[Federal Register Volume 76, Number 210 (Monday, October 31, 2011)]
[Proposed Rules]
[Pages 67105-67118]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-28124]


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PENSION BENEFIT GUARANTY CORPORATION

29 CFR Parts 4001, 4022, 4041, and 4044

RIN 1212-AB17


Cash Balance Plans; Benefit Determinations and Plan Valuations 
for Statutory Hybrid Plans; Pension Protection Act of 2006

AGENCY: Pension Benefit Guaranty Corporation.

Action: Proposed rule.

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SUMMARY: This proposed rule would implement provisions of the Pension 
Protection Act of 2006 (PPA 2006) that change the rules for determining 
benefits upon the termination of a statutory hybrid plan, such as a 
cash balance plan. PPA 2006 provides that, when such a plan terminates, 
a variable rate used under the plan to determine accrued benefits will 
be equal to the average of the rates of interest used under the plan 
during the five-year period ending on the termination date. Further, 
the amount of the benefit payable in the form of an annuity payable at 
normal retirement age will be determined using the interest rate and 
mortality table specified under the plan for that purpose as of the 
termination date (or an average interest rate if the plan rate is a 
variable rate). For a plan terminated and trusteed by PBGC, the 
proposed rule would amend PBGC's regulations to conform the rules for 
determining the allocation of assets and the amount of benefits payable 
under Title IV of ERISA to the PPA 2006 changes in the benefit 
determination rules for statutory hybrid plans. The proposed rule would 
also implement a PPA 2006 change for determining the present value of 
the accrued benefit under a statutory hybrid plan. Finally, the 
proposed rule would provide guidance on benefits payable under a 
statutory hybrid plan that terminates in a standard termination.

DATES: Comments must be submitted on or before December 30, 2011.

ADDRESSES: Comments, identified by Regulatory Information Number (RIN 
1212-AB17) may be submitted by any of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the Web site instructions for submitting comments.
     E-mail: [email protected].
     Fax: (202) 326-4224.
     Mail or Hand Delivery: Legislative and Regulatory 
Department, Pension Benefit Guaranty Corporation, 1200 K Street, NW., 
Washington, DC 20005-4026.
    Comments received, including personal information provided, will be 
posted to http://www.pbgc.gov. Copies of comments may also be obtained 
by writing to Disclosure Division, Office of the General Counsel, 
Pension Benefit Guaranty Corporation, 1200 K Street, NW., Washington, 
DC 20005-4026, or calling (202) 326-4040 during normal business hours. 
(TTY and TDD users may call the Federal relay service toll free at 1-
(800) 877-8339 and ask to be connected to (202) 326-4040.)

FOR FURTHER INFORMATION CONTACT: John H. Hanley, Director, or Constance 
Markakis, Attorney; Legislative and Regulatory Department, Pension 
Benefit Guaranty Corporation, 1200 K Street, NW., Washington, DC 20005-
4026; (202) 326-4024. (TTY and TDD users may call the Federal relay 
service toll free at 1-(800) 877-8339 and ask to be connected to (202) 
326-4024.)

SUPPLEMENTARY INFORMATION: 

[[Page 67106]]

Background

    When Pension Benefit Guaranty Corporation (PBGC) becomes trustee of 
a plan that terminates in a distress termination under section 4041 of 
the Employee Retirement Income Security Act of 1974, as amended 
(ERISA), or an involuntary termination (one initiated by PBGC) under 
section 4042 of ERISA, PBGC determines the amount of the annuity 
benefit that will be paid to a participant or beneficiary and whether 
the participant or beneficiary is eligible for a de minimis lump-sum 
payment. Guaranteed benefit determinations are made under section 4022 
of ERISA. PBGC also values the benefits payable under the plan for 
purposes of allocating the plan's assets to priority categories in 
accordance with section 4044 of ERISA, determines employer liability 
under sections 4062 through 4064 of ERISA, and determines the amount of 
any unfunded nonguaranteed benefits payable under section 4022(c) of 
ERISA. These benefit determinations and plan valuations are generally 
made as of the plan's termination date.\1\
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    \1\ As described below, section 404 of PPA 2006 added sections 
4022(g) and 4044(a)(3) of ERISA, which treat the date the sponsor's 
bankruptcy petition was filed as the termination date of the plan 
for specified purposes. These changes apply for plan terminations 
that occur during the bankruptcy of the plan sponsor, if the 
bankruptcy filing date is on or after September 16, 2006. For 
convenience, this preamble generally refers to the plan's 
termination date, although in some cases this reference will instead 
apply to the bankruptcy filing date.
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    The termination of a cash balance plan presents unique issues for 
PBGC.\2\ In contrast to a traditional defined benefit plan, which 
defines a participant's benefit under the plan as an annuity commencing 
at normal retirement age, a cash balance plan defines a participant's 
benefit as the balance of a hypothetical account maintained for the 
participant. The balance of a participant's hypothetical account 
consists generally of annual pay credits (e.g., a percentage of the 
participant's pay for the year) and annual interest credits (i.e., the 
hypothetical earnings on the account balance) at rates specified under 
the plan. The plan also provides an interest rate and mortality table 
(or factor) used for converting the participant's hypothetical account 
balance into a benefit payable as an annuity. Upon the termination of a 
cash balance plan (or an earlier freeze), the pay credits to a 
participant's hypothetical account cease, but interest credits 
generally continue to be added to the participant's hypothetical 
account until the participant begins to receive benefits.
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    \2\ Statutory hybrid plans other than cash balance plans, such 
as pension equity plans, also raise unique issues. For convenience, 
and because cash balance plans are the most common type of 
underfunded statutory hybrid plan trusteed by PBGC, this preamble 
generally refers to cash balance plans, although the regulatory 
changes would apply to all statutory hybrid plans.
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    If a cash balance plan uses a fixed interest rate as of the plan's 
termination date to determine accrued benefits or the amount of a 
benefit payable in the form of an annuity payable at normal retirement 
age, PBGC uses the plan's fixed rate when calculating benefits for 
valuation and payment purposes. PBGC has encountered difficult payment 
and valuation issues, however, when a cash balance plan uses a variable 
interest rate--e.g., a rate that changes annually under the plan based 
on changes in an underlying index plus a margin. Many plans using 
variable rates adopted the standard indices and associated margins set 
forth in IRS Notice 96-8 (1996-1 C.B. 359)--which are based on the 
yields on Department of the Treasury (Treasury) constant maturities of 
various durations--to determine the plan's interest crediting rate or 
annuity conversion rate.
    Under PBGC's operating policy on cash balance plans (established 
pre-PPA 2006), when PBGC performs its plan valuation under ERISA 
section 4044 of ERISA (for plans that terminated before the effective 
date of the relevant PPA 2006 changes), it fixes the plan's variable 
index at the plan's termination date. To calculate the value, as of the 
plan's termination date, of a participant's annuity commencing at the 
expected retirement age, PBGC derives a fixed rate equal to the average 
of the annual yields for 30-year Treasury constant maturities for the 
month specified in the plan, decreased by the associated margin in IRS 
Notice 96-8 for the variable index used by the plan, and adjusted by 
any plan margin.\3\
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    \3\ This policy applied only for plans that used a variable 
interest rate based on an index specified in IRS Notice 96-8, and 
that used either no plan margin or a plan margin that is constant.
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    Under this operating policy, however, PBGC does not derive a fixed 
interest rate from a variable rate to determine benefits for payment 
purposes. Instead, PBGC pays a participant's pension benefit using the 
actual interest crediting rates in effect under the plan's variable 
index for periods after the plan's termination date. Until a 
participant commences benefits, PBGC estimates annuity payments using 
the most recent interest rate under the variable index used by the plan 
to determine the participant's projected benefit. The fact that a 
participant's exact benefit can be determined only when the participant 
begins receiving benefits has frequently resulted in benefit 
calculations for payment purposes that vary both from previously 
provided estimates and from benefit calculations for valuation 
purposes.
    PBGC pays benefits in a single installment if the lump sum value of 
a benefit payable by PBGC is de minimis (currently $5,000 or less). See 
Sec.  4022.7(b). In the case of cash balance plans, the payment of de 
minimis lump sums has posed difficult issues for PBGC due to PBGC's 
policy of determining lump sums using a present value calculation of 
the participant's benefit. Cash balance plans typically pay benefits in 
the form of a lump sum and often pay an amount equal to the 
hypothetical account balance.\4\ In contrast, in accordance with its 
operating policy on cash balance plans, PBGC uses the present value 
methodology in Sec.  4022.7(d) to determine the lump sum value of a 
benefit, and, if either the present value or the participant's 
hypothetical account balance (or accumulated percentage of final 
average compensation) as of the termination date is de minimis, PBGC 
generally pays the greater of the two amounts.
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    \4\ Under IRS Notice 96-8, plans that use the standard indices 
to determine their interest crediting rates were permitted to pay 
the hypothetical account balance, even if this amount was less than 
the present value of the participant's life annuity payable at 
normal retirement age determined using the applicable interest rate 
and the applicable mortality table under section 417(e) of the Code.
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Pension Protection Act of 2006

    In the Pension Protection Act of 2006, Pub. L. 109-280 (PPA 2006), 
which became law on August 17, 2006, Congress sought to address, among 
other things, the problems encountered by terminating plans that use a 
variable interest rate. Under sections 701(a)(1) and 701(b)(1) of PPA 
2006, which added section 411(b)(5)(B)(vi) of the Internal Revenue Code 
(Code) and section 204(b)(5)(B)(vi) of ERISA, an applicable defined 
benefit plan must include the following provisions that would apply 
upon termination of the plan:
     If the interest crediting rate (or equivalent amount) is a 
variable rate, the rate of interest used to determine accrued benefits 
under the plan will equal the average of the rates of interest used 
under the plan during the five-year period ending on the termination 
date.
     The interest rate and mortality table used to determine 
the amount of any benefit under the plan payable in the form of an 
annuity payable at normal retirement age is the rate and table

