This Technical Update provides guidance on determining the present value of the maximum benefit guaranteed by the Pension Benefit Guaranty Corporation (PBGC) for purposes of section 436(d)(3)(A)(ii) of the Internal Revenue Code (IRC) and section 206(g)(3)(C)(i)(II) of ERISA.
I. Background
Under section 103(a) of the Pension Protection Act of 2006 (PPA 2006), there are situations in which the amount of benefit that can be paid in certain prohibited payment forms (e.g., a lump sum) is limited. Specifically, IRC section 436(d)(3) and ERISA section 206(g)(3)(C) provide that if the "adjusted funding target attainment percentage" is at least 60% but less than 80%, the plan may not pay a prohibited payment to the extent the payment exceeds the lesser of:
- 50% of the amount of the payment that would be paid if the restriction did not apply, or
- the present value, determined under guidance provided by PBGC, of the maximum guarantee with respect to the participant under ERISA section 4022.
On August 31, 2007 (at 72 FR 50544), Treasury published a proposed rule on "Benefit Restrictions for Underfunded Pension Plans." This proposed rule provides guidance on the IRC section 436 benefit restrictions, including the definition of "prohibited payment" and the relevant effective dates.
This Technical Update provides guidance on determining the present value of the maximum guarantee for purposes of the 436(d)(3) restriction.
II. Table of Present Values of PBGC Maximum Guarantee
PBGC is issuing a table, containing the present values of the PBGC maximum guarantee for purposes of the 436(d)(3) restriction. The table will show, for the calendar year, the applicable present value amount based on the age of the participant. Providing a table, as opposed to providing a calculation methodology, will reduce the burden on plan administrators, who would otherwise need to do an additional calculation to determine the present value of the maximum guarantee. The table is posted on PBGC's Web site, www.pbgc.gov and updated annually.
The values in the table for a calendar year apply to distributions with annuity starting dates in that calendar year regardless of when the plan year begins. For example, if the IRC section 436(d)(3) limitation applies to a benefit with an annuity starting date in calendar year 2008 for a participant who is age 58 (on the annuity starting date), the amount shown on the 2008 maximum guarantee present value table for age 58 is the relevant amount to compare to 50% of the benefit that would be payable if the 436(d)(3) restriction did not apply.
III. Methodology for Creating Present Value Table
A. PBGC Maximum Guarantee
For purposes of the section 436(d)(3) limitation, the phrase "maximum guarantee with respect to the participant under section 4022" means the maximum guarantee under ERISA section 4022(b)(3)(B). Any other limitations on guaranteed benefits, such as the phase-in limitations under ERISA section 4022(b) or the "accrued at normal" limitation under 29 CFR § 4022.21(a)(1), are disregarded for purposes of creating the present value table.
This maximum guarantee under ERISA section 4022(b)(3)(B) is expressed as a dollar ceiling on the amount of the monthly benefit that may be paid to a plan participant (in the form of a life annuity beginning at age 65) by PBGC. The maximum guarantee, which increases each year, is adjusted for benefits commencing at ages other than age 65 in order to make the maximum guarantee equivalent in value regardless of the age at which a participant starts receiving benefits from PBGC. See section 4022.23(c) of PBGC's regulation on Benefits Payable in Terminated Single Employer Plans, 29 CFR § 4022.23(c). PBGC annually posts on its Web site, www.pbgc.gov, a table showing the maximum guarantee at various ages.
B. Determining the Present Value of the Maximum Guarantee
IRC section 436(d)(3)(A)(ii) requires that the present value of the PBGC maximum guarantee be determined using the "applicable interest rate" and "applicable mortality table" prescribed by section 417(e) of the Internal Revenue Code. When creating the present value table for a calendar year, PBGC will use the applicable interest rate for the preceding August in order to facilitate publishing the table before year-end.
For each age in the table, the present value will be the greater of the present value of the PBGC maximum guarantee that, in the event of a termination, would be payable:
- immediately (as a single-life annuity), or
- commencing at age 65 (as a single-life annuity).
IV. Issuance of Table
PBGC expects to post the 2008 maximum guarantee present value table on its Web site shortly. For future years, PBGC expects to post the maximum guarantee present value table on its Web site at the same time that it issues the maximum guarantee annuity amounts for the coming year (typically early November).
V. Disclaimer
This guidance represents PBGC's current thinking on this topic. It does not create or confer any rights for or on any person or operate to bind the public. If an alternative approach satisfies the requirements of the applicable statutes and regulations, you can use that approach. If you want to discuss an alternative approach (you are not required to do so), you may contact PBGC.
VI. PBGC Contact Points
For questions about this Technical Update 07-4, contact Amy Viener of the Policy, Research and Analysis Department at (202) 229-4000, ext. 3919, or viener.amy@pbgc.gov.