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— Thomas Jefferson (1743–1826)
 to Archibald Stuart, 1791

Title IV Treatment of Rollovers From Defined Contribution Plans to Defined Benefit Plans

Guaranteed Benefits
Under section 4022 of ERISA, PBGC guarantees the payment of all nonforfeitable benefits provided by a plan, subject to two principal statutory limitations—the maximum guaranteeable benefit limitation and the five-year phase-in limitation.
The amount of the maximum monthly guarantee is set by law and is updated each calendar year. The maximum guaranteeable benefit applicable to a plan is fixed as of that plan’s termination date. Under the Pension Protection Act of 2006, if a plan terminates during a plan sponsor’s bankruptcy and the sponsor entered bankruptcy on or after September 16, 2006, the maximum guaranteeable benefit is fixed as of the date the sponsor entered bankruptcy.
The five-year phase-in limitation generally applies to a benefit increase that has been in effect for less than five years. Generally, 20 percent of a benefit increase is guaranteed after one year, 40 percent after two years, etc., with full phase-in of the guarantee after five years. If the amount of the monthly benefit increase is below $100, the annual rate of phase-in is $20 rather than 20 percent. For this purpose, a benefit increase resulting from a plan amendment is deemed to be in effect on the later of the amendment’s adoption date or its effective date.

Historically, PBGC has interpreted the statutory limitations to apply to the participant’s total nonforfeitable accrued benefit under a plan, including that portion of the benefit funded by traditional after-tax mandatory employee contributions. In the case of rollover amounts, however, PBGC will exempt from these limitations the accrued benefit derived from mandatory employee contributions determined under the rules of Code section 411(c)(2)(B). The exemption will not apply to any benefit resulting from rollover amounts that exceeds the accrued benefit derived from mandatory employee contributions (i.e., the accrued benefit attributable to employer contributions).
Rollovers can help preserve participants’ retirement savings until retirement. They provide a valuable means for participants to withdraw their benefits from one retirement plan and contribute them to another. PBGC believes that rollovers to defined benefit plans may provide lifetime-annuity protection at a competitive cost. Consistent with the Administration’s initiative on retirement security, PBGC wants to eliminate impediments to this form of annuitization of distributions from defined contribution plans by providing assurances to participants that their benefits attributable to rollover amounts to a defined benefit plan will largely be protected from the limitations that might otherwise apply if the plan terminates and is trusteed by PBGC.
There are a number of reasons why PBGC views benefits resulting from the portion of rollover amounts treated as mandatory employee contributions differently from other benefits under a plan. Unlike other mandatory employee contributions, rollover benefits require an affirmative election by the participant to roll over a pension distribution to obtain an additional annuity from a defined benefit plan. If the benefit resulting from rollover amounts caused a participant’s total benefit under the plan to exceed PBGC’s maximum guaranteeable benefit, participants might be reluctant to roll over benefits from defined contribution plans to defined benefit plans. Applying the five-year phase-in limitation to benefits resulting from rollover amounts similarly might make rollovers unattractive.
The limitations on PBGC’s guarantee were designed to protect the pension insurance system from risk of loss. But rollovers do not present the same risk of loss to the insurance program as other benefits. A benefit derived from rollover amounts treated as mandatory employee contributions is considered under Rev. Rul. 2012-4 to be actuarially equivalent to the rollover amounts received by the defined benefit plan. Therefore, although a plan accepting a rollover becomes liable to pay additional benefits, it simultaneously receives additional funds of equivalent value. That is not true for most new benefit accruals. Accordingly, it is a reasonable statutory interpretation to exempt from the maximum guaranteeable benefit and phase-in limitations a benefit resulting from rollover amounts that does not exceed the accrued benefit treated as derived from mandatory employee contributions.

In accordance with PBGC’s statutory interpretation, the final rule amends § 4022.22 to exempt the rollover benefit amount derived from mandatory employee contributions from the maximum guaranteeable benefit limitation. Thus, PBGC will exclude that amount from its determination of the participant’s maximum guaranteeable benefit. However, any rollover benefit in excess of the portion of such benefit derived from mandatory employee contributions (i.e., any portion of the rollover benefit derived from employer contributions) will be combined with the annuity otherwise payable under the plan in determining the participant’s maximum guaranteeable benefit.
Similarly, the final rule amends § 4022.24 to exempt a participant’s rollover benefit derived from mandatory employee contributions from the five-year phase-in limitation. The five-year phase-in limitation will, however, apply to the portion of any rollover benefit derived from employer contributions, with that benefit portion deemed to be in effect on the date the rollover amounts were received by the plan.
PBGC’s regulations provide for a third guarantee limitation, the “accrued-at-normal” limitation, which restricts PBGC’s guarantee of temporary supplements. Under § 4022.21, PBGC’s guarantee cannot exceed the accrued benefit payable as a straight life annuity at normal retirement age. PBGC will include the annuity attributable to rollover amounts in the determination of the accrued-at-normal limitation, which will increase the limitation against which the participant’s entire benefit is measured, and will apply the accrued-at-normal limitation to the entire benefit, including rollover amounts. This will generally have the effect of increasing the participant’s guaranteeable benefit.
Form of Payment