[[Page 67107]]

specified under the plan for such purpose as of the termination date. 
If the interest rate is a variable rate, the rate used must be the 
average of the rates used under the plan during the five-year period 
ending on the termination date.
    This change was intended to facilitate the calculation of benefits 
and provide participants with greater certainty about their benefit 
amounts when a plan terminates. This change is part of a more general 
interest rate requirement imposed by sections 701(a)(1) and 701(b)(1) 
of PPA 2006, which treats an applicable defined benefit plan as failing 
to meet accrual requirements related to age if the terms of the plan 
provide for an interest credit (or an equivalent amount) for any plan 
year that is greater than a market rate of return.
    Sections 701(a)(2) and 701(b)(2) of PPA 2006 also create special 
rules for computing benefits under an applicable defined benefit plan 
by reference to the hypothetical account balance. Under new sections 
411(a)(13)(A) of the Code and 203(f)(1) of ERISA, a plan is not treated 
as failing to meet the present value requirements of sections 417(e) of 
the Code or 205(g) of ERISA (and certain other vesting and accrued 
benefit rules) if the present value of the accrued benefit of any 
participant is equal to the amount expressed as the balance in the 
hypothetical account or as an accumulated percentage of the 
participant's final average compensation.
    New sections 411(a)(13)(C) of the Code and 203(f)(3) of ERISA 
define an ``applicable defined benefit plan'' as a defined benefit plan 
under which the accrued benefit (or any portion thereof) for a 
participant is calculated as the balance of a hypothetical account 
maintained for the participant or as an accumulated percentage of the 
participant's final average compensation. The term also describes any 
plan that has an effect similar to an applicable defined benefit plan 
under regulations issued by Treasury.
    The changes to the plan termination requirements made by sections 
701(a)(1) and 701(b)(1) of PPA 2006 are effective for years beginning 
after December 31, 2007, unless the plan sponsor elects the earlier 
application of such requirements for any period after June 29, 2005.\5\ 
A special rule for collectively bargained plans provides a delayed 
effective date.\6\ The changes to the present value rules made by 
sections 701(a)(2) and 701(b)(2) of PPA 2006 are effective for 
distributions made after August 17, 2006.
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    \5\ In the case of a new plan not in existence on June 29, 2005, 
these requirements are effective for periods beginning on or after 
June 29, 2005.
    \6\ Section 701(e)(4) of PPA 2006 provides that, for a plan 
maintained under one or more collective bargaining agreements 
between employee representatives and one or more employers that is 
ratified on or before August 17, 2006, the interest and three-year 
vesting requirements will not apply to plan years before--
     The earlier of the date on which the last of the 
collective bargaining agreements terminates (determined without 
regard to any extension made on or after August 17, 2006), or 
January 1, 2008, or
     January 1, 2010.
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    Treasury issued final regulations on Hybrid Retirement Plans (2010 
final Treasury regulations), 75 FR 64123 (Oct. 19, 2010), and 
simultaneously issued proposed Additional Rules Regarding Hybrid 
Retirement Plans (2010 proposed Treasury regulations), 75 FR 64197 
(Oct. 19, 2010). These regulations provide guidance on changes made by 
PPA 2006 under sections 411(a)(13) and 411(b)(5) of the Code.
    The other PPA 2006 provisions relevant to this proposed rule are in 
section 404, which added sections 4022(g) and 4044(e) of ERISA. These 
provisions provide that, when an underfunded pension plan terminates 
during the bankruptcy of the plan sponsor, the date that the sponsor's 
bankruptcy petition was filed is treated as the plan's termination date 
for purposes of determining (1) The amount of benefits PBGC guarantees, 
and (2) the amount of benefits in priority category 3 in the section 
4044 asset allocation. These changes apply for plan terminations that 
occur during the bankruptcy of the plan sponsor, if the bankruptcy 
filing date was on or after September 16, 2006. On June 14, 2011 (at 76 
FR 34590), PBGC published a final rule on Bankruptcy Filing Date 
Treated as Plan Termination Date for Certain Purposes that implements 
section 404 of PPA 2006.

Overview of Proposed Rule

    This proposed rule would amend PBGC's regulation on Benefits 
Payable in Terminated Single-Employer Plans (29 CFR part 4022) to 
implement the above-described changes made by PPA 2006 upon the 
termination of a statutory hybrid plan. This proposed rule is intended 
to be consistent with the proposed Treasury rules under section 
411(b)(5) of the Code that apply upon termination of a statutory hybrid 
plan (included in the 2010 proposed Treasury regulations at Treas. Reg. 
1.411(b)(5)-1(e)(2)). No inference should be drawn from the language in 
this proposed rule as to any changes that may be made to the Treasury 
rules when the 2010 proposed Treasury regulations are issued as final 
regulations. After the 2010 proposed Treasury regulations are 
finalized, PBGC intends to take those final Treasury regulations into 
account, so that the rules that finalize these proposed regulations are 
consistent with the final rules in the Treasury regulations.
    Under the proposed rule, PBGC would generally determine plan 
benefits based on plan terms as of the plan's termination date; if, 
however, the plan used a variable rate during the five-year period 
ending on the termination date, PBGC would take into account the plan's 
provisions for determining and applying an average rate of interest in 
accordance with section 411(b)(5)(B)(vi) of the Code and proposed 
Treas. Reg. 1.411(b)(5)-1(e)(2). In addition, the proposed rule sets 
forth certain default rules that PBGC would apply to the extent that 
the terms of the plan do not satisfy the plan termination requirements 
under PPA 2006 or Treasury regulations thereunder, or fail to specify 
provisions necessary to implement those requirements. Except in the 
case of certain involuntary plan terminations, PBGC would generally 
apply its rules to determine the benefits of any participant with an 
annuity starting date after the plan's termination date or, in the case 
of a distress termination under ERISA section 4041(c), the plan's 
proposed termination date. The proposed rule also addresses the 
interest crediting rules that apply to a plan that terminates during 
the bankruptcy of the plan sponsor.
    In addition, the proposed rule would amend PBGC's regulation on 
Allocation of Assets in Single-Employer Plans (29 CFR part 4044) to 
conform the rules for valuing benefits and allocating plan assets to 
the changes in the benefit determination rules. Under the proposed 
rule, certain benefits would be calculated differently for valuation 
purposes than for payment purposes. For example, de minimis benefits 
would continue to be calculated as annuities for valuation purposes, as 
under the current regulation, but the method of calculating such 
benefits for payment purposes would change under the proposed rule. The 
proposed rule would also amend part 4044 to provide that the priority 
category 3 benefits of a participant who is eligible but does not 
retire three years before a plan's termination date (or bankruptcy 
filing date, if applicable) would be determined based on the 
participant's account balance and the interest rates under the plan as 
if the participant had retired three years before the termination date 
(or bankruptcy filing date, if applicable).
    The proposed rule would amend PBGC's regulation on Termination of

[[Page 67108]]

Single-Employer Plans (29 CFR part 4041) to provide that, for purposes 
of part 4041, a plan that terminates in a standard termination (or a 
distress termination where the plan is sufficient for guaranteed 
benefits) will be deemed to satisfy the plan termination requirements 
under section 204(b)(5)(B)(vi) of ERISA and section 411(b)(5)(B)(vi) of 
the Code and Treasury regulations if the plan calculates and pays 
benefits consistent with the provisions for statutory hybrid plans 
under part 4022.
    A detailed discussion of the proposed rule follows.

Proposed Regulatory Changes

Definition of Statutory Hybrid Plan

    Under section 411(a)(13)(C) of the Code,\7\ an ``applicable defined 
benefit plan'' is a defined benefit plan under which the accrued 
benefit (or any portion thereof) is calculated as the balance of a 
hypothetical account maintained for the participant or as an 
accumulated percentage of the participant's final average compensation; 
the definition includes any plan that has an effect similar to an 
applicable defined benefit plan. Treasury's final regulations on Hybrid 
Retirement Plans use the term ``statutory hybrid plan'' to describe 
plans that are subject to the provisions of sections 411(a)(13) and 
411(b)(5)(B) of the Code. To maintain a uniform and consistent 
application of PPA 2006 changes to the rules in this area, PBGC is 
proposing to amend Sec.  4001.2 to add a definition of a ``statutory 
hybrid plan'' that cross-references the definition of a statutory 
hybrid plan under Treasury regulations.\8\
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    \7\ References to Code provisions used hereinafter should be 
read to include parallel provisions of ERISA.
    \8\ Under Sec.  1.411(a)(13)-1(d), a statutory hybrid plan means 
a defined benefit plan that contains a statutory hybrid benefit 
formula, which is defined as a benefit formula used to determine all 
or any part of a participant's accumulated benefit that is either a 
lump sum-based benefit formula (under which the benefit is expressed 
as the current balance of a hypothetical account maintained for the 
participant or as the current value of an accumulated percentage of 
the participant's final average compensation) or a benefit formula 
that has an effect similar to a lump sum-based benefit formula.
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PBGC Benefit Determinations--In General

