When faced with rising pension costs, many public pension plan sponsors are pressured to freeze plan benefits. However, a look into five key pension plan provisions that are the biggest drivers of pension costs can help sponsors set sustainable levels of benefits. This Dear Actuary column provides perspective.
Pension Benefit Guaranty Corporation (PBGC) premiums are set to increase in the next two years due to provisions passed in The Moving Ahead for Progress in the 21st Century (MAP-21) law this July. Defined benefit (DB) plan sponsors seeking to lower their PBGC premiums should consider performing mandatory cash outs to ease their pension obligations.
In September’s issue of DB Digest, Jason Hollar offers advice on how companies can reduce pension costs ahead of the rising premiums. Here is an excerpt:
Performing mandatory cash outs is one way plan sponsors can lower their PBGC premiums, which can save money in the long run. The addition of Section 657 of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) made it mandatory for qualified plans processing cash outs to open IRAs for participants with balances between $1,000 and $5,000. Concurrently, Internal Revenue Code Section 401(a)(31)(B)(i) requires the plan administrator to notify participants in writing of their impending cash out and that, unless they elect differently, the funds will be rolled into an IRA. The name of the institution accepting the rollover must be included in the notice and participants must also be informed of how many days they have to respond before the funds will be rolled into the IRA.
…Cashing out small benefits can be a relatively simple process that does not differ much from regular benefit payment processing. The main difference is the required notice described above. Mandatory cash outs are best completed annually prior to the end of the plan year to eliminate carrying over excess benefit liabilities into the new plan year. It is beneficial to perform a death audit and address search of all eligible cash out participants. Performing mandatory cash outs towards the end of each plan year allows a plans sponsor to avoid having to pay PBGC premiums for participants who will soon be cashed out and taken out of the plan’s headcount for the following plan year.
Hollar also provides a case study illustrating this process for plan sponsors. To read the entire article, click here.