[Federal Register Volume 76, Number 114 (Tuesday, June 14, 2011)]
[Rules and Regulations]
[Pages 34590-34606]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-14241]
=======================================================================
-----------------------------------------------------------------------
PENSION BENEFIT GUARANTY CORPORATION
29 CFR Parts 4001, 4022, and 4044
RIN 1212-AA98
Bankruptcy Filing Date Treated as Plan Termination Date for
Certain Purposes; Guaranteed Benefits; Allocation of Plan Assets;
Pension Protection Act of 2006
AGENCY: Pension Benefit Guaranty Corporation.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: This final rule implements section 404 of the Pension
Protection Act of 2006. Section 404 amended Title IV of ERISA to
provide that when an underfunded, PBGC-covered, single-employer pension
plan terminates while its contributing sponsor is in bankruptcy,
sections 4022 and 4044(a)(3) of ERISA are applied by treating the date
the sponsor's bankruptcy petition was filed as the termination date of
the plan. Section 4022 determines which benefits are guaranteed by
PBGC, and section 4044(a)(3) determines which benefits are entitled to
priority in ``priority category 3'' in the statutory hierarchy for
allocating the assets of a terminated plan. Thus, under the 2006
amendments, when a plan terminates while the sponsor is in bankruptcy,
the amount of benefits guaranteed by PBGC and the amount of benefits in
priority category 3 are fixed at the date of the bankruptcy filing
rather than at the plan termination date. In most cases, this reduces
the amount of guaranteed benefits and the amount of benefits in
priority category 3.
DATES: Effective July 14, 2011. See Applicability in SUPPLEMENTARY
INFORMATION.
FOR FURTHER INFORMATION CONTACT: John H. Hanley, Director, or Gail
Sevin, Manager, Legislative and Regulatory Department; or James J.
Armbruster, Assistant Chief Counsel, Office of Chief Counsel; 1200 K
Street, NW., Washington, DC 20005-4026. Mr. Hanley and Ms. Sevin may be
reached at 202-326-4024; Mr. Armbruster at 202-326-4020, extension
3068. (TTY/TDD users may call the Federal relay service toll-free at 1-
800-877-8339 and ask to be connected to 202-326-4024 or 202-326-4020.)
SUPPLEMENTARY INFORMATION:
Background
The Pension Benefit Guaranty Corporation (``PBGC'') administers the
single-employer pension plan termination insurance program under Title
IV of the Employee Retirement Income Security Act of 1974 (``ERISA'').
The program covers private-sector, single-employer defined benefit
plans, for which premiums are paid to PBGC each year. Covered plans
that are underfunded may terminate either in a distress termination
under section 4041(c) of ERISA or in an involuntary termination (one
initiated by PBGC) under section 4042 of ERISA. When such a plan
terminates, PBGC typically is appointed statutory trustee of the plan,
and becomes responsible for paying benefits in accordance with the
provisions of Title IV.
The amount of benefits paid by PBGC under a terminated, trusteed
plan is determined by several factors. The starting point is the plan
itself: PBGC pays only those benefits that were provided under the plan
and that have been earned by the participant under the plan's terms.
But PBGC does not guarantee all benefits earned under a terminated
plan. There are statutory and regulatory limits on PBGC's guarantee,
which are discussed below. On the other hand, a participant may
sometimes receive from PBGC more than his guaranteed benefits, if
either the allocation under section 4044 of ERISA of the plan's assets
or the allocation under section
[[Page 34591]]
4022(c) of PBGC's recoveries, or both, results in additional benefits
being payable.
When a plan terminates, a termination date must be established in
accordance with section 4048 of ERISA. If the plan is underfunded and
terminates in a distress or involuntary termination, the termination
date is the date agreed upon by the plan administrator and PBGC or, if
they do not agree, the date set by a United States district court.
The termination date is a critical date for many purposes under
Title IV of ERISA. For example, it is the date as of which a plan
sponsor's liability to the PBGC for a terminated plan's unfunded
benefit liabilities is determined under section 4062(b) of ERISA. Most
relevant to this final regulation, the termination date--under prior
law--was the date that governed the amount of benefits participants in
the terminated plan would receive. The amount of benefits guaranteed by
PBGC under section 4022 of ERISA and the amount of any additional
benefits payable from the plan's assets under section 4044 or from
PBGC's recoveries under section 4022(c) were all determined as of the
termination date.
Many single-employer pension plans that terminate in a distress or
involuntary termination do so while the plan sponsor is in bankruptcy.
Indeed, two of the criteria for a distress termination are based on the
sponsor's liquidating or reorganizing in bankruptcy. See ERISA section
4041(c)(2)(B)(i), (ii).
A persistent problem for the PBGC insurance program has been that
the funded status of plans often deteriorates significantly while the
plan sponsor is in bankruptcy. Many sponsors have failed to make
minimum funding contributions to their plans during the bankruptcy,
while the plan continues to pay retiree benefits as usual and employees
continue to earn additional benefits. Because the termination date
often comes after the sponsor has been in bankruptcy for some time, the
result has been that PBGC's losses often increase substantially during
the course of a bankruptcy proceeding.
Congress sought to address this problem in the Pension Protection
Act of 2006 (``PPA 2006''), which was signed into law on August 17,
2006. Section 404 of PPA 2006 provides generally that, if a PBGC-
insured plan terminates while its contributing sponsor is in
bankruptcy, PBGC's guarantees and the amount of benefits entitled to
priority in ``priority category 3'' in the ERISA section 4044
allocation of the plan's assets are determined as of the date that the
sponsor's bankruptcy petition was filed (the ``bankruptcy filing
date'') rather than as of the termination date. This means, for
example, that benefits earned by participants after the bankruptcy
filing date are not guaranteed. The changes generally reduce the amount
of benefits guaranteed by PBGC and the amount of benefits receiving
priority treatment in the section 4044 asset allocation. By protecting
PBGC from growth in its liabilities during bankruptcy proceedings,
these changes reduce claims on PBGC's funds and thereby strengthen the
PBGC insurance program. The changes are described more fully below.
PPA 2006 provided that the changes made by section 404 of PPA 2006
are effective for plan terminations that occur during the bankruptcy of
the plan sponsor, if the bankruptcy filing date was on or after
September 16, 2006 (the date that is 30 days after PPA's enactment).
The terminations to which the changes apply are referred to in this
preamble and in the final regulation as ``PPA 2006 bankruptcy
terminations.'' Of course, if a plan's termination date is the same as
the bankruptcy filing date, then the plan is unaffected by the changes
made by section 404.
On July 1, 2008 (at 73 FR 37390), PBGC published in the Federal
Register a proposed rule to implement section 404 of PPA 2006. PBGC
received comments on the proposed rule from four commenters--three
labor organizations and one individual. The individual commenter
opposed the proposed rule changes in their entirety on the ground that
PBGC ``should not shore up its finances on the backs of workers.''
Rather, the commenter stated, Congress has a responsibility to address
the solvency of the PBGC insurance program either by raising taxes or
increasing PBGC premiums, or by forcing employers to fully fund their
pensions. This comment should be addressed to Congress; PBGC has no
authority to disregard the statutory changes made by PPA 2006. The
other comments are discussed below with the topics to which they
relate.
Overview of Final Rule Changes
The final regulation implements the statutory changes, described
above, made by section 404 of PPA 2006.
The final regulation amends PBGC's regulations on Terminology, 29
CFR part 4001; Benefits Payable in Terminated Single-Employer Plans, 29
CFR part 4022; and Allocation of Assets in Single-Employer Plans, 29
CFR part 4044. The amendments establish rules for PPA 2006 bankruptcy
terminations, the most important of which are:
A participant's guaranteed benefit is based on the amount
of his service and the amount of his compensation (if applicable) as of
the bankruptcy filing date.
The Title IV guarantee limits--the maximum guaranteeable
benefit, the phase-in limit, and the accrued-at-normal limit--are all
determined as of the bankruptcy filing date.
Only benefits that are nonforfeitable as of the bankruptcy
filing date are guaranteed. Thus, for example, early retirement
subsidies and disability benefits to which a participant became
entitled after the bankruptcy filing date are not guaranteed.
Participants who retired under a subsidized early
retirement benefit (or a disability or other benefit) to which they
became entitled between the bankruptcy filing date and the termination
date will continue in pay status, or may go into pay status if they are
not already receiving a benefit, but the amount of the benefit is
reduced to reflect that the subsidy (or other benefit) is not
guaranteed.
