Priority Alert: 2021 RS Plan Lump Sum Cash Payment Interest Rates Issued
The Internal Revenue Service has issued the interest rates used to calculate Retirement Security (RS) Plan lump sum cash payments for 2021.
Different rates are used depending on when an employee earned benefits through the RS Plan. The GATT rate (30-year Treasury rate) generally applies to benefits earned before 2008. The Pension Protection Act (PPA) rates generally apply to benefits earned after 2007. PPA employs three rate segments in order to apply an interest rate to each annuity period that would be considered consistent with the period from retirement to the time a particular annuity payment would have been made.
In the past, interest rates from the Pension Benefit Guaranty Corp. (PBGC) were used for calculating the portion of benefits accrued before December 31, 1999. The PBGC announced in September that it would no longer be publishing annual interest rate assumptions, effective December 31, 2020. Even though the number of RS Plan participants affected by this change is small, NRECA has adopted a temporary methodology for calculating lump sums that effectively extends the PBGC interest rate for one more year. This extension is intended to provide affected participants more time to make retirement decisions.
The RS Plan administration system is being updated to reflect the sunsetting of the PBGC rate, with an expected completion date in Q3 2021. Even though NRECA’s extended PBGC rate will no longer apply to benefit calculations for retirement dates in 2022 and beyond, it will still appear on certain participant benefit estimates until the system update is complete. Participants with calculations for retirement dates in 2022 and later should disregard the PBGC rate when reviewing their projections.
Each interest rate is used in combination with a different mortality table, which can have a significant effect on the lump sum amount.
| Rate | 2020 | 2021 |
| PBGC | 0.25% | 0.25% |
| GATT | 2.28% | 1.62% |
| PPA Segment 1 (payment in first five years) | 2.04% | 0.53% |
| PPA Segment 2 (payment in next 15 years) | 3.09% | 2.31% |
| PPA Segment 3 (payment out further than 20 years) | 3.68% | 3.09% |
What does this mean for RS Plan participants considering retirement?
Generally, the value of a lump sum benefit increases when interest rates decrease. As a result, the lump sum benefit for a particular age generally will be higher using the 2021 rates than using the 2020 rates.
Because the change in interest rates is significant, in most instances the 2021 lump sum amount is expected to be higher than the 2020 lump sum amount. However, a number of factors affect a lump sum payment, including pay, benefit service and age. This means that while the lump sum interest rate changes listed above might cause a lump sum amount to be higher in 2021 compared with 2020, other factors could offset some or all of that increase in the lump sum amount.
As a reminder, benefits administrators have the ability to model and view most RS Plan benefit projections on the Employee Benefits website. Simply go to My Co-op’s Retirement > RS Plan Projections. Please note: RS Plan projections ordered through the Employee Benefits website as of Monday, December 14, 2020, will reflect the new rates.
Considering lump sum payments
Participants considering lump sum payments should thoughtfully review all distribution options and their personal plans for retirement income. Taking a lump sum provides the benefit all at once, but participants must consider how they plan to save, spend or invest their lump sum. Participants who choose annuity forms of payment are not affected by lump sum interest rate changes.
An educational flier, “The Answers You Need, Weighing Your RS Plan Payment Options,” is available for you to share with employees. This flier discusses all benefit options in the RS Plan, including a broad selection of annuity choices, and describes how lump sums are calculated and how fluctuations in interest rates can affect lump sum values. The flier also reminds employees to review their overall financial readiness before making final decisions about retiring. Members of NRECA’s Personal Investment & Retirement Consulting team are also available for one-on-one conversations by calling 866.673.2299, option 6, or by email at pirc@nreca.coop.
For questions, contact the Member Contact Center at 866.673.2299 or contactcenter@nreca.coop.