PBGC Proposes Rules on Determining Benefits in Terminating Hybrid Plans

• Statutory Hybrid Plan. The regulations will add a definition of statutory hybrid plan that cross-references the definition under the relevant Treasury regulations. Under that definition a statutory hybrid plan is a defined benefit plan that contains a benefit formula that is either a lump sum-based benefit formula (where the benefit is expressed as the current balance of a hypothetical account or as the current value of an accumulated percentage of final average compensation) or a benefit formula that has a similar effect.
• Determination of Benefits. The PBGC will follow plan terms to the extent they are consistent with the PPA changes, in determining the participant's annuity benefit payable at normal retirement age. These terms would include the plan's basis and timing for determining interest credits, the frequency of applying interest credits, the interest rate and mortality table for determining the amount payable as an annuity at normal retirement age, and the averaging methodology to be used on plan termination if the interest crediting rate or annuity conversion interest rate is a variable rate.
• Mortality Table. If the plan's mortality table is updated automatically to reflect expected improvements in mortality experience — for example, the applicable mortality table under Code § 417(e)(3) — the PBGC will determine benefits based on the mortality table as of the termination date taking into account future adjustments for expected mortality improvements through each participant's annuity starting date.
• Variable Interest Crediting Rate. If the interest rate used by the plan to determine a participant's accumulated benefit (or a portion thereof) was a variable rate during the interest crediting periods in the 5-year period ending on the plan's termination date, the PBGC will use the average of the interest crediting rates used during that 5-year period 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). The average is the arithmetic average of the interest crediting rates that applied under the plan during any interest crediting period for which the interest crediting date is within the 5-year period.
• Replacement with Third Segment Rate. If the interest crediting rate in any interest crediting period during the 5-year period is the rate of return on plan assets (or a variable rate that is impermissible under the Code § 411(b)(5) Treasury regulations regarding the permissible interest crediting rates for hybrid plans) the PBGC will replace that rate with the third segment rate under Code § 430(h) for the last calendar month ending before the beginning of the interest crediting period. The PBGC generally will adjust the third segment rate to account for any maximums or minimums that applied in the period under the plan's terms.
• Variable Rate for Determining Annuity Payable at Normal Retirement. If the interest rate or factor used to determine the amount payable in the form of an annuity at normal retirement age is a variable rate during the 5-year period ending on the plan's termination date, the 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 change was within the 5-year period. The average rate will apply to determine the amount of any benefit under the plan payable in the form of a life annuity payable at normal retirement age (or, in an immediate annuity conversion plan, to determine the amount 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 (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, the benefit amount will be converted from the automatic PBGC form in accordance with the existing provisions under PBGC regulation § 4022.8(c).
• Insufficient Plan Terms. To the extent the terms of the plan do not satisfy the PPA requirements (i.e., Code § 411(b)(5)(B) and ERISA § 204(b)(5)(B) and the implementing regulations) or they fail to specify the provisions necessary to implement those requirements, the PBGC will determine benefits using a set of default rules that are spelled out in the regulation. The default provisions include the interest averaging provisions that are delineated above, use of the Code § 417(e) mortality table that would apply if the annuity starting date were the plan's termination date (i.e., with no future projections) and, in the event no interest crediting rate is specified, a default interest rate that is based on the 30-year Treasury Constant Maturity rates.
• PBGC Lump Sum. 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), the 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. However, the PBGC will continue to use the present value methodology if the plan states that the present value rules of Code § 417(e) apply in calculating the amount of the single-sum payment. In that case, if either of the amounts (i.e., the hypothetical account or the present lump sum value as determined) is $5,000 or less as of the termination date, the PBGC will pay the greater of the two amounts as a de minimis lump sum payment. Notably, if 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 (or stated in writing its intent to make lump sum payment on that basis) the PBGC will calculate the lump sum value accordingly for this purpose (i.e., for determining whether the benefit is payable as a de minimis lump sum payment and the amount of the lump sum payment).

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Copyright 2011, Deloitte.

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