The benefits in priority category 3 under section 4044(a)
of ERISA are benefits in pay status, or that could have been in pay
status, three years before the bankruptcy filing date, generally taking
into account only benefit increases that were in effect throughout the
period beginning five years before the bankruptcy filing date and
ending on the termination date.
Benefits under section 4022(c) of ERISA are based on
(among other things) the value of a plan's unfunded nonguaranteed
benefits. Because section 404 of PPA 2006 has changed guaranteed
benefits and benefits in priority category 3, the unfunded
nonguaranteed benefits are changed and therefore the section 4022(c)
benefits are also changed.
Where a plan has more than one contributing sponsor and
all contributing sponsors did not file for bankruptcy on the same date,
PBGC determines the date to treat as the bankruptcy filing date, based
on the facts and circumstances.
Although the bankruptcy filing date thus displaces a plan's
termination date as the controlling date for certain purposes, the
termination date continues to be important for other purposes. For
example, although the monthly amount of benefits guaranteed and the
monthly amount of benefits in priority category 3 will be determined by
reference to the bankruptcy filing date, the value of those benefits is
determined--as before PPA 2006--as of the plan's termination date. The
value of a terminated plan's assets, too, is
[[Page 34592]]
determined as of the termination date. Also, determinations under
sections 4062(a) and (b) of ERISA of the parties liable for a plan's
unfunded benefit liabilities and the amount of those liabilities are
made as of the termination date.
The final regulation is nearly the same as the proposed regulation,
with only a few minor differences. Those differences are discussed
below with the topics to which they relate. And, like the proposed
regulation, the final regulation makes some minor changes unrelated to
PPA 2006.
A detailed discussion of the final regulation follows.
Guaranteed Benefits
Prior Law
PBGC's guarantee is limited, under section 4022(a) of ERISA, to
nonforfeitable benefits under a terminated plan. Before PPA 2006, the
crucial date for determining guaranteed benefits was the plan's
termination date, established under section 4048 of ERISA. PBGC had to
determine the amount of benefits participants had earned under the
plan, and whether those benefits were nonforfeitable, as of the
termination date.
In addition, PBGC's guarantee is subject to two important
limitations under section 4022(b) of ERISA: The maximum guaranteeable
benefit (sometimes referred to as the maximum guarantee limit or the
maximum insurance limit) under section 4022(b)(3), and the phase-in
limit under sections 4022(b)(1) and 4022(b)(7). The maximum
guaranteeable benefit essentially places a ceiling, or cap, on the
amount of a participant's guaranteed benefit. The maximum monthly
guaranteeable benefit under section 4022(b)(3)(B) was $750 per month
for a 65-year-old participant receiving a straight-life annuity in a
plan that terminated in 1974. (The maximum guaranteeable benefit may be
lower, under section 4022(b)(3)(A), depending on the participant's
average monthly gross income, but this limitation rarely applies, and
the discussion and examples in this regulation assume that it does not
apply.) The $750 monthly figure is adjusted each year based on the
contribution and wage base under the Social Security Act; for example,
for a plan whose termination date was in 2005 the maximum monthly
amount at age 65 payable as a straight-life annuity was $3,801.14. The
maximum guaranteeable benefit for an individual participant depends on
his age at the later of the plan's termination date or the date he
begins receiving his benefit from PBGC, and on the form in which the
benefit is paid. For example, the maximum guaranteeable benefit is
lower if the participant begins receiving benefits from PBGC before age
65, or if the benefit form will provide a survivor benefit after the
participant dies.
The phase-in limit under sections 4022(b)(1) and 4022(b)(7) of
ERISA provides that PBGC's guarantee of a benefit increase resulting
from amendment of an existing plan or adoption of a new plan is phased
in over a five-year period. PBGC's guarantee is equal to the number of
full years before the termination date that the increase was in effect
multiplied by the greater of (i) 20% of the monthly increase or (ii)
$20 per month (but the guarantee is never more than the amount of the
increase). For example, PBGC would guarantee $50 of a $125 monthly
benefit increase that was in effect more than two years but less than
three years before the termination date (40% of $125 = $50, which is
greater than $40). A benefit increase is considered to be in effect
beginning on the later of its adoption date or its effective date.
There is a third limitation on PBGC's guarantee that the agency
adopted when it issued its initial guaranteed-benefits regulation. (40
Fed. Reg. 43509, Sept. 22, 1975.) Under Sec. 4022.21 of PBGC's
regulation, PBGC's guarantee is generally limited to the amount of the
participant's benefit payable as a straight-life annuity commencing at
normal retirement age. The effect of this provision, often referred to
as the ``accrued-at-normal'' limit, is that PBGC generally does not
guarantee temporary supplemental benefits payable to a participant who
retires before normal retirement age. Consider, for example, a
participant who was entitled under his plan to receive $1,000 per month
as a straight-life annuity starting at his normal retirement date but
who could retire early under certain conditions with an unreduced
benefit of $1,000 plus a supplement of $400 per month payable until age
62. If the participant retires early, PBGC generally will not guarantee
more than $1,000 per month.
Before PPA 2006, the maximum guaranteeable benefit, the phase-in
limit, and the accrued-at-normal limit were all calculated as of the
termination date of a plan. Accordingly, before PPA 2006, a
participant's guaranteed benefit would be the amount of the
nonforfeitable plan benefit to which the participant was entitled as of
the termination date, subject to the guarantee limits applicable as of
that date.
PPA 2006 Changes
Section 404 of PPA 2006 changed the way in which the amount of
guaranteed benefits is determined in PPA 2006 bankruptcy terminations.
Section 404(a) of PPA 2006 added a new subsection (g) to section 4022
of ERISA. New section 4022(g) provides as follows:
Bankruptcy Filing Substituted for Termination Date.--If a
contributing sponsor of a plan has filed or has had filed against
such person a petition seeking liquidation or reorganization in a
case under title 11, United States Code, or under any similar
Federal law or law of a State or political subdivision, and the case
has not been dismissed as of the termination date of the plan, then
this section shall be applied by treating the date such petition was
filed as the termination date of the plan.
The ``section'' referred to is section 4022 of ERISA, which as
explained above determines the amount of a participant's guaranteed
benefit. Thus, for a plan that terminates while its contributing
sponsor is in bankruptcy, section 4022(g) requires that a participant's
guaranteed benefit be determined by treating the date the sponsor's
bankruptcy petition was filed (the ``bankruptcy filing date'') as if it
were the termination date of the plan.
This change has a number of important consequences. First, it means
that a participant's guaranteed benefit can be no greater than the
amount of his plan benefit as of the bankruptcy filing date. Even
though the plan in many cases will have continued after the bankruptcy
filing date and (in the absence of a plan freeze) participants will
have continued to accrue benefits after that date, those post-
bankruptcy accruals are not guaranteed. Thus, under the change, a
participant's guaranteed benefit is calculated by reference to the
amount of his service and the amount of his compensation (or the amount
of the plan's benefit ``multiplier,'' depending on how the plan
calculates benefits) as of the bankruptcy filing date.
Second, only benefits that were nonforfeitable as of the bankruptcy
filing date are guaranteed. For example, in a plan that has five-year
``cliff'' vesting, a participant with less than five years of service
as of the bankruptcy filing date has no guaranteed benefit, even if his
benefit becomes vested by the section 4048 termination date. Similarly,
if a participant becomes entitled to a disability retirement benefit or
an early retirement subsidy after the bankruptcy filing date but before
the termination date, that disability benefit or subsidy is not
guaranteed.
One commenter suggested that PBGC should not apply the rule
described in
[[Page 34593]]
the previous paragraph to participants who become disabled after the
bankruptcy filing date but before the termination date. The commenter
noted that the effects could be especially harsh in the case of
disability, and that a different rule ought to apply because becoming
disabled is not a choice over which a participant has control and is
subject to verification. PBGC has not adopted this suggestion. Under
ERISA and PBGC's rules, disability retirement benefits are treated the
same as other benefits in determining nonforfeitability: They are
nonforfeitable (and thus guaranteed) only if the condition for
entitlement, such as the disabling event, occurred on or before the
termination date. PPA 2006 changed the date for determining entitlement
to a guaranteed benefit from the termination date to the bankruptcy
filing date, but did not otherwise change the guarantee rules. Thus,
PBGC believes it would not be appropriate to make the suggested change.
