Menu

PBGC Supports Lifetime Income

Life, Annuity, and Retirement Solutions   |   July 8, 2014
Download   
Share Page

The Pension Benefit Guaranty Corporation (PBGC) recently issued a proposed regulation designed to encourage participants in defined contribution plans (e.g., 401(k) plans) to roll over their account balances to their employers’ existing defined benefit plans upon retirement and elect the plans’ lifetime income option. The proposed regulation is consistent with recently issued Internal Revenue Service guidance and Department of Labor initiatives designed to encourage lifetime income options.

The PBGC administers the single-employer pension plan termination insurance program under the Employee Retirement Income Security Act (ERISA). Generally, when the PBGC becomes responsible for paying benefits upon a plan termination, each participant’s plan benefit is assigned to one or more of six categories specified in ERISA."Mandatory employee contributions" are accorded the second-highest priority. Due to this higher claim on plan assets, an under-funded plan’s assets are usually sufficient to pay all accrued benefits derived from such contributions. The proposed regulation would treat benefits attributable to rollover amounts as an accrued benefit derived from "mandatory employee contributions" thereby assuring, in almost all instances, that the entire accrued benefit will be paid even if the defined benefit plan later terminated and the PBGC became responsible for paying the plan’s benefits.

ERISA also provides that the benefits guaranteed by the PBGC will not be fully paid if a plan has been in effect for less than 60 months or a plan amendment that increased the benefits under the plan became effective within 60 months of a plan’s termination. In either situation, the PBGC guarantee is phased in over a five-year period at 20 percent of such benefit per year. The proposed regulation would exempt from this limitation the accrued benefit attributable to the rollover amount derived from "mandatory employee contributions." This proposal is also designed to assure participants who decide to roll over the defined contribution balances to their employers’ defined benefit plans that such rollover amounts will largely be protected from the limitations that might otherwise apply if their employers’ defined benefit plans later terminated.

Studies show that participants must be encouraged to select a lifetime income option upon retirement. According to a recent Vanguard report, although nearly three-quarters of retirement-age participants kept their retirement savings intact, only about 20 percent of them still had plan account balances five years after termination, and only 20 percent of assets remained in the employer-sponsored plan after five years. The PBGC-proposed regulation mitigates the risk for participants who decide to preserve their defined contribution lump sum distributions by rolling them into their employer’s defined benefit pension plan and electing a lifetime retirement income option.


©2019 Carlton Fields, P.A. Carlton Fields practices law in California through Carlton Fields, LLP. Carlton Fields publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information and educational purposes only, and should not be relied on as if it were advice about a particular fact situation. The distribution of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship with Carlton Fields. This publication may not be quoted or referred to in any other publication or proceeding without the prior written consent of the firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our Contact Us form via the link below. The views set forth herein are the personal views of the author and do not necessarily reflect those of the firm. This site may contain hypertext links to information created and maintained by other entities. Carlton Fields does not control or guarantee the accuracy or completeness of this outside information, nor is the inclusion of a link to be intended as an endorsement of those outside sites.

Subscribe to Publications

Disclaimer

The information on this website is presented as a service for our clients and Internet users and is not intended to be legal advice, nor should you consider it as such. Although we welcome your inquiries, please keep in mind that merely contacting us will not establish an attorney-client relationship between us. Consequently, you should not convey any confidential information to us until a formal attorney-client relationship has been established. Please remember that electronic correspondence on the internet is not secure and that you should not include sensitive or confidential information in messages. With that in mind, we look forward to hearing from you.