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CCH® PENSION AND BENEFITS — 01/20/09

PBGC issues guidance on minimum lump-sum assumptions for terminating single-employer plans

The PBGC has issued a Technical Update which expands guidance provided in prior Technical Update 07-3 on lump-sum valuation issues for single-employer plans that terminate in a standard termination. The Technical Update applies to plans that terminate on or after the effective date of certain amendments to the law as enacted by the Pension Protection Act of 2006 (PPA; P.L. 109-280) and provides guidance on how to apply the PPA changes in the interest rate and mortality table used in calculating minimum lump-sum amounts.

Reflecting PPA changes in calculating minimum lump-sums

Code Sec. 417(e)(3) and the related regulations provide that the present value of any accrued benefit in a defined benefit plan, and the amount of any distribution including a lump sum, must not be less than the amount that is actuarially equivalent to the life annuity payable to the participant at normal retirement, determined using the “applicable interest rate” and the “applicable mortality table.”

The PPA amended Code Sec. 417(e)(3) to change the applicable interest rate and the applicable mortality table for plan years beginning on or after January 1, 2008. In Technical Update 07-3, the PBGC provided guidance on the application of the PPA changes to the calculation of minimum lump-sum amounts where a plan that terminated before the effective date of the changes but distributed plan assets on or after that effective date. However, PBGC Technical Update 07-3 did not address how the PPA changes apply to a plan that terminates after the effective date of the changes and makes a distribution in a plan year subsequent to the plan year the plan terminated (for example, where a plan that terminates in its 2008 plan year pays lump sums in its 2009 plan year). The new Technical Update provides further guidance.

The PPA amendments to Code Sec. 417(e)(3), including the applicable phase-in percentages for years 2008 through 2011, apply to plan years beginning after December 31, 2007. The PBGC therefore believes it should treat the applicable phase-in percentages as part of the PPA change in assumptions. Thus, for a plan that terminates in 2008-2011, the applicable interest rate is determined based on the applicable phase-in percentage in effect for the plan year in which the lump sum is paid (not for the plan year in which the plan terminates). Accordingly, the PBGC has stated in the new Technical Update, “if a plan’s termination date occurs during the phase-in period, the specific interest rates used to calculate the minimum value of a lump sum payment (determined in accordance with the stability period and lookback month in effect on the termination date) reflect the weighting of the 30-year Treasury yields and the new PPA rates under Code section 417(e)(3)(D) on the distribution date.” An example is provided.

Annual updates to the applicable mortality table are part of the base mortality table prescribed under Code Sec. 430(h)(3) , which is projected to improve using specified factors. Because the annual updates are part of the base mortality table, they are included in the law in effect on the termination date. Accordingly, the new Technical Update states, “for a plan with a termination date on or after the first day of the first plan year beginning in 2008, a lump sum would be determined based on the applicable mortality table as specified by the Secretary of Treasury on the plan’s termination date, taking into account projected mortality improvements under the table through the plan year containing the distribution date.”

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