Third, the PBGC guarantee limits--the maximum guaranteeable
benefit, the phase-in limit, and the accrued-at-normal limit--will all
be determined as of the bankruptcy filing date (subject to the
refinement described below). For example, if the sponsor's bankruptcy
filing date is in 2008 and the plan's termination date is in 2010, the
maximum guaranteeable benefit for all plan participants will be based
on the 2008 limit. Also, an individual participant's maximum
guaranteeable benefit will be based on his age and form of benefit as
of the later of the bankruptcy filing date or the date he begins to
receive his benefit. Similarly, the phase-in rule will be applied by
counting the number of full years before the bankruptcy filing date
that a benefit increase has been in effect. The accrued-at-normal
limit, too, will be determined based on the facts as of the bankruptcy
filing date.
The final rule modifies PBGC's regulations to reflect the changes
described above for PPA 2006 bankruptcy terminations. In most cases,
the final regulation (like the proposed regulation) simply provides
that in a PPA 2006 bankruptcy termination, ``bankruptcy filing date''
is substituted for ``termination date'' each place that ``termination
date'' appears in a specified section or paragraph of the regulation.
The final regulation provides a number of examples to clarify what this
means in various situations. In response to a comment, the final
regulation provides a second example (in addition to the one in the
proposed rule) to illustrate the workings of the accrued-at-normal
limit. Except for a few minor items discussed below, the regulations
are unchanged for plans to which the PPA 2006 amendments do not apply
(``non-PPA 2006 bankruptcy termination''; the final rule adds this term
to the definitions in Sec. 4001.2).
The final regulation contains one refinement that was not addressed
in the proposed regulation. The proposed regulation provided that PBGC
would determine the guarantee limits based on the age of the
participant and the form of benefit that was being paid at the later of
the bankruptcy filing date and the date the participant begins to
receive his benefit from PBGC. The final regulation adopts this rule,
but with a slight modification that applies primarily in cases in which
there has been a death before termination that affects the form of
benefit being paid at termination. PBGC has decided that the guarantee
limits should be applied based on the form of benefit that was being
paid (or was payable) and the person who was receiving or was entitled
to receive a benefit from PBGC as of the termination date, not the
bankruptcy filing date. For example, if as of the bankruptcy filing
date a participant was receiving a benefit in the form of a joint-and-
survivor annuity, but by the termination date the participant has died
and his spouse is receiving a survivor annuity, PBGC will determine the
maximum guaranteeable benefit for the surviving spouse based on the
spouse's age as of the bankruptcy filing date but based on the
straight-life benefit form being paid to the spouse at the termination
date rather than on the joint-and-survivor benefit form that was being
paid as of the bankruptcy filing date. Similarly, if the benefit in pay
status as of the bankruptcy filing date was a ``pop up'' annuity (a
joint-and-survivor annuity under which the benefit amount ``pops up''
to the straight-life amount if the beneficiary dies before the
participant) and the beneficiary dies before the termination date, PBGC
will determine the maximum guaranteeable benefit based on the
participant's age as of the bankruptcy filing date but based on the
straight-life benefit form being paid to the participant at the
termination date rather than on the joint-and-survivor ``pop up'' form
that was being paid as of the bankruptcy filing date.
The final rule adopts this refinement, which will generally
increase guaranteed benefits for the affected individuals, to reduce
the complexity and difficulty of computing benefits. When a plan
terminates, the plan records often do not reflect the full history of a
specific benefit. For example, the records may show only that an
individual is receiving so many dollars per month at termination and
that no survivor benefit is payable; they may not show whether the
person receiving that benefit is the original plan participant or a
beneficiary. An additional example has been added to Sec. 4022.23(g)
to illustrate this principle.
Aggregate Limit on Benefits Guaranteed
Title IV of ERISA includes an additional limitation on PBGC's
guarantee that applies only when a participant receives benefits under
two or more trusteed plans. Section 4022B of ERISA provides that, in
such a situation, the sum of the guaranteed benefits payable from PBGC
funds with respect to all such plans may not exceed the maximum
guaranteeable benefit payable ``as of the date of the last plan
termination.''
PPA 2006 made no change to this provision. PBGC therefore is making
no change to part 4022B of its regulations, and will continue to
calculate the aggregate limit by reference to a participant's maximum
guaranteeable benefit as of the section 4048 termination date of the
latest-terminating plan.
Benefits Payable Under the Section 4044 Allocation
Prior Law
PPA 2006 also made an important change to the allocation of a
terminated plan's assets under section 4044 of ERISA. To understand
this change, it is important to understand how the section 4044
allocation worked before the PPA 2006 amendment.
As noted above, a participant may receive more than his guaranteed
benefit from PBGC, depending on the amount of the plan's assets and
whether his benefits are entitled to priority under ERISA's allocation
scheme. Section 4044 of ERISA specifies how a plan's assets are to be
allocated among various classes of guaranteed and nonguaranteed
benefits of participants. Part 4044 of PBGC's existing regulations
provides detail about how assets and benefits are valued, and how the
assets are allocated to the benefits. (Section 4022(c) of ERISA may
provide additional benefits, as discussed below.)
The first step in the section 4044 allocation is to assign each
participant's plan benefits to one or more of six ``priority
categories'' that are described in paragraphs (1) through (6) of
section 4044(a) of ERISA. Before PPA 2006, the benefits in each
priority category were as follows:
Priority category 1: The portion of a participant's accrued benefit
derived
[[Page 34594]]
from the participant's voluntary contributions.
Priority category 2: The portion of a participant's accrued benefit
derived from the participant's mandatory contributions.
Priority category 3: The portion of a participant's benefit that
was in pay status as of the beginning of the three-year period ending
on the termination date of the plan, or that would have been in pay
status at the beginning of such three-year period if the participant
had retired before the beginning of the three-year period and had
commenced receiving benefits (in the normal form of annuity under the
plan) as of the beginning of such period. In either case, however, the
benefits in this category are limited to the lowest annuity benefit
payable under the plan provisions at any time during the five-year
period ending on the termination date (e.g., disregarding benefit
increases in the five-year period).
Priority category 4: All other guaranteed benefits, and benefits
that would be guaranteed but for the aggregate limit of section 4022B
of ERISA and the stricter phase-in limit that applies to business
owners.
Priority category 5: All other nonforfeitable benefits under the
plan.
Priority category 6: All other benefits under the plan.
PBGC's regulations make a distinction between a participant's
``gross'' benefit in a priority category and his ``net'' benefit in
that category (although the regulations do not use these terms). The
gross benefit is the total amount of the participant's benefit that
would be in a priority category, if benefits in higher priority (i.e.,
lower numbered) categories were not subtracted. The net benefit is the
amount in the priority category after subtracting amounts in higher
priority categories. For example, a participant's net benefit in
priority category 4 generally excludes any portion of his guaranteed
benefit that was allocated to priority categories 2 or 3. See 29 CFR
4044.10(c). Descriptions of benefits in a priority category usually
refer to the net benefits in that category, and the discussion below
generally follows that usage, unless otherwise indicated.
Once the benefits of each participant have been assigned to the
applicable priority category or categories, the benefits of all
participants are valued, using the rules in PBGC's valuation
regulation, 29 CFR part 4044, subpart B. The terminated plan's assets
are also valued (at fair market value). The valuation of both the plan
benefits and the plan assets is done as of the termination date.
After the plan benefits and assets are valued, the assets are
``poured through'' the priority categories, beginning with priority
category 1. If the assets are sufficient to pay all benefits in
priority category 1, then they pour into priority category 2, and so on
until either all benefits in all categories have been covered or until
the assets are insufficient to pay all benefits within a category.
Where assets are insufficient to pay all benefits within a category,
they are allocated among the benefits in that category according to the
rules in part 4044 of PBGC's regulations.
It is important to note that benefits in priority category 3--which
may or may not be guaranteed--come ahead of guaranteed benefits in
priority category 4 in the section 4044 asset allocation. Thus, for
example, if a terminated plan's assets are sufficient to cover all
benefits in priority category 3, those benefits will be paid,
regardless of whether they are guaranteed.
PPA 2006 Changes
Section 404 of PPA 2006 made an important change to priority
category 3 in the asset allocation, similar to the change to guaranteed
benefits. Section 404(b) added a new subsection (e) to section 4044,
which provides as follows:
Bankruptcy Filing Substituted for Termination Date.--If a
contributing sponsor of a plan has filed or has had filed against
such person a petition seeking liquidation or reorganization in a
case under title 11, United States Code, or under any similar
Federal law or law of a State or political subdivision, and the case
has not been dismissed as of the termination date of the plan, then
subsection (a)(3) shall be applied by treating the date such
petition was filed as the termination date of the plan.
