Lump Sum Payment Assumptions

SUMMARY: The PBGC is considering: Discontinuing use of its existing

lump sum assumptions for payment purposes and replacing them with a

modified version of its existing annuity assumptions, effective

sometime after December 2000, and discontinuing calculation and

publication of its existing lump sum interest rates at, or sometime

after, the time the PBGC discontinues their use. Because this may raise

issues for plans and participants, the PBGC is specifically soliciting

public comment on: the assumptions the PBGC should use to value its

lump sums after 2000, how long the PBGC should continue to calculate

and publish its existing lump sum interest rates, if it were to

discontinue their use, and any potential actions that the PBGC could

take to lessen the potential consequences that would arise if the PBGC

were to discontinue use--or calculation and publication as well as

use--of its existing lump sum interest rates. The Internal Revenue

Service has requested that the PBGC solicit public comments on its

behalf concerning the qualification issues that may arise in the

context of possible changes to the PBGC interest rates.

DATES: Comments must be received on or before December 28, 1998.

ADDRESSES: Comments to the PBGC may be mailed to the Office of the

General Counsel, Pension Benefit Guaranty Corporation, 1200 K Street,

NW., Washington, DC 20005-4026, or delivered to Suite 340 at the above

address. Comments to the PBGC also may be sent by Internet e-mail to

[email protected]. Comments to the PBGC will be available for

public inspection at the PBGC's Communications and Public Affairs

Department, Suite 240. Comments to the Internal Revenue Service may be

sent by mail to: Internal Revenue Service, PO Box 7604, Ben Franklin

Station, Attn: CC:EBEO:BR1(REG-209759-95), Room 5226, Washington, DC

20044; or may be hand delivered between the hours of 8 a.m. and 5 p.m.

to CC:DOM:CORP:R (REG-209759-95), Courier's Desk, Internal Revenue

Building, 1111 Constitution Avenue NW, Washington, DC. Alternatively,

comments to the Internal Revenue Service may be submitted via the

Internet at http://www.irs.ustreas.gov/prod/tax__regs/comments.html.

Comments to the Internal Revenue Service will be available for public

inspection at the Freedom of Information Reading Room, Room 1621,

Internal Revenue Building, 1111 Constitution Ave., NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Harold J. Ashner, Assistant General

Counsel, or James L. Beller, Attorney, Pension Benefit Guaranty

Corporation, Office of the General Counsel, Suite 340, 1200 K Street,

NW., Washington, DC 20005-4026, 202-326-4024. (For TTY/TTD users, call

the Federal relay service toll-free at 1-800-877-8339 and ask to be

connected to 202-326-4024.)

SUPPLEMENTARY INFORMATION:

Background

When a plan terminates in a distress or involuntary termination,

the PBGC values the plan's benefits in order to allocate assets to

benefits in accordance with the priority categories established under

section 4044 of ERISA. This allocation affects the amount of the PBGC's

employer liability claim (representing the entire plan underfunding)

and participant benefit entitlements beyond guaranteed benefits (i.e.,

nonguaranteed benefits that are funded either by plan assets or,

pursuant to ERISA section 4022(c), by PBGC recoveries on its employer

liability claims). The PBGC also values each benefit to determine

whether it is de minimis and therefore payable as a lump sum (and, if

so, in what amount) under ERISA section 4022 and 29 CFR part 4022. The

assumptions used to value benefits for purposes of sections 4022 and

4044 are in part 4044 of the PBGC's regulations.

The PBGC has historically derived its interest rate assumptions by

surveying private sector annuity prices and selecting a valuation

interest rate (or rates) that, when combined with the PBGC's mortality

assumptions, accurately replicates the price structure reflected in the

survey. When the PBGC updated its assumptions in 1993 (58 FR 50812

(September 28, 1993)), it noted that its historical interest rates--

derived based on UP-84 mortality assumptions--were lower than they

would have been under the more current GAM-83 mortality assumptions

then in use by many private sector insurers. The PBGC stated, ``Even

though the combination of mortality and interest assumptions accurately

replicates private sector group annuity prices, the disparity between

the PBGC's low interest rates and familiar private sector rates has

resulted in public confusion over the PBGC's interest rate

assumptions.'' 58 FR 5128, 5129 (January 19, 1993).

The PBGC updated its assumptions in 1993 to reflect, among other

things, the more current GAM-83 mortality assumptions (thereby

increasing the PBGC's derived interest rates), but only for benefits

that must be paid as annuities. The PBGC did not extend the updated

assumptions to benefits payable as lump sums because Congress had set

the PBGC lump sum interest rates as the interest rate ceiling (and thus

the value floor) for private-sector lump sums. The use of the more

current GAM-83 mortality assumptions would have increased the lump sum

interest rates and thereby decreased private sector lump sum values.

The PBGC stated that it would defer updating its lump sum

assumptions pending legislative action. See 58 FR 5130-31 (January 19,

1993); 58 FR 50812, 50814 (September 28, 1993). The Retirement

Protection Act of 1994 (``RPA'') eliminated the connection between the

PBGC's lump sum interest assumptions and the interest rates that

private plans are required to use to value lump sum benefits.

In a separate notice published elsewhere in today's Federal

Register, the Pension Benefit Guaranty Corporation is proposing to use

a single set of valuation assumptions--those currently used by the PBGC

to value benefits to be paid as annuities--for purposes of allocating

assets to all benefits under section 4044 of ERISA. The PBGC will

continue to use its existing lump sum interest rates for lump sum

payment purposes under ERISA section 4022 for plans with termination

dates through at least December 2000. This is because, under RPA, plans

may continue to use PBGC interest rates as the ``applicable interest

rate'' under Code section 417(e)(3) for distributions in plan years

beginning as late as December 1999.

