The Pension Benefit Guaranty Corporation finalized new rules Tuesday concerning benefit payments from terminated single-employer plans. The changes are largely clarifications of ambiguously worded regulations and the codification of existing practices.
The final rule explains that when a single-employer plan terminates, either under a distress situation or in an involuntary termination, the PBGC normally becomes the trustee for that plan and is responsible for administering its benefits. Once under the PBGC’s trusteeship, lump sum payments are not permitted unless the amount payable to a beneficiary is “de minimis,” meaning $5,000 or less. The second exception is if a participant wants their mandatory contributions returned as a lump sum.
The PBGC clarifies that this general prohibition on lump sum payments applies even when the participant requested a lump sum prior to plan termination, but it has not yet been paid out. The PBGC will not honor the request “regardless of the reason for not paying the lump sum” unless one of the other two exceptions apply. The rule explains that investigating instances in which a participant requested a lump sum would require a burdensome “facts and circumstances analysis” that the PBGC lacks the resources to conduct.
“De minimis” amounts, for the purpose of the lump sum exception, were also clarified. Under the final rule, PBGC regulations will refer to Section 203 of the Employee Retirement Income Security Act instead of a specific dollar amount. The de minimis threshold is currently $5,000, but it will be updated to $7,000 starting in 2024.
The final rule also clarifies that an estate cannot elect a life annuity upon the death of the participant. Current regulations state that an estate may elect a lump sum, which implies that the traditional alternative, a life annuity, would also be available. However, the final rule states that “a life annuity is inappropriate for an estate” and clarifies that an estate must take a lump sum payment if the participant dies.
Lastly, the PBGC clarified its rules for calculating plan assets, liabilities and a sponsor’s net worth. When a plan terminates, the PBGC attempts to recoup assets from the sponsor to make up any unfunded liabilities, considering the net worth of the sponsor in the process. The final rule explains that the PBGC currently uses a “fair market value” for assets which are easy to appraise and “fair value” for assets, such as private equity, which are harder to appraise. The final rule updates PBGC regulations to codify this existing practice.