Subsection (a)(3) of section 4044 describes the benefits assigned to
priority category 3. As explained above, before PPA 2006 the benefits
in priority category 3 were the benefits that were in pay status as of
the beginning of the three-year period ending on the termination date,
or that would have been in pay status as of that date if the
participant had retired--but based on the plan provisions during the
five years before the termination date under which the benefit would be
the least. See 29 CFR 4044.13. In the proposed rule, PBGC stated that
it interpreted new section 4044(e) to mean that these three-year and
five-year periods are the three-year and five-year periods before the
bankruptcy filing date rather than before the termination date. The
proposed rule stated that the benefits in priority category 3 will be
benefits in pay status, or that could have been in pay status, three
years before the bankruptcy filing date, but generally taking into
account only benefit increases that were effective throughout the five-
year period ending on the bankruptcy filing date. (The proposed rule
also stated that the exception in Sec. 4044.13(b)(5) for certain
``automatic'' benefit increases would apply to applicable benefit
increases in the fourth and fifth years preceding the bankruptcy filing
date.)
The final rule adopts these proposals, but with a slight
modification that will apply only in limited circumstances. The three-
year period, as under the proposed rule, is the three-year period
before the bankruptcy filing date. But for the five-year period, PBGC
realized that it would not be appropriate to simply substitute the
bankruptcy filing date for the termination date. Although that
formulation would present no problems in the case of a benefit that
increased during the years before a bankruptcy filing, it could have
anomalous results in the case of a benefit that decreased between the
bankruptcy filing date and the termination date. (A benefit might
decrease, for example, due to the expiration of a temporary supplement
or a plan amendment eliminating an ancillary benefit that is not
protected by section 411(d)(6) of the Internal Revenue Code.) Not
taking account of such a decrease could mean that a participant's
priority category 3 benefit would be larger than the participant's
total benefit as of the termination date. It makes no sense to provide
priority treatment for an amount larger than the amount of the
participant's entire benefit as of termination.
To address that anomaly, the final rule creates a new term in Sec.
4044.13(c)(1)--the ``applicable pre-termination period''--to describe
the period that includes the five years before the bankruptcy filing
date plus the additional time between the bankruptcy filing date and
the termination date. The final rule provides that the benefit in
priority category 3 is limited to the lowest annuity benefit payable
under the plan provisions at any time during the applicable pre-
termination period.
In addition, the changes made by PPA 2006 section 404(a) to the way
guaranteed benefits are determined necessarily affect the gross
benefits that are assigned to priority category 4. As explained above,
the gross benefits assigned to priority category 4 are guaranteed
benefits (and benefits that would be guaranteed but for the aggregate
limit of section 4022B and the stricter phase-in limit that applies to
business owners). Because section 404(a) of PPA 2006 has modified
[[Page 34595]]
PBGC's guarantee, the gross benefits assigned to priority category 4 in
a PPA 2006 bankruptcy termination are those benefits guaranteed under
new section 4022(g), not the benefits that would be guaranteed absent
that provision. In other words, the guaranteed benefits in priority
category 4 will be the plan benefits that were both accrued and
nonforfeitable as of the bankruptcy filing date, based on the guarantee
limits as of that date. In addition, the PPA 2006 changes to benefits
in priority category 3 necessarily affect the net benefits in priority
category 4 as well; some guaranteed benefits that previously would have
been in priority category 3 will now fall into priority category 4. The
final rule reflects this treatment.
PPA 2006 did not amend the other priority categories of section
4044. Therefore, the gross amount of a participant's benefit in those
categories will be unaffected by the changes discussed above. For
example, the gross amount of a participant's benefit in priority
category 5 is all of the participant's benefit that is nonforfeitable
as of the plan's termination date. See ERISA section 4044(a)(5); 29 CFR
4044.15. Thus, a benefit that is not guaranteed because it was
forfeitable as of the bankruptcy filing date will be treated as
nonforfeitable for purposes of priority category 5 if the participant
satisfied the conditions for entitlement to the benefit between the
bankruptcy filing date and the plan's termination date.
The net amount of a participant's benefit in priority category 5,
however, is necessarily affected by the changes to the benefits in
priority categories 3 and 4. For example, benefits that are not
guaranteed because they became nonforfeitable between the sponsor's
bankruptcy filing date and the plan's termination date will not be in
priority category 4 but will be in priority category 5. Thus, a
participant in that situation will have a smaller guaranteed benefit in
priority category 4 and therefore a larger net benefit in priority
category 5. (Benefits in priority category 5 are divided into
subcategories, based on whether they would have been payable based on
the plan provisions in effect five years before the plan's termination
date, or became payable due to subsequent plan amendments. See ERISA
section 4044(b)(4) (before PPA 2006, section 4044(b)(3)); 29 CFR
4044.10(e). Because PPA 2006 did not amend this provision, PBGC
interprets the five-year period in section 4044(b)(4) of ERISA--and in
Sec. 4044.10(e) of PBGC's regulation--as still being the five-year
period before the termination date. No change in the regulation is
needed to embody this interpretation.)
Like the changes to the guarantee provisions, the PPA 2006 changes
to the ERISA section 4044 asset allocation apply to PPA 2006 bankruptcy
terminations--plan terminations occurring during a bankruptcy
proceeding initiated on or after September 16, 2006.
The PPA 2006 changes, as explained above, require PBGC to determine
the amount of a participant's monthly benefit in priority category 3
and priority category 4 by reference to the bankruptcy filing date
rather than the termination date. Valuing benefits in the priority
categories is a different matter. PBGC has always valued benefits and
plan assets as of the plan's termination date, and section 4044(e) does
not dictate a change to that approach for priority category 3. Although
section 4044(e) might be read to suggest that a valuation should be
done as of the bankruptcy filing date for purposes of priority category
3, PBGC believes that the better interpretation is that the valuation
should still be done as of the termination date. Subsection (a)(3) of
section 4044, which is to be ``applied'' by treating the bankruptcy
filing date as the termination date, describes only the kind of
benefits that fall into priority category 3, not the time or manner of
valuing those benefits or plan assets.
Moreover, because section 4044(e) applies only to priority category
3, benefits and plan assets will still be valued as of the termination
date for all other categories. Using a different valuation date for
priority category 3 than for all the other priority categories would be
complex to administer, difficult to explain to participants, and
anomalous in its results. In the absence of a clear statutory mandate
of that intricate approach, PBGC is taking the simpler and more
coherent approach of valuing benefits and assets as of the termination
date for all priority categories.
Accordingly, PBGC is making no change to PBGC's existing rules in
this regard. Under Sec. 4044.10(c), benefits in a trusteed plan will
still be valued as of the termination date. The tables in Appendix D to
part 4044 used to determine a participant's expected retirement age are
also unchanged, and continue to be based on the year in which the
plan's termination date occurs. (PBGC's determination of a
participant's expected retirement age may be affected by the new PPA
2006 rules, however, because, as explained above, those rules may
change the amount of a participant's guaranteed benefit, and a change
in the guaranteed benefit in some cases affects the expected retirement
age.) A terminated plan's assets, too, will still be valued as of the
termination date under Sec. 4044.3(b).
Benefits Payable Under Section 4022(c) of ERISA
Prior Law
Under section 4022(c) of ERISA, PBGC pays additional benefits to
participants and beneficiaries, beyond guaranteed benefits and benefits
provided by the plan's assets. The amount of section 4022(c) benefits
depends on PBGC's recoveries of unfunded benefit liabilities under
section 4062 (or, in some circumstances, under sections 4063 or 4064).
Sections 4062(a) and (b) of ERISA provide that, when a plan terminates
in a distress termination or an involuntary termination, the
contributing sponsor of the plan and all members of the contributing
sponsor's controlled group are liable to PBGC for the ``total amount of
the unfunded benefit liabilities (as of the termination date) to all
participants and beneficiaries under the plan.'' The amount of unfunded
benefit liabilities, defined in section 4001(a)(18) of ERISA, is the
excess of the value of the plan's benefit liabilities over the value of
the plan's assets--i.e., the amount of the shortfall in the plan's
assets.
