Compliance November 24, 2014

PBGC Publishes Final Rule About DC to DB Rollovers

The Pension Benefit Guaranty Corporation (PBGC) is publishing a final rule for transferring defined contribution (DC) plan accounts into a defined benefit (DB) plan.
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The agency says it hopes to encourage people to get lifetime income by removing potential barriers to moving their benefits from DC plans to DB plans. The final rule, slated for publication in the Federal Register November 25, removes the fear that the amounts rolled over would suffer under guarantee limits should PBGC step in and pay benefits.

The Pension Benefit Guaranty Corporation (PBGC) issued a proposed rule in April. At the time, Lonie Hassel, principal at Groom Law Group in Washington, D.C., told PLANSPONSOR, “The rollover rules would only be relevant if the DB plan that DC assets were rolled into was later terminated, did not have enough assets to pay benefits, and was turned over to the PBGC.”

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The proposed rules provide protections for the rollover amounts derived from employee contributions from PBGC maximum benefit limitation rules. First, explained Hassel, when a plan terminates, the PBGC has a maximum benefit above which it will not pay. For plans terminating in 2014, that’s about $59,000 per year for a single-life annuity for a participant at age 65. The rollover benefit derived from employee contributions is not subject to that maximum, she said.

In addition, there is a five-year phase-in rule that says generally, if DB benefits have been increased in the five years before termination, the increase will be phased in over five years after termination. That does not apply to the rollover benefit derived from employee contributions, said Hassel.

Text of the final rule is here.

Benefits November 24, 2014

Illinois Pension Reform Found Unconstitutional

An Illinois judge has ruled that pension reforms signed into law in December 2013 violate a clause of the Illinois state constitution.
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Judge John W. Belz, of the Illinois Circuit Court for the 7th Judicial Circuit in Sangamon County, Illinois, found the 2013 law “without question” diminishes and impairs the benefits of membership in state retirement systems. This is in violation of the Pension Protection Clause of the state constitution, in which “the legislature could not have been more clear that any attempt to diminish or impair pension rights is unconstitutional,” Belz wrote in his opinion.

Belz listed provisions of the pension reform law that diminish benefits for public employees, including that the law reduces the annual cost-of-living increases for retirees and raises the retirement age for workers 45 and younger. He rejected the government’s argument that the reform law is justified as an exercise of the state’s sovereign or police powers. “The Pension Protection Clause contains no exception, restriction or limitation for an exercise of the State’s police powers or reserved sovereign powers,” he wrote.

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The lawsuit was filed in January by We Are One Illinois, a coalition of unions, on behalf of about two dozen retired employees. It followed several other lawsuits filed by retirees.

In July, in a combined ruling, the Illinois Supreme Court decided retiree health benefits for public employees are protected benefits under the Pension Protection Clause of the state’s constitution.

In a statement following Belz’s ruling, We Are One Illinois said, “We are gratified by the court’s ruling today, which makes clear that the Illinois Constitution means what it says. The court held today, as our unions have long argued, that the state cannot simply choose to violate the Constitution and diminish or impair retirement benefits if politicians find these commitments inconvenient to keep.”

The court opinion is at http://www.weareoneillinois.org/documents/SangamonCounty.pdf.

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