New PBGC Lump Sum Assumptions

The PBGC is considering replacing its existing lump sum assumptions

for payment purposes under Part 4022 with a modified version of its

annuity assumptions under Part 4044. The interest and other assumptions

(e.g., expected retirement age) under part 4022 would generally be the

same as those used under part 4044 for annuity valuations. However, the

PBGC will use a unisex mortality table for lump sum payment purposes.

The PBGC is

[[Page 57229]]

currently reviewing its part 4044 mortality assumptions (currently GAM-

83) as part of a separate rulemaking. See March 19, 1997, Notice of

Intent to Propose Rulemaking (62 FR 12982). The specific unisex

mortality table will depend upon the mortality table adopted in that

rulemaking.

In addition, the PBGC is considering whether the amount of lump sum

benefits should include an expense load to reflect that the PBGC

charges an expense load to the employer. In the past, the PBGC lump sum

payment included a load because its lump sum interest rates implicitly

included that load. The annuity assumptions from which the new lump sum

assumptions would be derived provide for an explicit loading charge

that can easily be excluded from lump sum payments. Although the PBGC

charges the employer for a load, it generally incurs at least most of

the expenses reflected in this charge even when it pays a benefit in

lump sum form. See 58 FR 5128, 5131 (January 19, 1993).

Effect on Ongoing and Other Nontrusteed Plans

Only those plans trusteed by the PBGC would be affected directly if

the PBGC were to discontinue use of its existing lump sum interest

rates sometime after 2000. However, plans not trusteed by the PBGC

could be affected indirectly. While the PBGC's lump sum rates will no

longer be the ``applicable interest rate'' for purposes of Code section

417(e)(3) and ERISA section 205(g)(3) after 2000, some plans may

nonetheless continue to provide for the use of the PBGC's lump sum

interest rates (if these rates produce a larger distribution for the

participant than required under Code section 417(e)(3) and ERISA

section 205(g)(3)), on a permanent basis or for a transitional period

that extends beyond 2000. These plans may face interpretive issues or

unintended consequences. For example, if the PBGC continues to

calculate and to publish its historical lump sum interest rates, and a

plan refers to the interest rates used by the PBGC to determine lump

sum values, there is a question whether this should be interpreted as a

reference to the PBGC's new assumptions for determining lump sum values

or the rates the PBGC continues to publish based on its former

methodology. Similar issues may arise in the case of an annuity

contract that provides for use of the PBGC's lump sum interest rates.

In addition to discontinuing use of its existing lump sum

assumptions, the PBGC is considering discontinuing calculation and

publication of its existing lump sum interest rates sometime after 2000

because these rates are derived under the assumption that present

values are calculated using the UP-84 mortality table, which will

become increasingly outdated. The interest rate assumptions that are

derived in connection with the use of the UP-84 mortality table are

lower than those that are derived in connection with the use of a more

current mortality table. The PBGC recognizes that discontinuing

calculation and publication of these rates would raise additional

issues for plans that provide for payment of a lump sum equal to the

value produced by these rates, and may raise issues in the case of

collective bargaining agreements and annuity contracts that reference

these rates.

The Internal Revenue Service has informed the PBGC that, in the

context of possible changes to the PBGC interest rates, employers'

responses (such as plan amendments or plan interpretations that have

the effect of reducing participants' benefits) might cause plans to

fail to satisfy the plan qualification requirements of the Internal

Revenue Code. The Internal Revenue Service notes that, depending on

plan language, issues may arise regarding whether a plan provides

definitely determinable benefits, is operated in accordance with its

terms, or complies with the requirements of section 411(d)(6). For

example, a violation of section 411(d)(6) may occur if a plan is

amended to eliminate use of the PBGC's existing lump sum interest rates

(or to substitute an alternative interest rate for the PBGC's existing

lump sum rates) with respect to benefits that have accrued before the

later of the adoption date or the effective date of the amendment,

unless the amendment is within the confines of the explicit relief

provided in connection with plan amendments that substitute the 30-year

Treasury rate for the PBGC interest rate under section 767(d)(2) of RPA

and 26 CFR 1.417(e)-1(d)(10)(iii) through (v).

The PBGC is soliciting comments on (1) the assumptions the PBGC

should use to value its lump sums after 2000, (2) how long the PBGC

should continue to calculate and publish its existing lump sum interest

rates, if it were to discontinue their use, and (3) any potential

actions that the PBGC could take to lessen the potential consequences

that would arise if the PBGC were to discontinue use--or calculation

and publication as well as use--of its existing lump sum interest

rates. The PBGC will not implement these changes without providing

adequate lead time.

The Internal Revenue Service has requested that the PBGC solicit

public comments on its behalf concerning the qualification issues that

may arise in the context of possible changes to the PBGC interest

rates, including the relief under Code section 411(d)(6)(B) that may be

appropriate to permit employers to make plan amendments to accommodate

the PBGC's change in lump sum interest rate assumptions. For example,

it may be appropriate for the Internal Revenue Service to permit an

employer to substitute an interest rate that is roughly comparable to

the PBGC's existing lump sum rates. Comments on this topic may be sent

to the Internal Revenue Service (see Addresses).

Issued in Washington, DC, this 21st day of October 1998.

David M. Strauss,

Executive Director, Pension Benefit Guaranty Corporation.

[FR Doc. 98-28626 Filed 10-23-98; 8:45 am]

BILLING CODE 7708-01-P