PBGC seeks to recover from contributing sponsors and members of
their controlled groups as much as it can of terminated plans' unfunded
benefit liabilities. A portion of those recoveries is paid to
participants and beneficiaries of a terminated plan in accordance with
the provisions of section 4022(c) of ERISA. Section 4022(c) provides
for determination of a ``recovery ratio,'' which is then multiplied by
the total value of the plan's unfunded nonguaranteed benefits to
determine the total amount allocable to participants in the plan who
have unfunded nonguaranteed benefits. It is allocated to those unfunded
nonguaranteed benefits beginning in the section 4044 priority category
where the plan's assets ran out, but none of it is allocated to
guaranteed benefits--i.e., this section 4022(c) allocation ``skips
over'' guaranteed benefits in the priority categories.
The recovery ratio is described in section 4022(c)(3) of ERISA. For
a large plan, it equals the value of PBGC's recovery of unfunded
liabilities for that plan divided by the amount of that plan's unfunded
benefit liabilities ``as of the termination date.'' For a small plan,
the ratio is based on an average of
[[Page 34596]]
PBGC's recoveries over a five-year period. For this purpose, a small
plan is any plan in which the value of unfunded nonguaranteed benefits
is equal to or less than $20 million. (Section 408 of PPA 2006 changed
the five-year period over which the recovery ratio is determined for
small plans; that change generally applies to plans in which
termination was initiated on or after September 16, 2006.)
A plan's unfunded nonguaranteed benefits, as the term suggests, are
those benefits that are neither funded by the plan's assets under the
section 4044 allocation nor guaranteed by PBGC. (PBGC generally uses
the term ``unfunded nonguaranteed benefits,'' because that term is more
descriptive than ``outstanding amount of benefit liabilities,'' the
term used in section 4001(a)(19) of ERISA.) Stated differently, the
unfunded nonguaranteed benefits are the benefits lost by participants
on account of their plan's termination, a portion of which is made up
by the section 4022(c) allocation.
PPA 2006 Changes
New section 4022(g) instructs PBGC to apply section 4022 by
treating the bankruptcy filing date as the plan's termination date.
Section 4022(c), of course, is part of section 4022. PBGC interprets
this statutory language, for section 4022(c) benefits, to mean that in
determining a plan's unfunded nonguaranteed benefits, PBGC must take
into account the changes to guaranteed benefits under new section
4022(g) and the changes to the asset allocation under new section
4044(e). For example, a benefit that became nonforfeitable between the
bankruptcy filing date and the termination date is not guaranteed and
thus (if not funded) is included in the unfunded nonguaranteed
benefits.
The final regulation also provides that, as in a non-PPA 2006
bankruptcy termination, PBGC will value the unfunded nonguaranteed
benefits as of the termination date. For reasons similar to those
explained above regarding priority category 3 benefits, PBGC believes
that the statutory provision should not be interpreted to require a
different valuation date for this purpose.
The final regulation similarly provides that the other elements
that go into calculation of section 4022(c) benefits are unaffected by
the PPA 2006 changes. The recovery ratio described in section
4022(c)(3)(A), as explained above, is based on PBGC's recoveries of
unfunded benefit liabilities. Because that section provides that the
denominator of the recovery ratio is the amount of the plan's unfunded
benefit liabilities as of the termination date, one might conclude that
in a PPA 2006 bankruptcy termination the unfunded benefit liabilities
should be determined for this purpose as of the bankruptcy filing date.
The final regulation does not adopt that approach. The numerator of the
recovery ratio--PBGC's recoveries--is based on PBGC's statutory claim
for unfunded benefit liabilities, which, under section 4062(b) of
ERISA, must be determined as of the termination date. Because section
4062(b) was not amended by PPA 2006, PBGC's recoveries will still be
based on that termination-date-computed claim. PBGC believes that the
general language of section 4022(g) should not be interpreted to
require a separate determination of unfunded benefit liabilities to be
made as of the bankruptcy filing date, when PBGC recoveries will be
based on a determination of unfunded benefit liabilities as of the
termination date. Thus, the amount of a plan's unfunded benefit
liabilities, as in a non-PPA 2006 bankruptcy termination, will be
determined based on the value of the plan's assets and benefit
liabilities as of the termination date. See ERISA sections 4001(a)(18),
4062(b).
The final rule adds a new Sec. 4022.51 to PBGC's regulations to
incorporate the above interpretations. It provides, for example, that
in computing section 4022(c) benefits in a PPA 2006 bankruptcy
termination, the benefits included in a plan's unfunded nonguaranteed
benefits take into account the provisions of sections 4022(g) and
4044(e) of ERISA, and the corresponding provisions of PBGC's
regulations. The value of unfunded nonguaranteed benefits will be
multiplied by the recovery ratio, as in a non-PPA 2006 bankruptcy
termination, to determine the total dollar amount to be allocated for
the plan. That dollar amount will be allocated to the unfunded
nonguaranteed benefits of participants in the same manner as before PPA
2006, but the result of the allocation will be different because of the
changes made by section 404 of PPA 2006 to guaranteed benefits and the
benefits in priority category 3. For example, a benefit that would have
been guaranteed under prior law but is not guaranteed under PPA 2006
and is not funded under the section 4044 allocation is an unfunded
nonguaranteed benefit that might be paid under the section 4022(c)
allocation.
Other Issues
Reduction of Benefits to Title IV Levels
In a distress termination, the plan administrator is required,
beginning on the proposed termination date, to reduce benefits in pay
status to the estimated levels payable under Title IV. See ERISA
section 4041(c)(3)(D)(ii); 29 CFR Sec. Sec. 4041.42(c), 4022.61-
4022.63. The final regulation provides that for any PPA 2006 bankruptcy
termination, those estimated benefits are based on the rules described
above relating to the bankruptcy filing date.
PPA 2006 did not change the provision in section 4041 of ERISA
about when these benefit reductions are to be made. Accordingly, the
final regulation does not change the rule in Sec. 4041.42(c) of the
regulations that the reductions are made beginning on the proposed
termination date.
Recoupment of Overpayments
PBGC's current regulations provide that the agency recoups benefit
overpayments if it determines that net benefits paid exceed the amount
to which a participant is entitled under Title IV of ERISA. See 29 CFR
4022.81. For example, if a retiree is paid an estimated termination
benefit of $3,100 per month while PBGC is processing the termination of
the plan, and PBGC later determines that the participant is entitled to
a termination benefit of only $3,000 per month, the agency generally
recoups the net overpayment (the $100 difference times the number of
months the benefit was overpaid) from future benefit payments. The
amount recouped is determined by multiplying future benefit payments by
a fraction the numerator of which is the net overpayment and the
denominator of which is the present value of the benefit to which the
participant is entitled under Title IV. The final rule (like the
proposed rule) amends Sec. 4022.82(a) to provide that the denominator
is determined taking into account the changes to participants' benefits
made by section 404 of PPA 2006.
In computing the net overpayment, the current regulation provides
that PBGC takes into account only overpayments made on or after the
latest of the proposed termination date, the termination date, or, if
no notice of intent to terminate was issued, the date on which
proceedings to terminate the plan are instituted pursuant to section
4042 of ERISA. See 29 CFR 4022.81(c)(1). Thus, for example, in a case
where a plan is terminated under section 4042 and the termination date
is before the date on which PBGC initiated termination proceedings,
PBGC does not
[[Page 34597]]
recoup overpayments made before initiation of the termination
proceedings even though those overpayments were made after (what later
became) the termination date.
In the preamble to the proposed rule, PBGC proposed not to make any
change to this rule. As under prior law, the preamble stated, in
determining the amount to be recouped (or otherwise recovered, if there
are no future benefits from which to recoup), PBGC would include only
overpayments made on or after the latest of the proposed termination
date, the termination date, or, if no notice of intent to terminate was
issued, the date on which proceedings to terminate the plan are
instituted pursuant to section 4042 of ERISA. Several commenters
applauded this aspect of the proposed rule. They stated that this was a
fair proposal that would moderate the hardship that would otherwise
result if PBGC were to treat as overpayments subject to recoupment
benefit payments made after the bankruptcy filing date that exceeded
the Title IV limitations. These commenters asked only that PBGC make
this treatment explicit in the regulation itself. To avoid any doubt
about this matter, PBGC has accepted this suggestion. PBGC has thus
included a new Sec. 4022.81(c)(3) in the regulation explicitly stating
that the rules regarding the overpayments and underpayments that will
be taken into account in determining any amount to be recouped or
reimbursed by PBGC apply regardless of whether the termination is a PPA
2006 bankruptcy termination.
