RS PLAN: 2016 Lump Sum Interest Rates Issued
The Internal Revenue Service and Pension Benefit Guaranty Corp. (PBGC) have issued the interest rates used to calculate Retirement Security (RS) Plan lump sum payments for 2016.
Different rates are used depending on when an employee earned benefits within 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 segmented rates to apply, among other things, an interest rate considered consistent with the period from retirement to the time a particular annuity payment would have been made. The PBGC rate generally applies to benefits earned before 2000. Each interest rate is used in combination with a different mortality table, which can have a significant effect on the lump sum amount.
| Rate | 2015 | 2016 |
| PBGC | 1.00% | 1.25% |
| GATT | 3.04% | 3.03% |
| PPA Segment 1 (payment in first five years) |
1.40% | 1.76% |
| PPA Segment 2 (payment in next 15 years) |
3.88% | 4.15% |
| PPA Segment 3 (payment out further than 20 years) |
4.96% | 5.13% |
What does this mean for the lump sum calculations of RS Plan participants considering retiring?
Generally, the value of a lump sum benefit decreases when rates increase. While the GATT rate is nearly the same as in 2015, the PBGC and PPA rates are higher than last year’s rates. As a result, the lump sum factor for a particular age generally will be lower using the 2016 rates than using the 2015 rates. Because the change in interest rates is relatively small, in most instances the changes in lump sums will be similarly small. However, a number of other factors affect a lump sum payment, including the participant’s age, final average salary, benefit service and the timing of any employer plan amendments. This means that while the lump sum interest rate change might cause a lump sum to be lower in 2016 compared with 2015, factors such as additional service and higher pay in 2016 could increase benefits, offsetting some or all of that reduction in the lump sum.
As a reminder, benefits administrators have the ability to model and view RS Plan benefit projections on the Employee Benefits website. Simply go to Administration > My Co-op’s Retirement > RS Plan Projections. Please note: Benefits administrators are currently unable to request RS Plan projections through the Employee Benefits website as we are updating and testing our systems with the new rates. After 5 pm ET on Thursday, December 17, benefits administrators will be able to go online and run projections that will incorporate the new rates.
Considering lump sums
Participants considering lump sums should thoughtfully review all distribution options and their personal plans for retirement income. Taking a lump sum provides the benefit 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.
For questions, contact the Member Contact Center at 866.673.2299 or contactcenter@nreca.coop.