The PBGC has recently initiated efforts to enhance retirement security for Americans by promoting lifetime income options (i.e., annuitized benefits). As part of these efforts, as well as those of the IRS and U.S. Department of Labor, the PBGC issued final regulations regarding the treatment of rollovers from defined contribution plans to defined benefit plans for purposes of the PBGC’s statutory guarantees under Title IV of ERISA. The PBGC regulations are intended “to encourage people to get lifetime income by removing barriers to moving their benefits from defined contribution plans to defined benefit plans.” The guidance also “removes the fear that the amounts rolled over would suffer under guarantee limits should [the] PBGC step in and pay benefits.”
Under the final regulations, certain amounts rolled over from defined contribution plans will not be subject to PBGC’s maximum insurance benefit levels or to the PBGC’s five-year phase-in limitation for the guarantee of benefit increases. The PBGC also would treat these amounts as covered in priority category two (PC2) under the PBGC’s asset allocation rules. This status means that the benefits would have a higher claim on plan assets than most benefits owed under a terminated pension plan. However, unlike other PC2 benefits, the PBGC generally will not pay out any benefits attributable to a rollover as a lump sum and, for purposes of pre-retirement death benefits, the PBGC will include those benefits in the value of the plan’s qualified preretirement survivor annuity for the surviving spouse of a deceased participant.
Significantly, this special treatment will only apply to rollovers that are treated as mandatory employee contributions for purposes of Section 411 of the federal tax code. Code section 411(c) generally provides that the accrued benefit derived from mandatory employee contributions to a pension plan is equal to the employee’s contributions accumulated to normal retirement age using certain specified rates and converted to an actuarially equivalent annuity commencing at normal retirement age using an interest rate under Code section 417(e)(3) as of the determination date.
IRS Revenue Ruling 2012-4 treats rollover amounts from defined contribution plans to defined benefit plans as mandatory employee contributions for purposes of Section 411(c). However, the Revenue Ruling provides that if a plan provides an annuity with respect to a rollover in excess of the amount determined under the rules of Section 411(c) (such as by using more favorable actuarial conversion rates), the excess portion of the benefit would be subject to the requirements applicable to benefits attributable to employer contributions. As a result, benefits attributable to these excess rollover amounts would not be treated as mandatory employee contributions by the PBGC.
Rollovers from defined contribution plans to defined benefits plans have been a plan design option for many years. However, plan participants may have been wary of using these rollovers – particularly in light of recent pension plan failures. As employers continue to consider ways to control retirement costs while still providing meaningful retirement benefits for employees, the PBGC’s new regulations should help make rollovers from defined contribution plans to pension plans more palatable for both employers and employees. The new regulations will become effective on December 26, 2014.