Compliance October 27, 2014

PBGC Announced Benefit Maximum Increase

October 27, 2014 (PLANSPONSOR.com) – The Pension Benefit Guaranty Corporation (PBGC) increased the annual maximum guaranteed benefit for a 65-year-old retiree in a single-employer plan to $60,136 for 2015.
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This is up slightly from the 2014 limit of $59,318, according to the PBGC. The increase is not retroactive; payments to retirees whose plans terminated before 2015 will not change. In addition, the guarantee for multiemployer plans has not changed, PBGC says.

The PBGC maximum guarantee for participants in single-employer plans is determined using a formula prescribed by federal law that calls for annual increases. The formula provides lower amounts for people who begin getting benefits from PBGC before age 65, reflecting the fact that they will receive more monthly pension checks over their expected lifetime. Conversely, amounts are higher for benefits starting at ages above 65. The formula also calls for reducing the amount for retirees who choose a payment form that continues benefits to a beneficiary after the retiree’s death.

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The maximum annual guarantee limits for 2015 for sample ages and payment forms are as follows:

  • For an individual at age 65, the annual maximum single life annuity is $60,136, and the annual maximum joint and 50% survivor annuity is $54,123;
  • For an individual at age 60, the annual maximum single life annuity is $39,098, and the annual maximum joint and 50% survivor annuity is $35,180; and  
  • For an individual at age 55, the annual maximum single life annuity is $27,061, and the annual maximum joint and 50% survivor annuity is $24,355.

The above figures assume spouses collecting benefits are the same age, the PBGC notes, meaning real-world examples may differ for married couples selecting annuities with survivor benefits. Amounts for other ages are posted on the PBGC’s Maximum Monthly Guarantees table on PBGC’s website.

The PBGC maximum guarantee for participants in multiemployer plans is also based on a formula prescribed by federal law. Unlike the single-employer formula, the multiemployer guarantee is not indexed (i.e., it remains the same from year to year) and does not vary based on the retiree’s age or payment form. Unlike the single-employer formula, it varies based on the retiree’s length of service.

In addition, the multiemployer guarantee structure has two tiers, providing 100% coverage up to a certain level and 75% coverage above that level. For a retiree with 30 years of service, the current annual limit is 100% of the first $3,960 and 75% of the next $11,760 for a total guarantee of $12,870. This limit has been in place since 2001. 

The new single-employer PBGC limits generally apply for participants whose plan terminates in 2015. However, if a plan terminates in 2015 as a result of a bankruptcy that began in an earlier year, the limits in effect for that earlier year apply, according to the PBGC.

In most cases, the single-employer PBGC guarantee is larger than the pension earned by people in such plans. In fact, according to a 2006 study, almost 85% of retirees receiving PBGC benefits at that time received the full amount of their earned benefit.

Also important to note, the limits shown above represent the cap on what PBGC guarantees, not on what PBGC pays. In some cases, PBGC pays benefits above the guaranteed amount. Whether that happens depends on the retiree’s age and how much money was in the plan when it terminated.

For more information about how the single-employer guarantee works, see the Pension Guarantees guide on PBGC.gov.

Compliance October 27, 2014

Regulators Doing More to Ensure Plan Compliance, Outcomes

October 27, 2014 (PLANSPONSOR.com) – Recent actions from regulators show a focus on compliance and improved outcomes for participants.
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The Internal Revenue Service’s (IRS) latest area of interest, according to Ilene H. Ferenczy, an attorney with Ferenczy Benefits Law Center, is processes. Processes could include policies, systems, computer programs and activities of the plan sponsor, she explains.

“The IRS believes plans with proper internal controls are better administered; maybe they won’t have to review as much and can get out of reviews faster,” she told attendees of the 2014 Association of Pension Professionals and Actuaries (ASPPA) Annual Conference.

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Ferenczy also noted that “theoretically,” sanctions due to errors found on audit will be lower if plan sponsors have proper internal controls in place, because controls “are an ‘equity’ in the plan sponsor’s favor.” She added that the IRS was going to use information it gathered in its 401(k) questionnaire to issue some guidance about proper internal controls, but that effort will not be executed.

Regulators are also focused on lifetime income. Just last week the IRS issued guidance that allows for deferred annuities to be included in target-date funds’ underlying investments. S. Derrin Watson, an attorney with SunGard, told conference attendees the inclusion of annuities in certain TDF series will mean, for those series, plan participants must select or be placed in the TDF investment corresponding with their expected retirement age or date. “Now, I could invest in a 2040 fund even though that is years from my expected retirement age,” he said. “TDFs with annuities will be more restrictive than this because now the funds with the earliest dates may include longevity annuities.”

In a separate discussion at the conference, speakers noted that an accompanying letter from the Department of Labor shows the DOL obviously understands employer’s concerns regarding fiduciary responsibility if participants are offered annuities. In its letter, the DOL noted that plan sponsors are responsible for selecting the TDF manager, but the TDF manager would have responsibility for selecting the annuity and annuity provider.

Ferenczy and Watson also mentioned a few items plan sponsors and advisers may look for from regulators. The IRS is working on an updated Employee Plans Compliance Resolution System (EPCRS). The update is expected it to address fixes for automatic enrollment errors, and the ability to self-correct loan errors.

Watson also said he expects to see more adjustments to the 403(b) pre-approved plan program. The IRS has already delayed the deadline for submissions of pre-approved documents, modifying the rules for submitting volume submitter plans.

Ferenczy said DOL Assistant Secretary Phyllis Borzi has announced that plan fiduciaries that perform any misconduct related to retirement plans will soon have a public record for that misconduct. The DOL intends to keep a prohibited persons list that those looking to hire someone to work for their plans may access.

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