement 
    Protection Act of 1994 (``RPA'') eliminated the connection between the 
    PBGC's lump sum interest assumptions and the interest rates that 
    private plans are required to use to value lump sum benefits.
        In a separate notice published elsewhere in today's Federal 
    Register, the Pension Benefit Guaranty Corporation is proposing to use 
    a single set of valuation assumptions--those currently used by the PBGC 
    to value benefits to be paid as annuities--for purposes of allocating 
    assets to all benefits under section 4044 of ERISA. The PBGC will 
    continue to use its existing lump sum interest rates for lump sum 
    payment purposes under ERISA section 4022 for plans with termination 
    dates through at least December 2000. This is because, under RPA, plans 
    may continue to use PBGC interest rates as the ``applicable interest 
    rate'' under Code section 417(e)(3) for distributions in plan years 
    beginning as late as December 1999.
    
    New PBGC Lump Sum Assumptions
    
        The PBGC is considering replacing its existing lump sum assumptions 
    for payment purposes under Part 4022 with a modified version of its 
    annuity assumptions under Part 4044. The interest and other assumptions 
    (e.g., expected retirement age) under part 4022 would generally be the 
    same as those used under part 4044 for annuity valuations. However, the 
    PBGC will use a unisex mortality table for lump sum payment purposes. 
    The PBGC is
    
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    currently reviewing its part 4044 mortality assumptions (currently GAM-
    83) as part of a separate rulemaking. See March 19, 1997, Notice of 
    Intent to Propose Rulemaking (62 FR 12982). The specific unisex 
    mortality table will depend upon the mortality table adopted in that 
    rulemaking.
        In addition, the PBGC is considering whether the amount of lump sum 
    benefits should include an expense load to reflect that the PBGC 
    charges an expense load to the employer. In the past, the PBGC lump sum 
    payment included a load because its lump sum interest rates implicitly 
    included that load. The annuity assumptions from which the new lump sum 
    assumptions would be derived provide for an explicit loading charge 
    that can easily be excluded from lump sum payments. Although the PBGC 
    charges the employer for a load, it generally incurs at least most of 
    the expenses reflected in this charge even when it pays a benefit in 
    lump sum form. See 58 FR 5128, 5131 (January 19, 1993).
    
    Effect on Ongoing and Other Nontrusteed Plans
    
        Only those plans trusteed by the PBGC would be affected directly if 
    the PBGC were to discontinue use of its existing lump sum interest 
    rates sometime after 2000. However, plans not trusteed by the PBGC 
    could be affected indirectly. While the PBGC's lump sum rates will no 
    longer be the ``applicable interest rate'' for purposes of Code section 
    417(e)(3) and ERISA section 205(g)(3) after 2000, some plans may 
    nonetheless continue to provide for the use of the PBGC's lump sum 
    interest rates (if these rates produce a larger distribution for the 
    participant than required under Code section 417(e)(3) and ERISA 
    section 205(g)(3)), on a permanent basis or for a transitional period 
    that extends beyond 2000. These plans may face interpretive issues or 
    unintended consequences. For example, if the PBGC continues to 
    calculate and to publish its historical lump sum interest rates, and a 
    plan refers to the interest rates used by the PBGC to determine lump 
    sum values, there is a question whether this should be interpreted as a 
    reference to the PBGC's new assumptions for determining lump sum values 
    or the rates the PBGC continues to publish based on its former 
    methodology. Similar issues may arise in the case of an annuity 
    contract that provides for use of the PBGC's lump sum interest rates.
        In addition to discontinuing use of its existing lump sum 
    assumptions, the PBGC is considering discontinuing calculation and 
    publication of its existing lump sum interest rates sometime after 2000 
    because these rates are derived under the assumption that present 
    values are calculated using the UP-84 mortality table, which will 
    become increasingly outdated. The interest rate assumptions that are 
    derived in connection with the use of the UP-84 mortality table are 
    lower than those that are derived in connection with the use of a more 
    current mortality table. The PBGC recognizes that discontinuing 
    calculation and publication of these rates would raise additional 
    issues for plans that provide for payment of a lump sum equal to the 
    value produced by these rates, and may raise issues in the case of 
    collective bargaining agreements and annuity contracts that reference 
    these rates.
        The Internal Revenue Service has informed the PBGC that, in the 
    context of possible changes to the PBGC interest rates, employers' 
    responses (such as plan amendments or plan interpretations that have 
    the effect of reducing participants' benefits) might cause plans to 
    fail to satisfy the plan qualification requirements of the Internal 
    Revenue Code. The Internal Revenue Service notes that, depending on 
    plan language, issues may arise regarding whether a plan provides 
    definitely determinable benefits, is operated in accordance with its 
    terms, or complies with the requirements of section 411(d)(6). For 
    example, a violation of section 411(d)(6) may occur if a plan is 
    amended to eliminate use of the PBGC's existing lump sum interest rates 
    (or to substitute an alternative interest rate for the PBGC's existing 
    lump sum rates) with respect to benefits that have accrued before the 
    later of the adoption date or the effective date of the amendment, 
    unless the amendment is within the confines of the explicit relief 
    provided in connection with plan amendments that substitute the 30-year 
    Treasury rate for the PBGC interest rate under section 767(d)(2) of RPA 
    and 26 CFR 1.417(e)-1(d)(10)(iii) through (v).
        The PBGC is soliciting comments on (1) the assumptions the PBGC 
    should use to value its lump sums after 2000, (2) how long the PBGC 
    should continue to calculate and publish its existing lump sum interest 
    rates, if it were to discontinue their use, and (3) any potential 
    actions that the PBGC could take to lessen the potential consequences 
    that would arise if the PBGC were to discontinue use--or calculation 
    and publication as well as use--of its existing lump sum interest 
    rates. The PBGC will not implement these changes without providing 
    adequate lead time.
        The Internal Revenue Service has requested that the PBGC solicit 
    public comments on its behalf concerning the qualification issues that 
    may arise in the context of possible changes to the PBGC interest 
    rates, including the relief under Code section 411(d)(6)(B) that may be 
    appropriate to permit employers to make plan amendments to accommodate 
    the PBGC's change in lump sum interest rate assumptions. For example, 
    it may be appropriate for the Internal Revenue Service to permit an 
    employer to substitute an interest rate that is roughly comparable to 
    the PBGC's existing lump sum rates. Comments on this topic may be sent 
    to the Internal Revenue Service (see Addresses).
    
        Issued in Washington, DC, this 21st day of October 1998.
    David M. Strauss,
    Executive Director, Pension Benefit Guaranty Corporation.
    [FR Doc. 98-28626 Filed 10-23-98; 8:45 am]
    BILLING CODE 7708-01-P
    
    
    

Document Information

Published:
10/26/1998
Department:
Pension Benefit Guaranty Corporation
Entry Type:
Proposed Rule
Action:
Notice of intent to propose rulemaking.
Document Number:
98-28626
Dates:
Comments must be received on or before December 28, 1998.
Pages:
57228-57229 (2 pages)
RINs:
1212-AA92: Lump Sum Payment Assumptions
RIN Links:
https://www.federalregister.gov/regulations/1212-AA92/lump-sum-payment-assumptions
PDF File:
98-28626.pdf
CFR: (2)
29 CFR 4022
29 CFR 4044