    PBGC proposes to amend part 4022 to add a new subpart H that would 
specifically address the determination of benefits payable under a 
terminating statutory hybrid plan. Subpart H would supplement the 
general rules in part 4022 for purposes of determining a participant's 
benefit under the provisions of a statutory hybrid plan and the amount 
and form of benefits guaranteed or otherwise payable under Title IV of 
ERISA.
    When PBGC trustees a terminated plan (including a statutory hybrid 
plan), as a first step in determining the benefits payable under Title 
IV, it determines a participant's benefit in accordance with the terms 
of the plan on the termination date. As described in proposed new Sec.  
4022.121, for statutory hybrid plans, this includes provisions relating 
to the interest rate(s) and mortality table used by the plan, such as 
the rate used to determine interest credits and the timing for 
determining such rate, the frequency at which interest credits are 
applied, and the interest rate and mortality table (or annuity 
conversion factor) used to determine the participant's benefit payable 
in the form of an annuity payable at normal retirement age--provided 
the plan's provisions satisfy the requirements of section 204(b)(5)(B) 
of ERISA and section 411(b)(5)(B) of the Code and implementing 
regulations.
    Because statutory hybrid plans use various methods for determining 
a participant's annuity benefit, PBGC would follow the plan's terms for 
this purpose. For example, a cash balance plan that defines the accrued 
benefit as an annuity commencing at normal retirement age, and that--
for purposes of sections 411(a)(13) and 411(b)(5)--expresses the 
accrued benefit as the balance of the participant's hypothetical 
account, may under its terms determine the participant's annuity by 
projecting interest credits to the participant's normal retirement 
date. In that case, PBGC would add interest credits to the 
participant's hypothetical account balance each interest crediting 
period beginning after the plan's termination date through the 
participant's normal retirement date (or the current date, if later) 
and then use the conversion factors (or the interest rate and the 
mortality table) specified under the plan as of the termination date to 
determine the benefit payable as an annuity. Alternatively, if such 
plan provides for the use of immediate annuity conversion factors, PBGC 
would add interest credits to the participant's hypothetical account 
balance through the participant's annuity starting date, then use the 
conversion factors (or the interest rate and mortality table) specified 
under the plan as of the termination date to determine the benefit 
payable as an annuity at the participant's age on the annuity starting 
date. In the case of a pension equity plan that provides for the use of 
deferred annuity conversion factors (or an interest rate and mortality 
table), PBGC would determine the current value of the accumulated 
percentage of an active participant's final average compensation as of 
the plan's termination date and apply the conversion factors specified 
under the plan as of the termination date to determine the benefit 
payable as an annuity at different future ages to the participant.
    If the mortality table specified under the plan as of the 
termination date used to determine the amount of any benefit payable in 
the form of an annuity (i.e., the table used to convert a hypothetical 
account balance to an annuity) is a table that is updated automatically 
in future years to reflect expected improvements in mortality 
experience (e.g., the applicable mortality table provided under Code 
section 417(e)(3)), PBGC would determine benefits payable under the 
plan based on the mortality table as of the termination date taking 
into account future adjustments for expected mortality improvements 
through the annuity starting date.
    The provisions of proposed new subpart H would be used to determine 
the benefits of any participant or beneficiary in a plan covered by the 
subpart with an annuity starting date after the plan's termination date 
or, in the case of a distress termination under ERISA section 4041(c), 
after the proposed termination date. A plan administrator's failure to 
apply an average interest rate as of the proposed termination date 
would require benefits to be re-determined using an average rate of 
interest. The proposed termination date would also be the relevant date 
if a plan provides a notice of intent to terminate in a distress 
termination and subsequently terminates under section 4042, and the 
termination date is the same as the proposed termination date under 
section 4041(c). If the proposed termination date is moved to a later 
date in a distress termination case (or in a distress termination that 
becomes an involuntary termination), benefits determined using an 
average interest rate between the proposed termination date and the 
final termination date would be recalculated using the interest rate 
that would have applied under the plan prior to the plan's final 
termination date.
    Proposed new Sec.  4022.121(a)(3)(ii) provides a special rule for a 
plan that terminates in an involuntary termination where the 
termination date is earlier than the date on which PBGC institutes 
termination proceedings pursuant to section 4042. In that

[[Page 67109]]

situation, in determining benefits under part 4022, PBGC generally 
would not change the interest rate(s) (or the mortality table or 
conversion factor) used by the plan under its provisions to calculate a 
benefit payable for a participant or beneficiary whose annuity starting 
date is after the termination date but on or before the date on which 
PBGC institutes termination proceedings or who submits a completed 
election for an annuity benefit during that time period. This would 
protect benefit determinations and participant elections when a plan 
operates in good faith in accordance with its terms prior to any notice 
of termination proceedings. PBGC would have discretion not to follow 
this special rule if warranted under the facts and circumstances, e.g., 
to avoid abuse.

Variable Rates

    Paragraph (c) of proposed new Sec.  4022.121 describes the 
averaging methodology PBGC would apply upon termination of a plan in 
the case of a variable rate. In accordance with proposed Treas. Reg. 
1.411(b)(5)-1(e)(2), if the interest crediting rate used to determine a 
participant's accumulated benefit (or a portion thereof) has been a 
variable rate during the interest crediting periods in the five-year 
period ending on the plan's termination date (including a rate that was 
not the same fixed rate during all such periods), PBGC would determine 
an average of the interest crediting rates used under the plan during 
the five-year period. For this purpose, the interest crediting rates 
used under the plan would include each rate that applied under the 
terms of the plan during an interest crediting period for which the 
interest crediting date is within the five-year period ending on the 
plan's termination date.\9\ The average rate would be determined as the 
arithmetic average of the rates used, expressed as an annual rate.
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    \9\ An interest crediting rate that applied under the terms of 
the plan only with respect to a date that is distinct from the 
plan's regular interest crediting date, such as the date of 
separation from employment or plan termination, would not be 
included in determining an average of the interest crediting rates 
that applied under the terms of the plan during the five-year 
period.
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    PBGC would apply the plan's average interest crediting rate to 
determine the participant's accumulated benefit \10\ under the plan 
beginning after the plan's termination date through the participant's 
normal retirement date (or annuity starting date, as applicable under 
the plan). If the plan's termination date occurs in the middle of an 
interest crediting period, PBGC would credit interest based on the 
plan's interest crediting rate (on a pro rata basis) for the portion of 
the interest crediting period ending on the plan's termination date; 
such rate would not be included in the determination of the average 
rate. For any subsequent partial interest crediting period (e.g., the 
portion of the interest crediting period following the plan's 
termination date), PBGC would credit a pro rata amount of the plan's 
average interest crediting rate. This approach is consistent with the 
statute and would simplify administration for PBGC.
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    \10\ Under Treas. Reg. 1.411(a)(13)-1(d)(2), a participant's 
accumulated benefit at any date means the participant's benefit, as 
expressed under the terms of the plan, accrued to that date. Thus, 
for example, for a cash balance plan the accumulated benefit is 
expressed as the current balance of a hypothetical account, and for 
a pension equity plan the accumulated benefit is expressed as the 
current value of an accumulated percentage of the participant's 
final average compensation.
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    In the event that the plan used a variable rate during the five-
year period ending on the plan's termination date to determine the 
amount of a participant's benefit payable in the form of an annuity 
payable at normal retirement age, PBGC would determine the arithmetic 
average of the interest rates (or tabular adjustment factors) that 
applied during periods for which the date of each rate (or factor) 
change was within the five-year period ending on the plan's termination 
date.
    Under Code section 411(b)(5)(B)(vi)(II), the average rate is used 
to determine the amount of any benefit under the plan payable in the 
form of an annuity payable at normal retirement age. PBGC would apply 
an average rate to determine a benefit under the plan that is payable 
in the form of a life annuity (i.e., an annuity that continues at least 
as long as the life of the annuitant, such as a straight-life annuity, 
joint-and-50%-survivor annuity, or 10-year certain and continuous 
annuity) payable at normal retirement age. In the case of an immediate 
annuity conversion plan that uses a variable interest rate to determine 
the amount of a benefit, PBGC would apply an average rate to determine 
a benefit under the plan payable in the form of a life annuity payable 
at the annuity starting date. In either case, the averaging requirement 
would apply only to determine the amount of the benefit in the 
automatic PBGC form under Sec.  4022.8(b) of PBGC's regulation on 
Benefits Payable in Terminated Single-Employer Plans, e.g., the form a 
married participant or an unmarried participant (as applicable) would 
be entitled to receive from the plan in the absence of an election. If 
the participant or beneficiary elects an optional PBGC form under Sec.  
4022.8(c), PBGC would convert the benefit amount from the automatic 
PBGC form in accordance with that section.
    Paragraph (c) of proposed new Sec.  4022.121 also provides that, 
consistent with Treasury regulations, if the interest crediting rate in 
any interest crediting period during the five-year period ending on the 
termination date is based on a variable rate that is not described in 
proposed Treas. Reg. 1.411(b)(5)-1(e)(2)(ii)(B) (e.g., the rate of 
return on plan assets), PBGC would replace such rate with the third 
segment rate under Code section 430(h)(2)(C)(iii) for the last calendar 
month ending before the beginning of the interest crediting period for 
purposes of determining the average interest crediting rate. In 
accordance with proposed Treas. Reg. 1.411(b)(5)-1(e)(2)(ii)(C), PBGC 
generally would adjust the third segment rate by any maximums or 
minimums applicable to the interest crediting rate in the period under 
the plan's terms, but would not adjust the third segment rate to 
account for any other adjustments under the plan to the interest 
crediting rate.

Default Rules and Other Rules

    Paragraph (d) of proposed new Sec.  4022.121 describes the default 
rules that PBGC would apply to the extent that plan provisions do not 
satisfy section 204(b)(5)(B) of ERISA and section 411(b)(5)(B) of the 
Code and implementing regulations, or that the plan fails to specify 
provisions necessary to implement applicable statutory and regulatory 
requirements. In the case of a plan that uses a variable rate but does 
not provide for the determination of an average rate or an arithmetic 
averaging methodology to be used upon termination of the plan, PBGC 
would determine an arithmetic average in the manner described above. If 
a plan does not specify a mortality table (or otherwise indicate the 
table or annuity conversion factor to be used), PBGC would use the 
mortality table provided under section 417(e) of the Code that would 
apply if the annuity starting date were the plan's termination date 
(i.e., future adjustments for expected mortality improvements under the 
mortality table would not be taken into account). If a plan fails to 
specify an interest crediting rate or annuity conversion interest rate 
(or otherwise indicate the rate or factor to be used), PBGC would 
compute an average rate as the arithmetic mean of the 30-year Treasury 
Constant Maturity rates in effect for the calendar month in which the 
plan terminates and for the same calendar month in each of the 
preceding four years.

[[Page 67110]]

    Under the proposed regulation, PBGC would apply a single average 
interest crediting rate to determine the benefits of all similarly 
situated participants under the plan (i.e., the same average interest 
crediting rate would apply to the extent the same rates applied under 
the plan to determine all participants' benefits). In the case of a 
plan that terminates within five years after the effective date of the 
PPA 2006 termination requirements with respect to the plan, PBGC would 
determine the average rate by including interest crediting rates used 
by the plan before the effective date but within the five-year period 
ending on the termination date. In the case of a plan (or the statutory 
hybrid benefit formula under a plan) that is in effect for less than 
five years, PBGC would determine the average rate based on the interest 
crediting periods during the time the plan (or the statutory hybrid 
benefit formula) was in effect.

PPA 2006 Bankruptcy Terminations

    Paragraph (e) of proposed new Sec.  4022.121 provides a special 
rule for determining interest credits in the case of a plan that 
terminates while the sponsor is in bankruptcy (a PPA 2006 bankruptcy 
termination, as defined in Sec.  4001.2). PBGC would project the amount 
of the participant's hypothetical account balance as of the bankruptcy 
filing date using the following interest rates:
     To credit interest beginning after the bankruptcy filing 
date and ending on the plan's termination date, the actual interest 
crediting rate(s) used under the plan during each interest crediting 
period.
     To credit interest beginning after the plan's termination 
date and ending on the participant's normal retirement date or, in some 
cases, annuity starting date, the rate in effect under the plan as of 
the plan's termination date, including the average interest crediting 
rate as determined under subpart H if the plan used a variable rate 
during the five-year period ending on the plan's termination date.

