October 31, 2019

PBGC Proposes Change in Interest Rates for Plans that Still Refer to PBGC Lump-Sum Rates

The Pension Benefit Guaranty Corporation (PBGC) recently issued a proposed regulation that would change the interest rates (PBGC rates) that PBGC publishes for private sector lump-sum calculations. Most plans no longer refer to PBGC rates, so the proposed change would affect only those few plans that still use those rates.

Background

Internal Revenue Code Section 417(e)(3) specifies the variable interest rates that plans must use to convert an annuity to an accelerated payment form, such as a lump sum. Originally, the required interest rates were based on PBGC rates. The Retirement Protection Act of 1994 amended Section 417(e)(3) to move away from PBGC rates for distributions in plan years beginning after December 31, 1999.

Some plans continued to refer to PBGC rates, providing that lump-sum payments must be equal to the greater of the present values determined using the current-law Section 417(e)(3) rates and PBGC rates. Additionally, plans may have continued to reference PBGC rates for other reasons, including converting to other optional forms.

In 2000, PBGC started publishing two sets of interest rates, one for valuing annuities for distress and involuntary terminations (i.e., plans that it trustees), and the other for private plans. While a number of plans referring to PBGC rates were amended at that time to clarify the set of rates to which they were referring, others were not. Until now, that lack of clarity did not matter because both sets of interest rates have been the same.

The Proposed Change

PBGC is proposing changes to both sets of rates. It proposes to change the rates that it currently uses for trusteed plans from its own rates to the current-law Section 417(e)(3) rates, and it proposes to change its private plan rates to the following fixed rates, which will not vary in the future:

  • A deferred rate of 4 percent until the annuity starting date
  • An immediate rate of 1.5 percent from the annuity starting date.1

Implications for Plan Sponsors

Whether the change proposed for private plan rates will affect the lump-sum payments made by a plan that refers to PBGC rates will depend on the plan’s current language and whether that language is interpreted to refer to PBGC trusteed plan rates, which would be the Section 417(e)(3) rates, or to PBGC private sector rates, which would be the new 4 percent/1.5 percent PBGC rates.2 If the proposal is finalized as drafted, the impact on a plan that refers to the private plan fixed rates could be material if interest rates rise significantly over time.

Comments

November 29, 2019 is the deadline for submitting comments to PBGC.

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1 PBGC determined these new private plan rates by looking at average rates for the last 120 months before July 1, 2019.
2 The preamble to the proposed regulation notes that plan documents that include general references to PBGC's lump-sum interest rates or to the rates used by PBGC “… may have an ambiguity that should be resolved.”

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