The Pension Benefit Guaranty Corporation (“PBGC”) proposes to amend its regulations to offer direction on Title IV treatment of rollovers.  In expectation of greater use of rollovers and as a part of its efforts to promote retirement security, the PBGC proposes a rule to guide the treatment of rollovers from defined contribution plans to defined benefit plans and to promote lifetime income options.

Under Title IV of the Employee Retirement Income Security Act of 1974 (“ERISA”), the PBGC administers the single-employer pension plan termination insurance program.  Premiums are paid to PBGC each year to cover program private-sector, single-employer defined benefit plans.  Normally, PBGC is appointed statutory trustee of the plan when a plan terminates.  The PBGC is then responsible for paying benefits in accordance with the provisions of Title IV.   ERISA describes that when a plan terminates in a distress termination or an involuntary termination, each participant’s plan benefit is assigned to one or more of six “priority categories.”  Benefits in Priority Category 2 (“PC2”) have a higher claim on plan assets than almost all other benefits under the plan and plan assets are normally adequate to pay accrued benefits derived from mandatory employee contributions.  Thus, participants’ accrued benefits derived from mandatory employee contributions are assigned to PC2.

Occasionally, plans trusteed by PBGC, also contain contributions made by employees that fund part of the benefit under the plan.  The PBGC proposes to amend its regulations on allocation of assets and benefits payable in terminated single-employer plans in order to spell out the treatment of benefits resulting from a rollover distribution from a defined contribution plan.  401(k) retirement savings rollover availability expands opportunities for participants to choose lifetime annuity options.

The Department of the Treasury (“Treasury”) and the Internal Revenue Service (“IRS”) issued Rev. Rul. 2012-4, 2012-8 I.R.B. 386 (“Ruling”), in February 21, 2012.  The Ruling explained particular qualification requirements under 401(a) of the Code for use of rollover amounts to provide an additional benefit under a defined benefit plan.  Under the Ruling, a qualified defined benefit plan will accept a direct rollover of a distribution from a qualified defined contribution plan maintained by the same employer for an employee or former employee of the employer who departs from the company after fifty five years of age with ten plus years of service and chooses an immediate annuity of the employee’s benefit under the plan.

For purposes of section 411(c) of the Code, the Ruling recognizes the amounts rolled over as mandatory employee contributions.  This satisfies section 411(c)(2) of the Code because:

1. The benefit resulting from the direct rollover is provided as an immediate annuity determined as the actuarial equivalent of the amount rolled over; and
2. In the event payment is delayed after the rollover, interest on the rollover contribution is accumulated and the benefit derived from the rollover is not forfeitable upon death prior to the annuity starting date.

In response to the Treasury’s and IRS’s rollover clarifications in the Rule, the PBGC proposes to amend its regulations to provide guidance on Title IV treatment of rollovers. The proposal amends the PBGC’s regulations on Benefits Payable in Terminated Single-Employer Plans (29 CFR part 4022) and Allocation of Assets in Single-Employer Plans (29 CFR part 4044).  These amendments would create or explain the rules for treatment of rollovers in plans that terminate underfunded, including, but not limited to the following:

• A benefit resulting from rollover amounts would be treated as an accrued benefit derived from mandatory employee contributions in PC2.
• Unlike other PC2 benefits, PC2 benefits resulting from rollover amounts would generally not be payable in lump sum form.
• The portion of any benefit resulting from rollover amounts that exceeds the accrued benefit derived from mandatory employee contributions would be a guaranteeable benefit in PC3, PC4, or PC5, as applicable.
• The participant’s accrued benefit resulting from rollover amounts generally would not be subject to PBGC’s maximum guaranteeable benefit limitation under ERISA and thus would not be taken into account in applying that limitation.
• However, the maximum guaranteeable benefit limitation would apply to any benefit resulting from rollover amounts that exceeds the accrued benefit treated as derived from mandatory employee contributions.
• The participant’s accrued benefit resulting from rollover amounts generally would not be subject to the five-year phase-in limitation on the guarantee of benefit increases.
• However, the phase-in limitation would apply to any benefit resulting from rollover amounts that exceeds the accrued benefit treated as derived from mandatory employee contributions, with the phase-in period beginning as of the date the rollover contributions were received by the plan.

The PBGC seeks public comment of this proposed rule.  Interested parties are invited to submit comments, identified by Regulatory Information Number (RIN 1212-AB23), by June 2, 2014, by any by the following methods:

• Federal eRulemaking Portal: http://www.regulations.gov. Follow the Web site instructions for submitting comments;
• Email: reg.comments@pbgc.gov;
• Fax: 202-326-4224; OR
• Mail or Hand Delivery: Legislative and Regulatory Department, Pension Benefit Guaranty Corporation, 1200 K Street NW., Washington, DC 20005-4026.

This post was originally published on the legacy ABA Section of Administrative Law and Regulatory Practice Notice and Comment blog, which merged with the Yale Journal on Regulation Notice and Comment blog in 2015.