De Minimis Lump Sums

    The proposed rule would add a new Sec.  4022.122 to describe how 
PBGC would make determinations regarding de minimis lump sum payments 
(currently $5,000 or less under Sec.  4022.7) under a statutory hybrid 
plan. Consistent with section 411(a)(13)(A) of the Code, if a plan 
provides for a single sum form of payment equal to the amount expressed 
as the balance in a hypothetical account, PBGC generally would 
determine whether the lump sum value of a benefit payable by PBGC is de 
minimis based on the participant's hypothetical account balance as of 
the plan's termination date, and, if so, would pay that amount to the 
participant.
    However, regardless of plan provisions, if after August 17, 2006, a 
plan made lump sum payments based on participants' hypothetical account 
balances without regard to the present value rules under section 417(e) 
of the Code, or stated in writing its intent to make lump sum payments 
on that basis (e.g., through communications to affected participants), 
PBGC would make de minimis lump sum determinations on that same basis. 
I.e., PBGC would treat the plan as if it had been amended to reflect 
plan operation in accordance with section 411(a)(13)(A) of the Code, 
pursuant to the amendatory period provided under section 1107 of PPA 
2006. PBGC would also make de minimis lump sum determinations based on 
the participants' hypothetical account balances without regard to the 
section 417(e) rules if there is no single sum form of payment under 
the plan or no description of the calculation for such a payment.
    In the case of a plan that provides for use of section 417(e) of 
the Code in determining lump sums and that, after August 17, 2006, has 
not made lump sum payments based solely on participants' hypothetical 
account balances or stated in writing its intent to make lump sum 
payments on that basis (e.g., through communications to affected 
participants), PBGC would make de minimis lump sum determinations in 
accordance with Sec.  4022.7(d) and its operating policy on cash 
balance plans.

Phase-In of Guarantee of Benefit Increases

    The proposed rule would add a new Sec.  4022.123 to PBGC's 
regulations to describe changes in the terms of a statutory hybrid plan 
resulting in a benefit increase that would be subject to the phase-in 
limitations on the PBGC guarantee (i.e., a benefit increase that has 
been in effect for less than five years on the plan's termination 
date). Such changes include, but are not limited to, a change in the 
plan's mortality table, timing or method for crediting interest, or 
basis for crediting interest or determining the annuity conversion 
factor (e.g., a change from a fixed rate to a variable rate, or from 
one variable index to another variable index).
    The proposed regulation would clarify that certain adjustments in 
the interest rate would not be subject to the phase-in limitations. 
These include: (i) A change in the interest rate under a single 
variable rate index (e.g., a change in the yield on 5-year Treasury 
Constant Maturities from one date to another); (ii) a change that is 
required to comply with the termination requirements of ERISA section 
204(b)(5)(B)(vi) and Code section 411(b)(5)(B)(vi) (e.g., a change in 
the plan's interest rate to an average rate of interest at 
termination); (iii) a change in the plan's interest crediting rate that 
is permitted, notwithstanding section 411(d)(6) of the Code, pursuant 
to Treas. Reg. 1.411(b)(5)-1(e)(3) (e.g., an amendment to change under 
certain circumstances to the long-term investment grade corporate bond 
rate); (iv) a change permitted during the amendatory period under 
section 1107 of PPA 2006 or any extension of the amendatory period 
issued by the Treasury Department; and (v) an automatic future update 
in a mortality table specified under the plan as of the termination 
date that reflects expected improvements in mortality experience. PBGC 
believes that excluding such changes from the phase-in rule is 
warranted. Changes in rate due to the fluctuations of a variable index 
or to the averaging under the termination requirements would just as 
likely result in a benefit decrease as a benefit increase. Furthermore, 
any increase in benefits that might result from the above changes would 
be moderated by the requirement to average the plan's rates for the 
five-year period ending on the termination date, and by the 
substitution of the third segment rate for any variable rate that is 
not described in proposed Treasury Regulation 1.411(b)(5)-
1(e)(2)(ii)(B) (e.g., the rate of return on plan assets) for purposes 
of determining the average interest crediting rate. Lastly, updates 
under a mortality table that automatically reflects age improvements 
are an inherent aspect of the annuity conversion factor used; by 
contrast, a change to the conversion factor (e.g., from a fixed 
mortality table to one that updates automatically) by a plan would be 
subject to phase-in.

Allocation of Assets--Distress and Involuntary Terminations

    PBGC proposes to amend part 4044 by adding a new Sec.  4044.52(e) 
to address the valuation of benefits under a terminating statutory 
hybrid plan. The proposed regulation provides that benefits should be 
valued consistent with the general valuation rules of part 4044 and the 
provisions for the calculation and payment of benefits in subpart H of 
part 4022.
    In two situations, notwithstanding PBGC's calculation of benefits 
for payment purposes, PBGC would value

[[Page 67111]]

the benefits under a cash balance plan in the same manner as all other 
benefits are valued. First, although proposed new Sec.  4022.122 
provides for the determination of de minimis lump sums in some cases on 
the basis of the participant's hypothetical account balance, a benefit 
payable as a de minimis lump sum would nevertheless be required to be 
valued, for purposes of part 4044, in the form of a benefit payable as 
an annuity in the absence of a valid election under the terms of the 
plan (as is the case under current regulations). Second, despite the 
special rule in proposed new Sec.  4022.121(a)(3)(ii) that would 
generally require PBGC to use the plan's interest crediting rate and 
annuity conversion interest rate to determine benefits commencing or 
elected during the time period between the plan's termination date and 
the date on which PBGC institutes termination proceedings, these 
benefits would be valued, for purposes of part 4044, using the interest 
rates in effect under the plan (including the five-year average rate, 
if applicable) as of the plan's termination date.
    Proposed new Sec.  4044.52(e)(4) describes the calculation of a 
priority category 3 benefit under a statutory hybrid plan. Priority 
category 3 benefits generally are benefits in pay status, or that could 
have been in pay status, three years before the termination date; 
priority category 3 benefits come ahead of guaranteed benefits in 
priority category 4 in the section 4044 asset allocation. In a plan 
termination that is not a PPA 2006 bankruptcy termination, the priority 
category 3 benefit for a participant eligible to receive an annuity 
(taking into account PBGC's rules on the Earliest PBGC Retirement Date 
under Sec.  4022.10) before the beginning of the three-year period 
ending on the termination date but not in pay status as of that date 
would be determined based on the balance of the participant's 
hypothetical account and the interest crediting rate and annuity 
conversion factor under the plan had the participant retired three 
years before the termination date.\11\ In the case of PPA 2006 
bankruptcy termination, the bankruptcy filing date would substitute for 
the termination date in determining whether a participant or 
beneficiary is eligible for a priority category 3 benefit, and the 
amount of benefits in priority category 3. A priority category 3 
benefit would in no event exceed the benefit amount payable under the 
terms of the plan as of the plan's termination date (determined by 
applying the averaging rules under Sec.  4022.121 if the plan uses a 
variable rate).
---------------------------------------------------------------------------

    \11\ Benefits in priority category 3 are limited to the lowest 
annuity benefit payable under the plan provisions at any time during 
the five-year period ending on the termination date (or bankruptcy 
filing date, if applicable). This limitation also affects the 
benefits of participants who retired between three and five years 
before the termination date (or bankruptcy filing date, if 
applicable).
---------------------------------------------------------------------------

Standard and Distress Terminations

    The termination requirements under section 411(b)(5)(B)(vi) of the 
Code, added by PPA 2006, apply to any applicable defined benefit plan 
upon the termination of the plan. Sections 4041.28(c) and 4041.50 
provide that, in general, the plan administrator of a plan that 
terminates in a standard termination or a distress termination where 
the plan is sufficient for guaranteed benefits must close out the plan 
``in accordance with all applicable requirements under the Code and 
ERISA.'' These requirements include the new rules for cash balance 
plans under section 411(b)(5)(B)(vi) of the Code and implementing 
Treasury regulations.
    The proposed rule would amend Sec.  4041.28(c) to provide that for 
purposes of part 4041 the plan administrator of a statutory hybrid plan 
would be deemed to satisfy the applicable Code and ERISA requirements 
if it calculates and pays benefits consistent with the interest and 
mortality provisions described in proposed new Sec.  4022.121.

Issues Not Addressed

    This proposed rule does not address issues relating to plans in 
which the interest crediting rate is determined by participant 
direction, e.g., where the interest crediting rate depends upon choices 
made by the participant. PBGC will provide further guidance as 
appropriate.

Applicability

    The proposed regulatory changes to implement the plan termination 
requirements under section 411(b)(5)(B)(vi) of the Code would generally 
apply to any plan with a termination date in a plan year beginning on 
or after January 1, 2008. In addition, the proposed changes would apply 
to any plan that was not in existence on June 29, 2005. Pursuant to 
sections 701(e)(3) through (e)(5) of PPA 2006, if a plan elected to 
have these statutory provisions apply for any period after June 29, 
2005, and before the plan year beginning on or after January 1, 2008, 
or if the statutory provisions are first effective for a plan after the 
first plan year beginning on or after January 1, 2008 (e.g., a 
collectively bargained plan), these regulatory changes would apply to 
any plan with a termination date on or after such earlier effective 
date elected by the plan, or such later effective date provided under 
PPA 2006. For plans that terminate under part 4041 on or after the 
effective date of these statutory provisions and pending the issuance 
of final Treasury regulations, compliance with PPA 2006 would 
constitute compliance with the new rules for Title IV purposes.\12\
---------------------------------------------------------------------------

    \12\ The 2010 final Treasury regulations provide that, for 
periods after the statutory effective date and before the regulatory 
effective date, a plan is permitted to rely on the provisions of the 
2010 final Treasury regulations, the 2010 proposed Treasury 
regulations, the 2007 proposed regulations on Hybrid Retirement 
Plans, 72 FR 73680, 48 (Dec. 28, 2007), and IRS Notice 2007-6 for 
purposes of satisfying the requirements of sections 411(a)(13) and 
411(b)(5) of the Code.
---------------------------------------------------------------------------

    The proposed regulatory changes to implement the lump sum 
provisions under section 411(a)(13) of the Code would apply to 
distributions made from a terminated plan with a termination date in a 
plan year beginning on or after January 1, 2008.

