What Happens?

[Andy the Actuary]

Let's say a year ago a Plan purchases an annuity contract from a life insurance company for a monthly pension that exceeds the PBGC guaranteed benefit. Now, the Plan is terminating in a distress situation and the PBGC takes over.

How or does the PBGC work with the insurer to reduce benefits and receive compensation?

[My 2 cents]

Was the sponsor in bankruptcy at the time? One presumes that at the time of the purchase, there would have been no statutory or regulatory bars to making the purchase (i.e., if the participant was not one of the top-25 HCEs, the AFTAP was at least 80% and the sponsor was not in bankruptcy, and if the participant was in the top-25, then there would have either been funding after the purchase at 110% on at least a minimum funding basis under MAP-21 or the purchase was less than 1% of the Funding Target, or there was sufficient security set up). If the sponsor was not in bankruptcy and accelerated payments were not limited at the time of purchase, it would seem that the PBGC should have no legitimate basis for trying to unwind the purchase. If there were statutory or regulatory limitations on accelerated distributions, buying an annuity would violate those restrictions. If security was set up, well, this is the sort of situation that security is needed for (to enable the PBGC to claw back at least part of the purchase).

Upon the purchase of the annuity, the annuitant ceases to be a plan participant and would not appear to have to be reported to the PBGC as such. The ability of the plan to buy an annuity would be akin to its ability to pay a full lump sum. Have you ever heard of the PBGC going after a participant who was validly paid an unrestricted lump sum a year before the plan sponsor declared bankruptcy or before the plan sponsor filed for a distress termination just because the benefit amount was in excess of the PBGC guarantee?

[Andy the Actuary]

What about 4044(a) allocation priorities regarding benefits that have been in payout for fewer than 3 years?

[My 2 cents]

Would it not be the case that as of the date of plan termination, there would be no liabilities for the person for whom the annuity was purchased and no assets remaining with the plan to be allocated?

All assuming, of course, that the annuity purchase itself can withstand scrutiny under the non-discrimination rules and under the restrictions on accelerated distributions. Unless it is a plan big enough for a benefit in excess of the PBGC guarantee to represent less than 1% of the total liability or the participant was not in the top-25 HCE group, to have purchased the annuity would have required that (nominally, at least) the annuity purchase would have left behind assets sufficient to cover 110% of the plan liabilities (even if only on a MAP-21 basis). If the plan was subject to IRC 436 restrictions, the annuity should not have been purchased. Making a commitment to cover 100% of someone's benefit is roughly equivalent to paying a lump sum. If a lump sum could not have been paid, an annuity should not have been purchased. Then there would be trouble.

[Andy the Actuary]

Facts were stated. Pleasant situation became a distress situation. Had the Plan been making annuity payments directly, PBGC would reduce payments. Assume this is a given. So what does PBGC do if insured annuity purchased or lump sum distributed?