Before being amended by this final rule, PBGC’s regulation provided for the return of mandatory employee contributions in a single installment (or a series of installments) if a participant, or a beneficiary of a pre-retirement death benefit, so elected in accordance with the plan’s provisions. If a participant (or a surviving spouse) elected a return of mandatory employee contributions prior to the annuity starting date in the form of a lump sum, instead of as an annuity, the lump sum benefit would have been determined under § 4044.12(c)(2) as the amount of the participant’s accumulated mandatory contributions.
[7]

A withdrawal of the participant’s accumulated mandatory employee contribution would have resulted in an accrued benefit under the plan derived solely from employer contributions.

Under the final regulation, PBGC generally will not pay participants a lump sum return of mandatory employee contributions attributable to rollover amounts. PBGC will disregard a plan’s provisions for the return of employee contributions in a lump sum and will make rollover amounts payable only in the form of an annuity. Because the participant had the chance to take the distribution from a defined contribution plan as a lump sum and instead chose to roll it into a defined benefit plan to obtain additional annuity benefits, it would seem anomalous to later allow the participant to convert the additional annuity back into a lump sum. Moreover, paying the additional benefit as an annuity is consistent with PBGC’s policy of promoting retirement security through preserving lifetime retirement income.
Under the final regulation, the annuity resulting from rollover amounts will be payable at the same time, and in the same form, as the remainder of the participant’s benefit under the plan to avoid administrative burden to PBGC.
[8]

In the case of a plan that provides for a pre-retirement death benefit that returns the employee’s mandatory contributions in a single installment, if a participant dies after the plan terminates, PBGC will not allow the participant’s spouse to elect to withdraw the mandatory contributions attributable to rollover amounts in a single installment. Instead, PBGC will include such contributions in the value of the plan’s qualified preretirement survivor annuity (QPSA) to the spouse.
[9]

PBGC will determine whether a payment was de minimis (currently $5,000 or less under § 4022.7(b)(1)(i)) and, if so, will base the amount of the payment on the lump sum value of the participant’s total benefit payable by PBGC (the benefit resulting from rollover amounts combined with the benefit excluding rollover amounts).

Allocation of Assets
The final rule also amends PBGC’s asset allocation regulation to set forth rules for PBGC treatment of rollover benefits when a defined benefit plan terminates with insufficient assets to pay all benefits.
New §§ 4044.12(b)(4) and (c)(4) describe the calculation of a participant’s total annuity benefit resulting from rollover amounts. For participants and beneficiaries not yet in pay status as of the termination date, the rollover amounts will be credited with interest payable under plan provisions to the plan’s termination date, and converted to an annuity benefit payable at the normal retirement age using the plan’s interest rates and conversion factors in effect as of the plan’s termination date for the conversion of such rollover amounts.
Under the final regulation, the portion of a participant’s accrued benefit resulting from rollover amounts derived from mandatory employee contributions will be determined using the rules of section 411(c) of the Code. Specifically, the participant’s accumulated mandatory employee contributions—the participant’s rollover amounts credited with interest at 120% of the Federal mid-term rate from the date of the rollover to the plan’s termination date—will be converted to an actuarially equivalent straight life annuity under the plan payable at the normal retirement age using the applicable interest rate and mortality table under section 417(e) of the Code as of the plan’s termination date. Consistent with Rev. Rul. 2012-4, which defines this annuity amount as the actuarial equivalent of an employee’s rollover amounts to a defined benefit plan, only an annuity benefit determined on this basis will be assigned to PC2.

Rev. Rul. 2012-4 permits a qualified defined benefit plan to offer a subsidy with respect to a rollover by using a more generous annuity conversion factor than under the minimum rules for an actuarially equivalent annuity under section 411(c) of the Code, provided the additional qualification requirements applicable to a benefit derived from employer contributions are met. If, under the plan’s provisions, the benefit resulting from rollover amounts exceeds the annuity derived from mandatory employee contributions determined under the rules of section 411(c)(2) of the Code—for example, because the plan uses more generous conversion factors than those under section 417(e) of the Code—the final regulation treats the portion of the benefit in excess of the annuity derived from mandatory employee contributions under the rules of section 411(c)(2) as a benefit derived from employer contributions for purposes of assigning the benefits to the priority categories under part 4044. The annuity benefit derived from employer contributions will be a guaranteeable benefit in PC3, PC4, or PC5, as applicable, because it is a nonforfeitable benefit (i.e., a benefit for which the participant has satisfied all plan conditions for entitlement as of the plan’s termination date). Under section 4022(a) of ERISA, PBGC is required to guarantee all nonforfeitable benefits provided by a plan, subject to the limitations contained in section 4022(b).


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