Regulatory Impact Analysis

Regulatory Procedures

Executive Order 12866 ``Regulatory Planning and Review'' and Executive 
Order 13563 ``Improving Regulation and Regulatory Review''
    Executive Orders 12866 and 13563 direct agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). Executive 
Order 13563 emphasizes the importance of quantifying both costs and 
benefits, of reducing costs, of harmonizing rules, and of promoting 
flexibility. Executive Orders 12866 and 13563 require a comprehensive 
regulatory impact analysis be performed for any economically 
significant regulatory action, defined as an action that would result 
in an annual effect of $100 million or more on the national economy or 
which would have other substantial impacts. In accordance with OMB 
Circular A-4, the Department has examined the economic and policy 
implications of this proposed rule and has concluded that the action's 
benefits justify its costs.
    Under Section 3(f)(1) of Executive Order 12866, a proposed rule is 
economically significant if ``it is likely to result in a rule that may 
* * * [h]ave an annual effect on the economy of $100 million or more or 
adversely affect in a material way the economy, a sector of

[[Page 67112]]

the economy, productivity, competition, jobs, the environment, public 
health or safety, or State, local, or tribal governments or 
communities.'' PBGC has determined that this proposed rule does not 
cross the $100 million threshold for economic significance and is not 
otherwise economically significant.
    The economic effect of the proposed rule is attributable almost 
entirely to the economic effect of the PPA 2006 changes to terminating 
cash balance plans. Accordingly, PBGC is basing its determination on 
its experience with plans subject to these provisions.
    PBGC estimates that, to date, the total economic effects of the PPA 
2006 changes--in terms of lower benefits paid to participants and 
associated savings--is less than $4 million. These effects are 
primarily due to lower lump sum payments to some participants as a 
result of the PPA 2006 provisions that allow payment of the 
hypothetical account balance to participants. Because PBGC generally 
pays lump sums only when the benefit is de minimis (currently $5,000 or 
less), and because only a small percentage of participants in cash 
balance plans trusteed by PBGC receive benefits in lump sum form, the 
economic effects are relatively small.
    PBGC estimates that there will be little if any economic effect 
from PPA 2006's averaging provisions. As explained in the Background 
section, before the PPA 2006 changes went into effect, if a cash 
balance plan used a variable interest rate at plan termination to 
determine accrued benefits, for payment purposes PBGC credited interest 
to a participant's account using the plan's variable index from the 
termination date until a participant's normal retirement date or 
annuity starting date. PPA 2006 requires that a cash balance plan that 
uses a variable rate for calculating benefits use the average of the 
rates used under the plan during the five-year period ending on the 
plan termination date. This change could result in larger benefits 
payable to some participants and smaller benefits payable to other 
participants as compared to the pre-PPA 2006 methodology, depending on 
fluctuations in rates. PBGC believes that these losses and gains in 
benefits for participants will be largely offsetting.
    Although, PBGC cannot predict with certainty which cash balance 
plans will terminate, the funding level of such plans, or the number of 
participants that will be paid de minimis lump sum payments, given the 
relatively low estimate of the effect of the statutory provisions to 
date, PBGC has determined that the annual effect of the proposed rule 
will be less than $100 million.

Regulatory Flexibility Act

    PBGC certifies under section 605(b) of the Regulatory Flexibility 
Act (5 U.S.C. 601 et seq.) that the amendments in this proposed rule 
would not have a significant economic impact on a substantial number of 
small entities. The amendments implement and in some cases clarify 
statutory changes made in PPA 2006; they do not impose new burdens on 
entities of any size. Accordingly, as provided in section 605 of the 
Regulatory Flexibility Act (5 U.S.C 601 et seq.), sections 603 and 604 
do not apply.

Paperwork Reduction Act

    The amendments in the proposed rule would change the information 
requirements approved by the Office of Management and Budget under the 
Paperwork Reduction Act under OMB control number 1212-0036 (expires 
December 31, 2013). PBGC is submitting the information requirements 
relating to these amendments to part 4041 to the Office of Management 
and Budget for review and approval under the Paperwork Reduction Act. 
Copies of PBGC's request may be obtained free of charge by contacting 
the Disclosure Division of the Office of the General Counsel of PBGC, 
1200 K Street, NW., Washington, DC 20005, (202) 326-4040; the request 
is also available on http://www.reginfo.gov.
    PBGC estimates that 1,379 plan administrators will be subject to 
the collection of information requirements under 1212-0036 each year, 
and that the total annual burden of complying with these requirements 
is 2,161 hours and $3,098,441. Much of the work associated with 
terminating a plan is performed for purposes other than meeting these 
requirements. (Detailed information on these burden estimates is 
included in PBGC's request.)
    Comments on the paperwork provisions under this proposed rule 
should be sent to the Office of Information and Regulatory Affairs, 
Office of Management and Budget, Attention: Desk Officer for Pension 
Benefit Guaranty Corporation, via electronic mail at [email protected] or by fax to (202) 395-6974. Although comments may 
be submitted through December 30, 2011, the Office of Management and 
Budget requests that comments be received on or before November 30, 
2011 to ensure their consideration. Comments may address (among other 
things)--
     Whether the proposed collection of information is needed 
for the proper performance of PBGC's functions and will have practical 
utility;
     The accuracy of PBGC's estimate of the burden of the 
proposed collection of information, including the validity of the 
methodology and assumptions used;
     Enhancement of the quality, utility, and clarity of the 
information to be collected; and
     Minimizing the burden of the collection of information on 
those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques or other forms of information technology, e.g., permitting 
electronic submission of responses.

List of Subjects

29 CFR Part 4001

    Pensions.

29 CFR Part 4022

    Pension insurance, Pensions.

29 CFR 4041

    Pension insurance, Pensions, Reporting and recordkeeping 
requirements.

29 CFR 4044

    Pension insurance, Pensions.

    For the reasons given above, PBGC proposes to amend 29 CFR parts 
4001, 4022, 4041, and 4044 as follows.

PART 4001--TERMINOLOGY

    1. The authority citation for part 4001 continues to read as 
follows:

    Authority:  29 U.S.C. 1301, 1302(b)(3).

    2. In Sec.  4001.2, add a new definition in alphabetical order to 
read as follows:


Sec.  4001.2  Definitions

    Statutory hybrid plan means a cash balance plan or other statutory 
hybrid plan under regulations issued by the Department of the Treasury.

PART 4022--BENEFITS PAYABLE IN TERMINATED SINGLE-EMPLOYER PLANS

    3. The authority citation for part 4022 continues to read as 
follows:

    Authority:  29 U.S.C. 1302, 1322, 1322b, 1341(c)(3)(D), and 
1344.

    4. In Sec.  4022.2, amend the first paragraph by removing the words 
``proposed termination date, substantial owner'' and adding in their 
place ``proposed termination date, statutory hybrid plan, substantial 
owner.''
    5. Add a new subpart H to read as follows:

[[Page 67113]]

Subpart H--Calculation of Benefits Payable Under Statutory Hybrid 
Plans


Sec.  4022.120  Purpose and scope.

    (a) General. This subpart H supplements the general rules in part 
4022. These rules apply for determining the benefit payable under the 
provisions of a statutory hybrid plan and the amount of the benefit 
that PBGC will guarantee or that is payable under title IV of ERISA. To 
the extent the rules and procedures of this subpart H conflict with the 
rules and procedures in subparts A through G of part 4022, the 
provisions of subpart H govern.
    (b) Statutory hybrid plan. In general, a statutory hybrid plan 
(defined in Sec.  4001.2 of this chapter) includes a hybrid defined 
benefit pension plan under the terms of which the accumulated benefit 
of a participant (or any portion thereof) is expressed as the current 
balance of a hypothetical account maintained for the participant (a 
cash balance formula), as the current value of an accumulated 
percentage of the participant's final average compensation (a pension 
equity formula), or as a formula with an effect similar to a cash 
balance or pension equity formula. This subpart H applies with respect 
to all or any portion of a participant's benefit under a defined 
benefit plan to the extent such benefit is determined under a statutory 
hybrid benefit formula.


Sec.  4022.121  Interest and mortality assumptions and other plan 
terms.