Continuation of Payments; Entry Into Pay Status
As explained above, under new section 4022(g) of ERISA, PBGC will
not guarantee a benefit that was forfeitable as of the bankruptcy
filing date even if it became nonforfeitable by the termination date.
This includes, for example, a subsidized early retirement benefit or
disability benefit to which a participant became entitled between the
two dates.
Because the plan normally will have been ongoing as of the
bankruptcy filing date, participants who became entitled to subsidized
early retirement benefits or other benefits after the bankruptcy filing
date but before the termination date may have retired and been put into
pay status by the plan administrator. It would impose a hardship on
such participants to take them out of pay status, likely depriving them
of all or most of their retirement income.
To address this situation, the proposed regulation proposed that
participants who became entitled under their plan to subsidized early
retirement benefits or other benefits between the bankruptcy filing
date and the termination date would be continued in pay status or, if
they were not already receiving a benefit, would be allowed to go into
pay status. The amount of such a benefit, however, would be reduced to
reflect that the subsidy or other benefit is not guaranteed.
PBGC received several comments on this proposal. One commenter
suggested that PBGC should give a choice to participants who became
entitled to a subsidized early retirement or other benefit between the
bankruptcy filing date and the termination date and went into pay
status with that benefit. The choice would be either to remain in pay
status but with the benefit reduced to reflect that the subsidy or
other benefit is not guaranteed, or to come out of pay status with the
ability to resume benefit payments at a later date.
The final rule does not adopt this suggestion. In the situations in
question, the participant was entitled under the plan to the subsidized
or other benefit at the time he was put into pay status and the benefit
was nonforfeitable as of the termination date. Even though the benefit
is not guaranteed because of section 4022(g), some or all of it may be
paid by PBGC in priority category 5, depending on the level of the
plan's assets and PBGC's recoveries on its claims for unfunded benefit
liabilities under section 4062(b) of ERISA. Moreover, the Title IV
limits on PBGC's guarantee have often resulted in substantial
reductions to retirees' benefits, but PBGC historically has not offered
a choice to such retirees to come out of pay status and resume benefits
later.\1\ If PBGC were to allow such a choice in the situations
addressed in this regulation, it might seem unfair not to allow a
similar choice to any retiree whose benefit is reduced because of Title
IV limits. But allowing a potentially large number of participants to
come out of pay status and resume benefits later would create
complications, including how to account for the benefits previously
received and possible disputes about entitlement if, for example, the
participant in the interim has divorced and remarried or a spouse has
died. For these reasons, PBGC does not believe it would be appropriate
to offer a choice to come out of pay status in these situations.
---------------------------------------------------------------------------
\1\ PBGC in the past has allowed participants the option to come
out of pay status (and resume benefits later) in very limited
circumstances, such as where a participant was mistakenly put into
pay status by the plan administrator at a time when the participant
was not entitled to any benefit under the plan. Relatively few
participants have taken advantage of this option in any event, and
for the reasons stated in the text PBGC is not inclined to expand
the group to whom such a choice is offered.
---------------------------------------------------------------------------
A commenter also suggested that PBGC specify in the regulations how
it will determine the amount of the reduction in the benefit in these
situations. The final rule does not adopt this suggestion. There are
quite a number of different situations that may arise, and different
rules may be needed for each. For example, in one case a participant
who is not entitled to a fully subsidized early retirement benefit
because he had not satisfied the conditions for it by the bankruptcy
filing date may not be entitled to any other early retirement benefit.
In that case a full actuarial reduction from the accrued benefit would
be appropriate. In another case, although a participant might not be
entitled to the fully subsidized benefit he had been receiving, he
might be entitled to a different, partially subsidized benefit for
which he had satisfied the conditions by the bankruptcy filing date. In
that case, the reduction would not be a full actuarial reduction from
the accrued benefit but rather would take into account the partially
subsidized benefit to which the participant was entitled. Also, the
plan may or may not have actuarial reduction factors for the
participant's age (since under the plan they may not have been needed).
PBGC believes that specifying reduction factors in this regulation for
a wide range of theoretical scenarios would add more complexity than
clarity.
Finally, a commenter noted that the proposed rule had described how
PBGC will treat participants who become entitled to a benefit between
the bankruptcy filing date and the termination date only in an example
about subsidized early retirement benefits. Because this treatment
applies to any benefit to which a participant becomes entitled between
the bankruptcy filing date and the termination date, the commenter
suggested that PBGC include it in a separate paragraph rather than
merely as part of an example. This suggestion is a good one and has
been adopted in Sec. 4022.3(b)(2).
Sufficiency for Guaranteed Benefits
In a distress termination, the plan's enrolled actuary must
certify, among other things, whether the plan is sufficient for
guaranteed benefits as of the proposed termination date and as of the
proposed distribution date. (See section 4041(c)(2)(A) of ERISA.) In
making those determinations, the actuary must take into account
nonguaranteed benefits to which the
[[Page 34598]]
plan's assets must be allocated under section 4044--notably,
nonguaranteed benefits in priority category 3. PBGC must determine
whether it agrees that the plan is sufficient for guaranteed benefits.
(See section 4041(c)(3)(A) of ERISA.) If PBGC agrees that the plan is
sufficient for guaranteed benefits, it so notifies the plan
administrator and the administrator then proceeds to distribute the
plan's assets and carry out the termination of the plan. (See section
4041(c)(3)(B)(ii) of ERISA.) One purpose of the determinations under
section 4041 of the plan's sufficiency for guaranteed benefits is to
avoid PBGC trusteeship of a plan that has enough assets to pay all the
benefits that PBGC would pay if it took over the plan. (Any additional
benefits that may be payable under section 4022(c) of ERISA are not
considered for purposes of whether a plan is sufficient for guaranteed
benefits.)
The final regulation provides that in a PPA 2006 bankruptcy
termination, the determination of sufficiency for guaranteed benefits
is made taking into account the amendments made by section 404 of PPA
2006. That is, the plan actuary and PBGC must determine sufficiency for
guaranteed benefits based on whether, as of the termination date and
the distribution date, the plan has sufficient assets to pay the
benefits that are guaranteed as of the bankruptcy filing date and the
benefits that are in priority category 3 as of three years before the
bankruptcy filing date (based generally on the plan provisions as of
five years before the bankruptcy filing date). It would make little
sense to treat as insufficient for guaranteed benefits--and thus
require PBGC to trustee--a plan that has enough assets to provide all
the benefits that PBGC would pay if it became statutory trustee of the
plan.
Amendment of Definition of Basic-Type Benefit
PBGC's regulations define the term ``basic-type benefit'' in Sec.
4001.2 to mean any benefit that is guaranteed under part 4022 or that
would be guaranteed if the guarantee limits in Sec. Sec. 4022.22
through 4022.27 (primarily the maximum guaranteeable benefit and the
phase-in limit) did not apply. A ``nonbasic-type benefit'' is any
benefit provided by a plan other than a basic-type benefit. The effect
of this distinction is to treat temporary supplements, which as
explained above are generally not guaranteed due to the accrued-at-
normal limit in Sec. 4022.21, as nonbasic-type benefits. Nonbasic-type
benefits are treated differently from basic-type benefits in the
section 4044 allocation. See, e.g., Sec. Sec. 4044.10(c) and 4044.12.
If no change were made to the definition of basic-type benefit in a
PPA 2006 bankruptcy termination, benefits that accrued, or to which a
participant otherwise became entitled, between the sponsor's bankruptcy
filing date and the plan's termination date would become nonbasic-type
benefits (because they would not be guaranteed but not due to the
limitations in Sec. Sec. 4022.22 through 4022.27) and thus subject to
the different treatment currently accorded temporary supplements. Such
benefits would, absent this regulatory change, receive less favorable
treatment in priority category 5, a technical result that PBGC believes
was not intended by the statutory change. Not amending the regulation
would also require PBGC to follow the more complex allocation
procedures in part 4044 for nonbasic-type benefits even where a plan
has no temporary supplements. Accordingly, the final regulation
modifies the definition of ``basic-type benefits'' to provide that
benefits not guaranteed solely because they accrued or became
nonforfeitable, or the participant became entitled to them, after the
bankruptcy filing date will be considered basic-type benefits. This
change to the regulatory definition of basic-type benefits requires a
conforming change to Sec. 4044.14 of the regulations, to ensure that
these nonguaranteed benefits are not placed in priority category 4,
which (with limited exceptions for benefits of business owners and of
participants in more than one terminated plan) is reserved for
guaranteed benefits.
