Up to Speed on DB Regulatory Activity?
Attendees at an Oct. 24 workshop session got an update on IRS and PBGC regulatory initiatives in the defined benefit world from two highly regarded experts.
Co-presenters James E. Holland, Jr., Chief Research Actuary at Cheiron, Inc., and Judy A. Miller, Executive Director of the ASPPA College of Pension Actuaries, covered a wide range of recent regulatory developments affecting DB plans.
Proposed Revisions to §417(e)
An IRS proposed regulation would modify the rules for payment of partial lump sum and annuity. Under the old rule, the equation was: the partial lump sum plus the present value of the annuity equals the present value of the benefit using 417(e) rates for calculating present value. Under the new rule, a partial lump sum can be paid without having to meet the present value equation under certain scenarios.
The new rule provides for bifurcation of benefit into a partial lump sum and remaining annuity. There are two paths:
Explicit bifurcation. The plan provides that a specified portion of the accrued benefit will be provided as a lump sum and subject to §417(e) as if the entire accrued benefit. The percentage must be specified, such as 25%; the accrued benefit must be derived from employee contributions; and the amount of accrued benefit must be at the freeze, amendment, or conversion date. Then the remainder is paid in any life annuity form using plan factors.
Explicit bifurcation is required if: (1) a portion of the accrued benefit as of the amendment date, for an amendment that eliminates form subject to §417(e), is retained to meet §411(d)(6); and (2) a lump sum is available for the entire accrued benefit and portion of accrued benefit being paid as lump sum.
Specified amount. The plan provides for distribution of a lump sum amount that is not a specified portion of the accrued benefit (e.g., $10,000). The remaining accrued benefit is determined by subtracting annuity that is the actuarial equivalent of a lump sum amount, using § 417(e) rates, from the total accrued benefit. Then, the remaining amount is paid in any life annuity form using plan factors.
There are “rules of operation” contained in the regulation:
- Separate forms treatment. If two different options are chosen for different parts of the accrued benefit per the new rules, they can be treated separately for § 417(e) purposes.
- Repeated application permitted. Bifurcated benefit can again be split per the rules.
- Requirement to use explicit bifurcation in some cases.
- If different factors apply to a portion of the accrued benefit, and distribution settles some but not all of the accrued benefit, the plan must specify which portion is settled.
- The new rule will apply to distributions with annuity starting dates in plan years beginning on or after Jan. 1, 2017, although taxpayers may elect to apply to earlier years.
2017 Mortality Tables
IRS Notice 2016-50 provides mortality tables for §430 and §417(e) for the 2017 calendar year. Since it is based on existing regulations, it is an update on the 2016 tables. The notice states the IRS’ expectation that revised final regulations will apply for 2018, presumably based on RP 2014 tables.
Closed Plan Relief
IRS Notice 2016-57, issued in April in anticipation of final regs, extended the relief provided in Notice 2014-5 through 2017. Under the notice, plans that closed by Dec. 13, 2013 and satisfied the coverage and nondiscrimination requirements for plan years beginning in 2013 without aggregating with DC plans can test on a benefits basis without triggering the gateway provisions.
§401(a)(4) Proposed Regulations
Proposed changes to the §401(a)(4) regulations are aimed at easing the transition into minimum allocation gateways. The changes would eliminate gateways under certain circumstances, reduce gateways in certain circumstances, and reduce costs associated with replacement plans.
Legislation pending in the U.S. Senate, the Retirement Enhancement and Savings Act of 2016, would put the proposed rules on hold if enacted, Miller noted. However, “the bill’s chances of passage in [the] lame duck [session] are slim,” she said, ‘but they are not ‘none.’” The lame duck session is the only chance for delaying the rules, Miller believes: ‘If it doesn’t get done in the lame duck, the rule will be finalized next year,” she said. Holland agreed, adding that the fate of the rule depends on two things: the makeup of the Senate Finance Committee in the next session of Congress, and the new administration’s view of it.
PBGC Missing Participants Proposal
A PBGC proposed regulation would overhaul and expand existing regulations, expanding to cover non-title IV plans (professional corporation plans, DC plans and multiemployer plans.
Highlights of the proposed changes include:
- a one-time fee, initially $35, per missing distributee, payable when benefits transferred to PBGC
- “missing distributees” would be defined to include those with benefits subject to mandatory cash out who are non-responsive, as well as those who cannot be located
- mandatory for single-employer title IV plans, but voluntary for others
- can either transfer benefits or purchase annuity contract and give information to PBGC
- non-title IV plans could not pick and choose which benefits turned over to PBGC (all or nothing), although comments are invited on this aspect
- new terminology, including “benefit transfer amount,” “plan make-up amount,” “benefit transfer date,” “missing participant interest rate”and “PBGC missing participant assumptions”
- would preserve early retirement subsidies and elective lump sums as part of new payout regime
In addition, PBGC would create an online spreadsheet to value benefit using missing participant assumptions (using expected retirement age, straight life annuity, no expense adjustment or load, etc.), presumably by non-actuaries. Holland speculated that use of this online spreadsheet could be made mandatory.
PBGC Late Premium Relief
A final regulation lowers penalties for late payment of premiums. In general, starting with 2016 plan years, penalties are being cut in half (1% to ½%, 5% to 2 ½%, 50% cap to 25% cap, 100% cap to 50% cap).
The changes include an automatic waiver of 80% of the penalty at higher rate if two conditions are met: a 5-year record of premium compliance (timely filing and no penalty required) and a premium shortfall made no later than 30 days after PBGC notice. Thus, the waiver reduces a 2.5% penalty to 0.5%.