    (a) In general. PBGC will determine a participant's benefit based 
on the terms of the plan, including the interest rate and mortality 
table otherwise applicable for determining that benefit under the plan, 
as of the plan's termination date. Special rules apply under paragraph 
(e) of this section for a PPA 2006 bankruptcy termination.
    (1) Plan terms. PBGC will determine plan benefits using relevant 
plan provisions in effect as of the plan's termination date (or, for 
determining the average rate in the case of a variable rate, within the 
5-year period ending on the plan's termination date). All relevant plan 
provisions (including provisions that become applicable upon plan 
termination) must be consistent with the requirements under section 
204(b)(5)(B) of ERISA and section 411(b)(5)(B) of the Code and 
regulations thereunder. Relevant plan provisions include, but are not 
limited to, the following:
    (i) The basis and the timing for determining the interest crediting 
rate used by the plan for each plan year (or portion thereof).
    (ii) The periodic frequency at which interest credits are applied 
(monthly, quarterly, etc.).
    (iii) The interest rate and mortality table (or conversion factor) 
used to determine the amount of any benefit payable in the form of an 
annuity payable at normal retirement age. If a plan uses a mortality 
table as of the termination date that is updated automatically to 
reflect expected improvements in mortality experience (e.g., the 
applicable mortality table provided under Code section 417(e)(3)), PBGC 
will take into account future adjustments under that table for expected 
improvements in mortality experience through each participant's annuity 
starting date.
    (iv) The averaging methodology to be used, if the interest 
crediting rate or the annuity conversion interest rate under the plan 
is a variable rate, upon the termination of the plan.
    (v) The method for determining a participant's annuity benefit. 
Examples--
    Example 1. Immediate annuity conversion plan. A cash balance 
plan determines immediate annuity benefits by applying immediate 
annuity conversion factors to the participant's hypothetical account 
balance as of the annuity starting date. PBGC will add interest 
credits to the participant's hypothetical account balance each 
interest crediting period beginning after the plan's termination 
date through the participant's annuity starting date and convert the 
balance to an annuity using the immediate annuity conversion factors 
(specified under the plan as of the termination date) at the 
participant's age on the annuity starting date.
    Example 2. Deferred annuity conversion plan. A pension equity 
plan determines annuity benefits by applying deferred annuity 
conversion factors to the accumulated percentage of the 
participant's final average compensation at cessation of accruals. 
PBGC will determine the current value of the accumulated percentage 
of an active participant's final average compensation as of the 
plan's termination date and convert this value to an annuity using 
the deferred annuity conversion factors specified under the plan as 
of the termination date (followed by an adjustment, if necessary, in 
the annuity using the plan's early retirement provisions to reflect 
the participant's age on the annuity starting date) to determine the 
benefit payable as an annuity at different future ages to the 
participant.
    Example 3. Projected annuity conversion plan. A cash balance 
plan determines annuity benefits by reference to the accrued 
benefit, which is determined by projecting the participant's 
hypothetical account balance with interest credits to the plan's 
normal retirement age. PBGC will add interest credits to the 
participant's hypothetical account balance each interest crediting 
period beginning after the plan's termination date through the 
participant's normal retirement date (or the current date, if later) 
and convert the balance to an annuity payable at that age using the 
immediate conversion factors for that age (or the interest rate and 
mortality table) specified under the plan as of the termination date 
(followed by an adjustment, if necessary, in the annuity using the 
plan's early retirement provisions to reflect the participant's age 
on the annuity starting date).
    (2) Fixed or variable interest rate and related terms. If, during 
the 5-year period ending on the plan's termination date, the plan uses 
the same fixed interest rate to determine a participant's accumulated 
benefit or the amount of any benefit under the plan payable in the form 
of an annuity payable at normal retirement age, PBGC will apply the 
rules in paragraph (b) of this section. If, during the 5-year period 
ending on the plan's termination date, the plan uses a variable rate 
(as defined in paragraph (c)(4)) to determine a participant's 
accumulated benefit or the amount of any benefit under the plan payable 
in the form of an annuity payable at normal retirement age, PBGC will 
apply the rules in paragraph (c) of this section. To the extent that 
the terms of the plan do not satisfy section 204(b)(5)(B) of ERISA and 
section 411(b)(5)(B) of the Code and implementing regulations, or that 
the plan fails to specify provisions necessary to implement applicable 
statutory and regulatory requirements, PBGC will determine plan 
benefits using the rules under paragraph (d) of this section. In the 
case of a PPA 2006 bankruptcy termination, PBGC will apply the interest 
crediting rules in paragraph (e) of this section.
    (3) Benefits affected. (i) General rule. The provisions of this 
Sec.  4022.121 apply to determine the benefits of any participant or 
beneficiary with an annuity starting date after the plan's termination 
date. If the plan administrator issues a notice of intent to terminate 
in a distress termination under ERISA section 4041(c), in compliance 
with Sec.  4041.42 of this chapter, the plan administrator must apply 
the provisions of this Sec.  4022.121 as of the proposed termination 
date specified in the notice of intent to terminate under Sec.  
4041.43. (If the plan fails to qualify for distress termination, in 
accordance with Sec.  4041.42(d), benefits determined using an average 
interest rate must be recalculated using the interest rate otherwise 
applicable under the plan, disregarding the proposed termination date.)
    (ii) Special rule for involuntary terminations. Notwithstanding 
paragraph (a)(3)(i) of this section, if PBGC initiates termination 
proceedings under ERISA section 4042 and the

[[Page 67114]]

termination date is earlier than the date on which PBGC institutes such 
proceedings, PBGC generally will not change the interest rate(s), the 
mortality table, or other conversion factor used by the plan (in 
accordance with ongoing plan provisions) to calculate a benefit payable 
to a participant or beneficiary whose annuity starting date is after 
the termination date but on or before the date on which PBGC institutes 
termination proceedings. PBGC also generally will not change the 
interest rate(s), the mortality table, or other conversion factor used 
by the plan to calculate the benefit of a participant or beneficiary 
who submits a completed election for an annuity benefit during the 
period between the termination date and the date on which PBGC 
initiates termination proceedings. (This special rule does not apply in 
the case of a plan that issues a notice of intent to terminate in a 
distress termination under section 4041(c) and subsequently terminates 
under section 4042, where the termination date is the same as the 
proposed termination date under section 4041(c).) PBGC may in its 
discretion apply the general rule in paragraph (a)(3)(i) instead of the 
special rule in this paragraph (a)(3)(ii) if warranted under the facts 
and circumstances (e.g., to avoid abuse).
    (b) Fixed interest rate. If the interest crediting rate used to 
determine the participant's accumulated benefit (or a portion thereof) 
under the plan is the same fixed rate during each interest crediting 
period for which the interest crediting date is within the 5-year 
period ending on the plan's termination date, PBGC will use the fixed 
rate to apply interest credits to a participant's hypothetical account 
beginning after the termination date and ending on the participant's 
normal retirement date or annuity starting date, as applicable. If the 
interest rate (or tabular adjustment factor) used to determine the 
amount of any benefit under the plan payable in the form of an annuity 
payable at normal retirement age is the same fixed rate (or factor) for 
the entire 5-year period ending on the termination date, PBGC will use 
such fixed rate (or factor) to convert the participant's hypothetical 
account to an annuity.
    (c) Variable rate.
    (1) Use of average rate for determining interest credits after 
termination date.
    (i) If the interest rate used by the plan to determine a 
participant's accumulated benefit (or a portion thereof) under the plan 
was a variable rate during the interest crediting periods in the 5-year 
period ending on the plan's termination date, PBGC will use the average 
of the interest crediting rates used under the plan during the 5-year 
period ending on the termination date to apply interest credits to a 
participant's hypothetical account balance beginning after the 
termination date and ending on the participant's normal retirement date 
or annuity starting date, as applicable.
    (ii) For purposes of paragraph (c)(1)(i), the average is the 
arithmetic average, expressed as an annual rate, of the interest 
crediting rates that applied under the terms of the plan during any 
interest crediting period for which the interest crediting date is 
within the 5-year period ending on the termination date (excluding any 
interest crediting date under the terms of the plan that is distinct 
from the plan's regular interest crediting date, such as the date of 
separation from employment or plan termination).
    (2) Use of average rate for determining annuity amount. If the 
interest rate (or tabular adjustment factor) used by the plan to 
determine the amount of any benefit under the plan payable in the form 
of an annuity payable at normal retirement age is a variable rate 
during the 5-year period ending on the plan's termination date, PBGC 
will determine the arithmetic average of the interest rates (or 
factors) that applied under the terms of the plan during periods for 
which the date of any rate (or factor) change was within the 5-year 
period ending on the termination date. The average rate will apply to 
determine the amount of any benefit under the plan payable in the form 
of a life annuity (i.e., an annuity that continues at least as long as 
the life of the annuitant) payable at normal retirement age, or, in the 
case of an immediate annuity conversion plan that uses a variable rate 
to determine the amount of a benefit, to determine the amount of any 
benefit under the plan payable in the form of a life annuity payable at 
the annuity starting date. In either case, the averaging requirement 
will apply only to determine the amount of the benefit in the automatic 
PBGC form under Sec.  4022.8(b) of PBGC's regulation on Benefits 
Payable in Terminated Single-Employer Plans, e.g., the form a married 
participant or an unmarried participant (as applicable) would be 
entitled to receive from the plan in the absence of an election. If the 
participant or beneficiary elects an optional PBGC form under Sec.  
4022.8(c), PBGC will convert the benefit amount from the automatic PBGC 
form in accordance with that section.
    (3) Replacement with 3rd Segment Rate. If the interest crediting 
rate in any interest crediting period during the 5-year period ending 
on the termination date is a variable rate described in Sec.  
1.411(b)(5)-1(d)(5) of the Treasury regulations or a variable rate that 
is impermissible under Treasury regulations, PBGC will replace such 
rate with the third segment rate under Code section 430(h)(2)(C)(iii) 
for the last calendar month ending before the beginning of the interest 
crediting period. Consistent with Treasury regulations, PBGC generally 
will adjust the third segment rate to account for any maximums or 
minimums to the interest crediting rate that applied in the period 
under the plan's terms, but will not adjust the third segment rate with 
regard to other reductions that applied in the period under the plan.
    (4) Application of average interest rate. The average interest 
crediting rate determined under paragraphs (c)(1), (c)(2), and (c)(3) 
of this section will apply to determine the participant's accumulated 
benefit beginning after the plan's termination date, and ending on the 
participant's normal retirement date (or later annuity starting date), 
or--depending on the terms of the plan--the participant's annuity 
starting date. If the plan's termination date occurs in the middle of 
an interest crediting period, the participant's hypothetical account 
balance will be credited with a pro rata amount of the interest credit 
the participant would have otherwise received under the terms of the 
plan for the portion of the interest crediting period ending on the 
plan's termination date (but this rate will not be included in the 
average interest crediting rate determined under paragraphs (c)(1), 
(c)(2), and (c)(3) of this section). For any subsequent partial 
interest crediting period (e.g., a portion of the interest crediting 
period following the plan's termination date), the participant's 
hypothetical account balance will be credited with a pro rata amount of 
the average interest crediting rate determined under paragraphs (c)(1), 
(c)(2), and (c)(3).
    (5) Definition of variable rate. A variable interest rate is a rate 
of interest that is adjusted at least annually under the plan based on 
a floating interest rate, yield, or rate of return, and that otherwise 
satisfies the requirements of section 204(b)(5) of ERISA and section 
411(b)(5) of the Code and regulations thereunder. It includes interest 
credits determined under a plan based on the greater of 2 or more 
different interest crediting rates (e.g., a fixed rate and a variable 
rate); a floor applied to certain rates; and a rate that can never be 
in excess of certain bond-based rates (see Treasury regulations Sec.  
1.411(b)(5)-1(d)). Also, for purposes of the averaging rules described 
in Sec.  4022.121(c), a variable rate includes any rate that was not 
the

