Compliance November 6, 2020

J.C. Penney Pension Plan Taken Over by PBGC

The company recently entered an asset purchase agreement designed to allow it to emerge from Chapter 11 bankruptcy, but the pension plan was not part of the deal.

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The Pension Benefit Guaranty Corporation (PBGC) announced Friday that it would take on administrative and financial responsibility for the J.C. Penney Corp. Inc. Pension Plan, which covers approximately 36,000 current and future retirees.

The takeover comes nearly six months after the J.C. Penney Corp., along with more than a dozen subsidiaries and related entities, filed for Chapter 11 protection in the U.S. Bankruptcy Court in Corpus Christi, Texas, and just a few weeks after the retail company sought court approval of the sale of its operating assets to a joint venture led by Brookfield Asset Management Inc. and the Simon Property Group.

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The joint venture did not agree to assume the pension plan, PBGC reports, leaving it without an ongoing, viable sponsor. Thus, PBGC has stepped in to become trustee of the pension plan.

“This action allows the agency to continue delivering hard-earned benefits as allowed under the law and to provide retirees with information that will help them plan for the future,” PBGC Director Gordon Hartogensis says. “As with all plans we insure, PBGC is acting to protect the retirement security of the J.C. Penney plan participants, and we will continue to do the same for the millions of other workers, retirees and families who rely on us.”

PGBC says retirees will continue to receive benefits, and future retirees can apply for benefits as soon as they are eligible, but PBGC will only pay pension benefits earned by J.C. Penney’s current and future retirees up to the legal limits.

The termination of the plan will be effective as of November 6. PBGC estimates that J.C. Penney’s plan is 92% funded, with approximately $3.3 billion in assets and about $3.6 billion in benefit liabilities.

In September, the McClatchy Co. Retirement Plan, which covers more than 24,000 current and future retirees, was similarly taken over by PGBC as a part of Chapter 11 bankruptcy proceedings, though its estimated funded status was far lower, at 57%.

Compliance November 6, 2020

IRS Publishes Guidance for Terminating 403(b) Plans

In tandem with the Treasury Department, the IRS is also requesting comments on the application of annuity and spousal rights provisions related to distributions in certain 403(b) plans.

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The U.S. Department of the Treasury and the Internal Revenue Service (IRS) have issued guidance for employers and employees related to terminating 403(b) plans that fund benefits through 403(b)(7) custodial accounts.

As explained by the Treasury and IRS, the guidance reflects changes provided for in the Setting Every Community Up for Retirement Enhancement (SECURE) Act. In short, the landmark retirement legislation, which was passed last year, directed the IRS to issue guidance providing that individual custodial accounts (ICAs) may be distributed to participants in-kind upon plan termination, eliminating the requirement of a cash distribution. The SECURE Act requires the guidance to be effective retroactively for tax years beginning on and after December 31, 2008.

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Sources say this change will allow for distributions of custodial accounts under rules similar to those that have been available for annuity contracts under a 403(b) plan.

Specifically, the IRS Revenue Ruling (Rev. Rul.) 2020-23 now provides that 403(b) retirement plans funded through individual or group 403(b)(7) custodial accounts can be terminated through the distribution of individual custodial accounts. The guidance establishes that, if a distributed custodial account continues to comply with certain requirements, no portion of the distributed custodial account is includible in gross income until such amounts are actually paid out of the account to a participant or beneficiary.

The text of Rev. Rul. 2020-23, as is commonly the case, presents a number of theoretical situations to assist in plan sponsor compliance. In one of these situations, the guidance explains that, after the occurrence of an in-kind distribution, the custodial account will be maintained as an ICA of the participant or beneficiary, and it is no longer part of the 403(b) plan from which it came. The distributed ICA is to be maintained by the custodian as a Section 403(b)(7) custodial account that adheres to the requirements of Section 403(b) in effect at the time of the distribution of the ICA—again until amounts are actually paid to the participant or beneficiary. Additionally, the guidance explains, the employer has no material retained rights under the distributed ICA after it has been distributed.

Published alongside Rev. Rul. 2020-23 was Notice 2020-80, which requests comments on the application of annuity and spousal rights provisions related to distributions in certain plans described in Rev. Rul. 2020-23.

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