Determination of the Bankruptcy Filing Date
Section 404 of PPA 2006 requires treating the date that a
contributing sponsor of a plan has filed or has had filed against it
``a petition seeking liquidation or reorganization in a case under
title 11, United States Code, or under any similar Federal law or law
of a State or political subdivision'' as the termination date of the
plan, for the purposes discussed above. The final regulation uses the
term ``bankruptcy filing date'' to describe the date when a bankruptcy
petition has been filed, and PBGC does not anticipate difficulty
determining what that date is in most cases.
However, three situations may arise in which there could be
ambiguity about the bankruptcy filing date. The first involves
conversion of a bankruptcy case--for example, where a bankruptcy case
began with the filing of a petition for reorganization under Chapter 11
of the Bankruptcy Code but was later converted to a liquidation case
under Chapter 7. The final regulation clarifies that, in such a
situation, the date of the original bankruptcy petition is the
bankruptcy filing date. This is consistent with section 348 of the
Bankruptcy Code, which provides that conversion of a case from one
chapter to another under the Bankruptcy Code does not change the date
of the filing of the petition.
The second situation involves plans that have more than one
contributing sponsor. Section 404 of PPA 2006 applies where a plan
terminates during the bankruptcy proceeding of ``a'' contributing
sponsor of a plan. Although most terminating single-employer plans have
only a single contributing sponsor, some plans have more than one
contributing sponsor. The final regulation provides that if a plan with
multiple contributing sponsors terminates during the sponsors'
bankruptcy proceedings and if the various sponsors all filed for
bankruptcy on the same date, that date is the bankruptcy filing date.
However, if the various contributing sponsors filed for bankruptcy
on different dates, or if not all of them have filed for bankruptcy, it
is not obvious what date should be treated as the bankruptcy filing
date. PBGC believes that it would be impracticable to use more than one
bankruptcy filing date in determining benefits under a single plan. But
PBGC also believes that it would be unwise to attempt to establish a
mechanical rule on what date to use that would apply in all cases.
Thus, where a plan has more than one contributing sponsor and not all
sponsors filed for bankruptcy on the same date, the proposed regulation
provided that PBGC would determine the date to treat as the bankruptcy
filing date for determining guaranteed benefits and benefits in
priority category 3. PBGC's determination would be based on the facts
and circumstances, which might include such things as the relative
sizes of the various contributing sponsors, the relative amounts of
their minimum required contributions to the plan, the timing of the
different bankruptcies, and the expectations of participants.
One commenter suggested a change to the proposal described in the
previous paragraph regarding plans that have more than one contributing
sponsor that filed for bankruptcy on different dates. Noting the
importance to participants of the date chosen as the bankruptcy filing
date, the commenter urged that the final rule provide that PBGC
either--
Obtain a court determination of the appropriate bankruptcy
filing date; or
[[Page 34599]]
Issue a notification of its determination of the
bankruptcy filing date to participants, relevant labor unions, and
other affected parties and exempt this determination from PBGC's
administrative review process under Sec. 4003.1 of its regulations,
thereby allowing speedier judicial review of the determination.
The final rule does not adopt either of these suggestions, and
adopts the procedure described in the proposed rule. PBGC believes that
obtaining a court order or issuing notification to potentially
thousands of participants could be onerous and unduly delay PBGC's
processing of a terminated plan. Moreover, such situations are likely
to be rare; if future experience reveals problems with the position
adopted in this regulation, PBGC may consider amending the regulation
to address such problems based on that experience.
The third situation in which there could be ambiguity about the
bankruptcy filing date involves liquidation or reorganization cases
that are filed, not under the U.S. Bankruptcy Code, but under a
``similar * * * law of a State or political subdivision.'' Some states
have insolvency statutes similar to the U.S. Bankruptcy Code and
include provisions similar to 11 U.S.C. 301(a), 302(a), and 303(b)
under which a case is commenced by the filing of a petition in court.
The date on which such a petition is filed will be treated as the
bankruptcy filing date under the final rule. Other, perhaps more
informal, proceedings, such as assignments for the benefit of
creditors, may have different procedures for commencing cases, which
may vary from state to state. For such proceedings, PBGC will make
case-by-case determinations on what date is most analogous to the date
of the filing of a bankruptcy petition and would treat that date as the
bankruptcy filing date.
PBGC received a comment on an issue that was not addressed in the
proposed rule concerning determination of the bankruptcy filing date.
This comment proposed that in a case in which an involuntary bankruptcy
petition is filed against a contributing sponsor and the sponsor timely
contests the petition, PBGC should use the date on which the bankruptcy
court enters an order for relief, rather than the date on which the
petition was filed, as the bankruptcy filing date. (See 11 U.S.C.
303(h).) The final rule does not adopt this proposal. Sections 4022(g)
and 4044(e) make no distinction between voluntary and involuntary
bankruptcies. In describing when they apply, both provisions refer to
cases in which a contributing sponsor ``has filed or has had filed
against such person a petition seeking liquidation or reorganization.''
(Emphasis added.) Moreover, under the Bankruptcy Code, both a voluntary
bankruptcy case and an involuntary case are commenced by the filing of
a ``petition.'' (Compare 11 U.S.C. 301(a) with 11 U.S.C. 303(a).) Thus,
Congress evidently intended that the relevant date under sections
4022(g) and 4044(e) be the date on which the bankruptcy petition was
filed, regardless of whether it is a voluntary or involuntary petition.
Changes Unrelated to PPA 2006
The final regulation adopts a few minor changes unrelated to the
PPA 2006 amendments, most of which were proposed in the proposed
regulation. For example, in Sec. Sec. 4022.4(a)(1), 4044.2, and
4044.13, the final regulation changes the words ``date of termination''
or ``date of plan termination'' to ``termination date'' to conform to
the current phrasing in section 4048(a) of ERISA. The regulation amends
Sec. 4022.4(a)(2) to codify PBGC's practice of allowing a participant
who has elected an optional life-annuity form of benefit (not a lump
sum) at any time up until the date that PBGC is appointed statutory
trustee of the plan to receive his benefit in that form, even if it is
not one of the PBGC optional forms under Sec. 4022.8(c) of the
regulations. The regulation also corrects the reference in Sec.
4022.22 to the provision of the Internal Revenue Code defining ``earned
income''; the definition has been moved from section 911(b) to section
911(d)(2) of the Code since PBGC's original regulation was adopted.
A new Sec. 4022.62(b)(5) has been added to clarify that the rules
in Sec. 4022.62(b), which generally apply to the calculation of
estimated benefits pending PBGC's determination of final benefits, do
not override the requirements of subparts A or B of part 4022 with
respect to the requirements for a benefit to be guaranteed by PBGC.
In addition to these changes that were in the proposed regulation,
the final regulation incorporates some other minor changes unrelated to
PPA 2006. The final rule makes non-substantive, clarifying changes to
Sec. 4044.13, including examples designed to remove any ambiguity
about the dates on which the relevant periods begin and end.
Also, certain provisions of existing part 4044 have been superseded
by legislative changes, and some provisions of the existing regulation
include anachronistic language. The existing regulation contains a
prefatory note to the effect that PBGC intends to amend part 4044 to
conform it to current statutory provisions. The final rule does so by
deleting or rewording anachronistic language in part 4044; no
substantive change in part 4044 is intended. It also removes the no-
longer-needed prefatory note in part 4044 (and does not include a
prefatory note that the proposed rule would have added to part 4022).
Coordination With Other PPA 2006 Amendments
Section 404 was only one of a number of provisions of PPA 2006 that
affect the determination of benefits under Title IV. PBGC's regulations
therefore must coordinate the various provisions, where necessary.
Below is a description of certain PPA 2006 amendments that interrelate
with the changes made by section 404.
Shutdown Benefits and Other Unpredictable Contingent Event Benefits
One situation requiring coordination involves section 403 of PPA
2006, which added new section 4022(b)(8) to the guarantee provisions of
Title IV. Section 4022(b)(8) provides a special phase-in rule for
shutdown benefits and other ``unpredictable contingent event
benefits.'' In cases to which that provision applies, PBGC is to apply
the phase-in rules of section 4022 as if a plan amendment had been
adopted on the date that the unpredictable contingent event occurred.
For example, in a case in which new section 4022(g) does not apply, if
an unpredictable contingent event occurred more than two years but less
than three years before the termination date, this would mean that the
guarantee of a benefit increase arising from the unpredictable
contingent event would be 40% phased in.
