[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]]

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Part V





Pension Benefit Guaranty Corporation





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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 
[email protected]. 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

[[Page 57229]]

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