[[Page 67115]]

same fixed rate on any interest crediting date during the interest 
crediting periods in the 5-year period ending on the plan's termination 
date or, in the case of a variable annuity conversion rate (or factor), 
on the date of any rate (or factor) change within the 5-year period 
ending on the termination date.
    (d) Default rules for determining benefits. To the extent that plan 
provisions do not satisfy section 204(b)(5)(B) of ERISA and section 
411(b)(5)(B) of the Code and implementing regulations, or that the plan 
fails to specify provisions necessary to implement applicable statutory 
or regulatory requirements (including requirements in paragraph (d)(5) 
and (d)(6) of this section), PBGC will apply the rules in paragraphs 
(d)(1) through (d)(6) of this section.
    (1) Averaging requirement or averaging methodology. If the plan 
uses a variable rate to determine the participant's accumulated benefit 
or the amount of any benefit payable as an annuity at normal retirement 
age, PBGC will determine a participant's benefits using the arithmetic 
average of the rates of interest used under the plan, as described in 
paragraph (c).
    (2) Mortality table. With respect to the mortality table to be 
used, PBGC will use the mortality table provided under Code section 
417(e) that would apply if the annuity starting date were the plan's 
termination date (i.e., no future projections to the mortality table).
    (3) Interest crediting rate. Solely with respect to a plan's 
failure to specify the interest crediting rate to be used, PBGC will 
compute an average interest crediting rate as the arithmetic mean of 
the 30-year Treasury Constant Maturity rates in effect for five 
calendar months: the calendar month in which the plan terminates, and, 
for each of the preceding four years, the calendar month that is the 
same as the calendar month in which the plan terminates. For example, 
if a plan terminates in July 2009, the relevant months would be July 
2009, July 2008, July 2007, July 2006, and July 2005.
    (4) Annuity conversion interest rate. With respect to an annuity 
conversion interest rate or conversion factor to be used, PBGC will 
compute an average annuity conversion interest rate as the arithmetic 
mean of the 30-year Treasury Constant Maturity rates in effect for five 
calendar months: the calendar month in which the plan terminates, and, 
for each of the preceding four years, the calendar month that is the 
same as the calendar month in which the plan terminates. For example, 
if a plan terminates in July 2009, the relevant months would be July 
2009, July 2008, July 2007, July 2006, and July 2005.
    (5) Five-year period includes plan years before 2008. PBGC will 
take into account the interest rates used under the plan prior to the 
first plan year beginning on or after January 1, 2008 (or the earlier 
or later effective date described in sections 701(e)(3)-(5) of PPA 
2006), if these plan years are part of the 5-year averaging period, for 
purposes of calculating an average rate of interest. For plans in 
existence on June 29, 2005, the rates used before the 2008 plan year 
(or other PPA 2006 effective date for a plan) during the 5-year 
averaging period are not subject to the requirements of section 
204(b)(5)(B) of ERISA and section 411(b)(5)(B) of the Code (except as 
otherwise provided under Treasury regulations) although PBGC will apply 
the rules in paragraph (c)(2) of this section to such rates.
    (6) Statutory hybrid benefit formula in effect less than five 
years. If the statutory hybrid benefit formula under the plan was in 
effect for less than five years, PBGC will use the interest rates used 
under the plan, modified in accordance with this section, during the 
period the statutory hybrid benefit formula was in effect to calculate 
the average rate of interest.
    (7) Examples of application of averaging rules.

    Example 1. Projected annuity conversion plan with replacement of 
3rd segment rate. Upon the termination of a cash balance plan, the 
plan provides a variable index for purposes of determining the 
interest crediting rate. The plan credits interest annually at the 
end of each calendar year through the participant's normal 
retirement date (or the current date, if later). The plan's 
termination date is June 30, 2015. For the two immediately preceding 
interest crediting dates within the 5-year period ending on the 
termination date, December 31, 2014, and December 31, 2013, the plan 
used the annual rate of return on plan assets as of the end of the 
preceding plan year as its interest crediting rate. For the three 
preceding interest crediting dates within the 5-year period, the 
plan used the rates under a Treasury bond index described in Treas. 
Reg. Sec.  1.411(b)(5)-1(d)(4) as of the end of the preceding plan 
year as its interest crediting rate. Based on these rates, the plan 
used interest crediting rates of 8.00%, -3.00%, 4.50%, 5.50%, and 
6.00%, respectively, for the interest crediting periods ending 
December 31, 2014, December 31, 2013, December 31, 2012, December 
31, 2011, and December 31, 2010. When calculating the average rate 
of interest, PBGC would replace the rate of return on plan assets 
with the third segment rate for the last calendar month ended before 
the beginning of each interest crediting period. Assume these third 
segment rates are 6.40% and 6.70%, respectively. PBGC would replace 
the 8.00% interest rate with 6.40% and the -3.00% interest rate with 
6.70%. PBGC would then calculate the average rate of interest as the 
arithmetic average of 6.40%, 6.70%, 4.50%, 5.50%, and 6.00%, which 
equals 5.82% ((6.40 + 6.70 + 4.50 + 5.50 + 6.00)/5). PBGC thus would 
use a pro rata amount of the annual rate of return on plan assets 
for the period ending December 31, 2014, to credit a participant's 
hypothetical account balance for the period from January 1, 2015 
through June 30, 2015, and a rate of 5.82% to apply interest credits 
to a participant's hypothetical account balance each year for the 
period from July 1, 2015, through the participant's normal 
retirement date (pro rated for any partial interest crediting 
period).
    Example 2. Immediate annuity conversion plan with fixed tabular 
conversion factor. The interest crediting rate is the same as in 
Example 1, except that the plan credits interest through the 
participant's retirement date and provides for immediate annuity 
conversion factors at any age. Assume a participant has a 
hypothetical account balance equal to $100,000 as of the plan's 
termination date on June 30, 2015; this balance includes annual pay 
credits through December 31, 2014, and a pro rata interest credit 
through June 30, 2015, based on the plan's interest crediting rate. 
The participant retires on November 1, 2020, at age 55. PBGC would 
determine the participant's hypothetical account balance on November 
1, 2020, by applying interest credits to the participant's $100,000 
hypothetical account balance at an annual rate of 5.82%, credited on 
December 31 of each year and pro rated for any partial crediting 
period. The resulting hypothetical account balance at the 
participant's retirement is $135,216 ($100,000 x 1.0582 \5.33333\) 
(this includes pro rata credit for the periods July 1, 2015 through 
December 31, 2015, and January 1, 2020 through October 31, 2020). 
PBGC would then determine the amount of the participant's benefit 
payable as an annuity by converting the hypothetical account balance 
to an immediate annuity using the plan's immediate annuity 
conversion factor at age 55. The plan provides for an immediate 
annuity conversion factor of 14.2 at age 55. Therefore, the 
resulting monthly annuity benefit for the participant at age 55 is 
$794 ($135,216/(14.2 x 12)).
    Example 3. Immediate annuity conversion plan with variable 
conversion interest rate. The facts are the same as in Examples 1 
and 2, except that the plan used a variable annuity conversion rate 
based on the rates under a Treasury bond index described in Treas. 
Reg. Sec.  1.411(b)(5)-1(d)(4) at the beginning of each plan year. 
The plan's average annuity conversion rate would include rates on 
the date of each rate change that occurred within the 5-year period 
from July 1, 2010 through June 30, 2015. Assume these rates are 
5.25%, 4.75%, 5.50%, 4.50%, and 5.50%, respectively, for the date of 
each rate change on January 1, 2015, January 1, 2014, January 1, 
2013, January 1, 2012, and January 1, 2011. PBGC would calculate the 
arithmetic average of 5.25%, 4.75%, 5.50%, 4.50%, and 5.50%, which 
equals 5.10% ((5.25 + 4.75 + 5.50 + 4.50 + 5.50)/5). The plan 
defines the mortality table used to convert account balances to 
monthly annuity

[[Page 67116]]

benefits to be GAR94. PBGC would then use 5.10% and mortality table 
GAR94 to calculate an annuity conversion factor of 14.4198 at age 
55. Therefore, the resulting monthly annuity benefit for the 
participant at age 55 is $781 ($135,216/(14.4198 x 12)).

    (e) PPA 2006 bankruptcy termination. In the case of a PPA 2006 
bankruptcy termination, PBGC will apply interest credits to a 
participant's hypothetical account balance determined as of the 
bankruptcy filing date by using the following interest rates:
    (i) The interest rate(s) in effect under the plan for the period 
beginning after the bankruptcy filing date and ending on the plan's 
termination date.
    (ii) The interest rate as of the plan's termination date--or if the 
interest rate under the plan is a variable rate as of the termination 
date, the average rate of interest as determined under paragraphs (c) 
or (d) of this section--for the period beginning after the termination 
date and ending on the participant's normal retirement date (or later 
annuity starting date), or--depending on the terms of the plan--on the 
participant's annuity starting date.


Sec.  4022.122  Lump sum payment.

    (a) Lump sum as hypothetical account balance under the plan. 
Notwithstanding Sec.  4022.7 of this part, if the plan provides for a 
single sum payment equal to the balance of the hypothetical account of 
the participant (or the value of the accumulated percentage of the 
participant's final average compensation), PBGC will determine whether 
the benefit is payable as a de minimis lump sum payment and the amount 
of the lump sum payment based on the participant's hypothetical account 
balance (or the accumulated percentage of final average compensation) 
as of the plan's termination date, to the extent payable under title IV 
of ERISA.
    (b) Lump sum based on section 417(e) under the plan.
    (1) In general. If paragraph (a) of this section does not apply 
(e.g., the plan provides that the present value rules of section 417(e) 
of the Code apply in calculating the amount of a single sum payment), 
PBGC will use the methodology in Sec.  4022.7 of this part to determine 
the lump sum value of the benefit. If either this amount or the 
participant's hypothetical account balance (or accumulated percentage 
of final average compensation), as of the termination date, is $5,000 
or less, PBGC will pay the greater of the two amounts as a de minimis 
lump sum payment, except as provided in paragraph (b)(2) of this 
section.
    (2) Exception. If, on or after August 18, 2006, the plan has made 
any lump sum payments based on the hypothetical account balance (or the 
current value of the accumulated percentage of the participant's final 
average compensation) without regard to the present value rules of 
section 417(e) of the Code, or stated in writing its intent to make 
lump sum payments on that basis, PBGC will calculate the lump sum value 
of a benefit, to determine whether the benefit is payable as a lump sum 
and, if so, the amount of the payment, in accordance with paragraph (a) 
of this section.
    (c) Plan does not describe determination of lump sum amount. If the 
plan does not provide for a single sum payment or de minimis lump sum 
payment, or does not describe the calculation of such a payment, PBGC 
will calculate the lump sum value of a benefit, to determine whether 
the benefit is payable as a lump sum and, if so, the amount of the 
payment, in accordance with paragraph (a) of this section.


Sec.  4022.123  Phase-in of guarantee of benefit increases.

    (a) Changes subject to phase-in limitation. For purposes of 
applying Sec.  4022.24 and the phase-in limitations on the guarantee 
under Sec.  4022.25, except as otherwise provided in subsection (b) of 
this section, a benefit increase as defined under Sec.  4022.2 
includes, but is not limited to, a benefit increase that results from a 
change in the plan's--
    (i) Timing or method for crediting interest;
    (ii) Fixed mortality table to another fixed mortality table;
    (iii) Fixed mortality table to a mortality table that updates 
automatically in future years to reflect expected improvements in 
mortality experience (or such updated mortality table to a fixed 
mortality table), or other change in the basis on which a participant's 
hypothetical account balance is converted into a benefit payable as an 
annuity;
    (iv) Fixed interest rate to another fixed interest rate; or
    (v) Basis for crediting interest to a participant's hypothetical 
account or for determining the interest factor used to convert a 
hypothetical account to an annuity. Such a change includes, but is not 
limited to, a change from a fixed rate basis to a variable rate basis 
(or vice versa) or a change from one variable index to another variable 
index.
    (b) Changes not subject to phase-in limitation. Changes resulting 
in a benefit increase under a plan that will not be treated as a 
benefit increase under Sec.  4022.2 include--
    (i) A change that is required to comply with the termination 
requirements of ERISA section 204(b)(5)(B)(vi) and Code section 
411(b)(5)(B)(vi) (e.g., a change in the plan's interest rate to an 
average rate of interest);
    (ii) A change in the interest crediting rate that is permitted, 
notwithstanding section 411(d)(6) of the Code, pursuant to Treasury 
regulations (e.g., a change that is permitted under Treas. Reg. 
1.411(b)(5)-1(e)(3), including a change under certain circumstances to 
the long-term investment grade corporate bond rate);
    (iii) A change in the interest crediting rate that is permitted 
during the amendatory period under section 1107 of PPA 2006, or any 
extension of the amendatory period issued by the Department of the 
Treasury;
    (iv) An adjustment in the interest rate under a specified variable 
rate index used by the plan; and
    (v) An automatic future update in a mortality table specified under 
the plan as of the termination date that reflects expected improvements 
in mortality experience (e.g., the applicable mortality table provided 
under Code section 417(e)(3)).

PART 4041--TERMINATION OF SINGLE-EMPLOYER PLANS

    6. The authority citation for part 4041 continues to read as 
follows:

    Authority:  29 U.S.C. 1302(b)(3), 1341, 1344, 1350.

    7. In Sec.  4041.2, amend the first paragraph by removing the words 
``standard termination, termination date'' and adding in their place 
``standard termination, statutory hybrid plan, termination date''.
    8. In Sec.  4041.28, amend paragraph (c) by redesignating paragraph 
(4) as paragraph (5), redesignating paragraph (3) as paragraph (4), and 
adding a new paragraph (3) to read as follows:


Sec.  4041.28.  Closeout of plan.

* * * * *
    (c) * * *
* * * * *
    (3) Statutory hybrid plans. This paragraph (c)(3) applies only for 
purposes of this part. The plan administrator is deemed to comply with 
section 204(b)(5)(B)(vi) of ERISA and section 411(b)(5)(B)(vi) of the 
Code and implementing regulations issued by the Department of the 
Treasury if the plan administrator distributes plan assets in 
satisfaction of plan benefits consistent

[[Page 67117]]

with the provisions in Sec.  4022.121 of this chapter.
    9. In Sec.  4041.42, amend paragraph (c) by adding a sentence at 
the end to read as follows: ``The plan administrator of a statutory 
hybrid plan must do so consistent with the provisions under part 4022, 
subpart H, of this chapter.''

PART 4044--ALLOCATION OF ASSETS IN SINGLE-EMPLOYER PLANS

    10. The authority citation for part 4044 continues to read as 
follows:

    Authority:  29 U.S.C. 1301(a), 1302(b)(3), 1341, 1344, 1362.

    11. In Sec.  4044.2, amend paragraph (a) by removing the words 
``single-employer plan, substantial owner'' and adding in their place 
``single-employer plan, statutory hybrid plan, substantial owner''.
    12. In Sec.  4044.52, add a new paragraph (e) to read as follows:


Sec.  4044.52  Valuation of Benefits.

* * * * *
    (e) Statutory hybrid plans.
    (1) In general. Except as provided in paragraphs (e)(2) through 
(e)(4) of this section, benefits must be valued under a terminating 
statutory hybrid plan consistent with the general valuation rules of 
this subpart B of part 4044, and the provisions for the calculation and 
payment of benefits described in subpart H of part 4022 of this 
chapter.
    (2) De minimis lump sum exception. If a benefit is payable as a de 
minimis lump sum under Sec.  4022.122, the form to be valued is the 
benefit payable as an annuity in the absence of a valid election under 
the terms of the plan, at the expected retirement age, in accordance 
with Sec. Sec.  4044.51 through 4044.57 of this part.
    (3) Involuntary termination exception. If a benefit payment is 
calculated pursuant to Sec.  4022.121(a)(3)(ii), the benefit will be 
valued based on the interest crediting rate and the annuity conversion 
rate in effect under the plan as of the plan's termination date 
(subject to the rules of Sec. Sec.  4022.121 through 4022.123, 
disregarding Sec.  4022.121(a)(3)(ii)), at the expected retirement age, 
in accordance with Sec. Sec.  4044.51 through 4044.57 of this part.
    (4) Priority category 3 benefits. The amount of the priority 
category 3 benefit under Sec.  4044.13 of this part with respect to a 
participant who was eligible to receive a priority category 3 benefit 
will be determined in accordance with paragraphs (e)(4)(i) through 
(iii) of this section.
    (i) In the case of a termination that is not a PPA 2006 bankruptcy 
termination, the priority category 3 benefit of a participant who is 
eligible to receive an annuity before the beginning of the 3-year 
period ending on the termination date, but whose benefit was not in pay 
status as of that date, will be determined based on the balance of the 
participant's hypothetical account, the interest crediting rate, and 
the annuity conversion factor that the plan would have used had the 
participant retired three years before the termination date (on the 
same day and month as the termination date). The interest rates as so 
determined will be used to apply interest credits from such date 
through the plan's normal retirement age, and to convert the 
participant's hypothetical account balance to an annuity. (If the plan 
provides for immediate annuity conversion factors, the amount of the 
account balance is determined and converted to an annuity as of the 
date three years before the termination date, based on the rates in 
effect as of that date.) The benefits in priority category 3 are 
generally based on the lowest annuity benefit payable under the plan 
provisions during the 5-year period ending on the termination date.
    (ii) In the case of a PPA 2006 bankruptcy termination, the priority 
category 3 benefit of a participant who is eligible to receive an 
annuity before the beginning of the 3-year period ending on the 
bankruptcy filing date, but whose benefit was not in pay status as of 
that date, will be determined based on the balance of the participant's 
hypothetical account, the interest crediting rate, and the annuity 
conversion rate that the plan would have used had the participant 
retired three years before the bankruptcy filing date (on the same day 
and month as the bankruptcy filing date). The interest rates as so 
determined will be used to apply interest credits from such date 
through the plan's normal retirement age, and to convert the 
participant's hypothetical account balance to an annuity. (If the plan 
provides for immediate annuity conversion factors, the amount of the 
account balance is determined and converted to an annuity as of the 
date three years before the bankruptcy filing date, based on the rates 
in effect as of that date.) The benefits in priority category 3 are 
generally based on the lowest annuity benefit payable under the plan 
provisions during the 5-year period ending on the bankruptcy filing 
date.
    (iii) In accordance with Sec.  4044.10, the benefit assigned to 
priority category 3, as determined under paragraphs (e)(4)(i) or 
(e)(4)(ii), may not exceed the amount of the benefit determined as of 
the plan's termination date under the plan provisions as of the 
termination date (including the use of an average rate of interest in 
the case of a variable rate under Sec.  4022.121).
    (5) Example: The plan termination is a PPA 2006 bankruptcy 
termination with a bankruptcy filing date on August 31, 2008. Because 
Participant A had reached his Earliest PBGC Retirement Date, as defined 
in Sec.  4022.10, based on plan provisions in effect on August 31, 
2005, on the same day and month as the bankruptcy filing date but three 
years earlier, Participant A has benefits in priority category 3. The 
plan used the 1-year Treasury Constant Maturity rate of 3.64% for the 
calendar month prior to the bankruptcy filing date (July 2005) to 
determine both the interest crediting rate and the annuity conversion 
rate on August 31, 2005. PBGC would determine Participant A's priority 
category 3 benefit based on the balance of Participant A's hypothetical 
account as of August 31, 2005, by using the interest rate used under 
the plan on August 31, 2005, to apply interest credits from August 31, 
2005, through the normal retirement age (as provided under the plan's 
terms) and convert the participant's hypothetical account balance to an 
annuity. The participant's priority category 3 benefit would be limited 
to the amount of the participant's plan benefit as of the termination 
date, in accordance with Sec.  4044.10, determined by applying interest 
credits based on the interest rate(s) in effect under the plan for the 
period from the bankruptcy filing date through the plan's termination 
date, and the interest rate as of the plan's termination date 
(including the average of the rates of interest under a variable index 
used by the plan during the 5-year period ending on the termination 
date) for the period from the termination date to the normal retirement 
age.
    13. Add new Sec.  4044.76 to subpart B to read as follows:


Sec.  4044.76  Statutory hybrid plans.

    (a) Valuation. This section supplements the general rules in part 
4044 for the valuation of benefits payable in a terminated statutory 
hybrid plan.
    (b) Interest and mortality assumptions. In determining benefits 
under the plan, the plan administrator must value benefits consistent 
with the provisions in Sec.  4022.121 of this chapter.


[[Page 67118]]


    Issued in Washington, DC, this 24th day of October 2011.
Joshua Gotbaum,
Director, Pension Benefit Guaranty Corporation.
[FR Doc. 2011-28124 Filed 10-28-11; 8:45 am]
BILLING CODE 7709-01-P