But if section 4022(g) also applies to such a case, PBGC believes
that, as with other benefit increases, the five-year phase-in period
must be measured by reference to the bankruptcy filing date, not the
termination date. Thus, continuing the above example, if the sponsor's
bankruptcy filing date were one year before the plan's termination
date, then the guarantee of the unpredictable contingent event benefit
would be only 20% rather than 40% phased in, because the unpredictable
contingent event would have occurred more than one year but less than
two years before the bankruptcy filing date. Section 4022(b)(8) applies
to benefits that become payable as a result of an unpredictable
contingent event that occurs after July 26, 2005.
PBGC intends to issue a separate proposed rule to implement section
4022(b)(8).
[[Page 34600]]
Commercial Airlines
Another provision that raises coordination issues is PPA 2006
section 402(g)(2)(A), which added new section 4022(h) to Title IV.
Section 4022(h) modifies the guarantee and asset allocation rules
primarily for plans of commercial airlines that make an election under
section 402(a)(1) of PPA 2006 (relating to special minimum funding
rules) and that terminate within 10 years of such election. Section
4022(h) provides that when those conditions are met, section 4022 is to
be applied by treating the first day of the first applicable plan year
(for the special airline funding rules) as the termination date of the
plan. It also provides generally that the plan's assets are to be
allocated first to the benefits that would have been guaranteed but for
this provision (i.e., ahead of benefits in all other priority
categories under section 4044). Section 4022(h) applies to plan years
ending after August 17, 2006.
The final regulation does not address implementation of section
4022(h) or how it interrelates with the amendments made by section 404
of PPA 2006. PBGC intends to do so in a future rulemaking.
Substantial-Owner Benefits
Section 407 of PPA 2006 amended section 4022(b)(5) of ERISA, which
previously provided a special phase-in rule for PBGC's guarantee of the
benefits of ``substantial owners,'' who were generally defined as those
owning more than 10% of the business. Under the amendment, a special
phase-in rule applies only to benefits of ``majority owners,''
generally defined as those owning 50% or more of the business. The
amendment also completely revamped the way in which the special phase-
in rule works. Previously, the substantial-owner phase-in rule was used
in lieu of the usual phase-in rule for benefits of substantial owners.
The new majority-owner phase-in rule, by contrast, applies in addition
to the usual phase-in rule, but the additional limitation looks back
only 10 years rather than 30 years. Finally, section 407 of PPA 2006
amended section 4044 of ERISA to change the treatment in priority
category 4 of benefits subject to the majority-owner phase-in. These
section 407 amendments are effective for distress terminations in which
notices of intent to terminate are provided on or after January 1,
2006, and for involuntary terminations in which notices of
determination are provided on or after January 1, 2006.
The final regulation does not address implementation of these
changes or how they interrelate with the amendments made by section 404
of PPA 2006. PBGC intends to do so in a future rulemaking.
Applicability
Section 404(c) of PPA 2006 provided that the changes made by
section 404 apply to any plan whose termination date occurs while
bankruptcy proceedings are pending with respect to the contributing
sponsor of the plan, if the bankruptcy proceedings were initiated on or
after September 16, 2006. Bankruptcy proceedings are pending, for this
purpose, if the contributing sponsor has filed or has had filed against
it a petition seeking liquidation or reorganization in a case under
title 11, United States Code, or under any similar Federal law or law
of a State or political subdivision, and the case has not been
dismissed as of the termination date of the plan. Accordingly, the
final regulation, which implements the statutory changes, likewise
applies to terminations occurring during a bankruptcy proceeding of the
contributing sponsor that was initiated on or after September 16, 2006.
Compliance With Rulemaking Guidelines
Executive Order 12866
PBGC has determined, in consultation with the Office of Management
and Budget, that this final rule is a ``significant regulatory action''
under Executive Order 12866. The Office of Management and Budget has
therefore reviewed this final rule under that executive order.
Section 404 of PPA 2006 made significant changes to provisions of
Title IV of ERISA relating to the guarantee of benefits under section
4022 and the allocation of a terminated plan's assets under section
4044. This final rule implements those statutory changes and, as
described in this preamble, clarifies the implications of those changes
in areas where there might be ambiguity in the absence of a regulation.
The final rule provides guidance to participants and beneficiaries of
terminated plans about their benefits paid by PBGC. It will also assist
PBGC staff in making benefit determinations. Except for a few minor
housekeeping items described above under ``Changes Unrelated to PPA
2006,'' the final rule is limited to implementing and clarifying the
changes made by section 404.
Under Section 3(f)(1) of Executive Order 12866, a regulatory action
is economically significant if ``it is likely to result in a rule that
may * * * [h]ave an annual effect on the economy of $100 million or
more or adversely affect in a material way the economy, a sector of the
economy, productivity, competition, jobs, the environment, public
health or safety, or State, local, or Tribal governments or
communities. The PBGC has determined that this final rule does not
cross the $100 million threshold for economic significance and is not
otherwise economically significant.
As discussed above, the economic effect of the final rule is
attributable almost entirely to the economic effect of section 404(c)
of PPA 2006. Accordingly, PBGC bases its determination on its
experience with plans subject to the statutory provision. As stated
above in Applicability, the statutory provision applies to any plan
whose termination date occurs while bankruptcy proceedings are pending
with respect to the contributing sponsor of the plan, if the bankruptcy
proceedings were initiated on or after September 16, 2006.
PBGC estimates that, to date, the total effect of section 404(c) of
PPA--in terms of lower benefits paid to participants and associated
savings for PBGC--is between $10 and $15 million. Many of the plans
subject to the statutory provision had frozen benefit accruals before
the date of bankruptcy filing, which resulted in the statutory
provision having minimal, if any, effect. For those plans for which the
statutory provision did significantly affect benefits, the effect was
lessened because the date of bankruptcy filing was less than a year
(and sometimes much less) before the date of plan termination.
For various reasons, it is difficult to predict the future effect
of the statutory provision and related regulatory changes. For example,
PBGC cannot predict with certainty which plans will terminate during
the bankruptcy of the plan sponsor, how long the plan sponsor will be
in bankruptcy before the plan terminates, whether the plan will be
frozen, the funding level of the plan, or what benefits will be
affected by the guarantee limits. However, given the relatively low
estimate of the effect of the statutory provision to date, PBGC has
determined that the annual effect of the final rule will be less than
$100 million.
Regulatory Flexibility Act
PBGC certifies under section 605(b) of the Regulatory Flexibility
Act (5 U.S.C. 601 et seq.) that the amendments in this final regulation
will not have a significant economic impact on a substantial number of
small entities. The amendments implement and in some cases clarify
statutory changes made in PPA 2006; they do not impose new burdens on
entities of any size.
[[Page 34601]]
Virtually all of the statutory changes affect only PBGC and persons who
receive benefits from PBGC. Accordingly, as provided in section 605 of
the Regulatory Flexibility Act, sections 603 and 604 do not apply.
List of Subjects
29 CFR Part 4001
Pensions.
29 CFR Part 4022
Pension insurance, Pensions, Reporting and recordkeeping
requirements.
29 CFR Part 4044
Pension insurance, Pensions.
For the reasons given above, PBGC is amending 29 CFR parts 4001,
4022, and 4044 as follows.
PART 4001--TERMINOLOGY
0
1. The authority citation for part 4001 continues to read as follows:
Authority: 29 U.S.C. 1301, 1302(b)(3).
0
2. In Sec. 4001.2:
0
a. Amend the definition of basic-type benefit by adding a sentence at
the end.
0
b. Amend the definition of sufficient for guaranteed benefits by adding
two sentences at the end.
0
c. Add definitions for bankruptcy filing date and non-PPA 2006
bankruptcy termination in alphabetical order.
The additions read as follows:
Sec. 4001.2 Definitions
* * * * *
Bankruptcy filing date means, with respect to a plan, the date on
which a petition commencing a case under the United States Bankruptcy
Code is filed, or the date on which any similar filing is made
commencing a case under any similar Federal law or law of a State or
political subdivision, with respect to the contributing sponsor of the
plan, if such case has not been dismissed as of the termination date of
the plan. If a bankruptcy petition is filed under one chapter of the
United States Bankruptcy Code, or under one chapter or provision of any
such similar law, and the case is converted to a case under a different
chapter or provision of such Code or similar law (for example, a
Chapter 11 reorganization case is converted to a Chapter 7 liquidation
case), the date of the original petition is the bankruptcy filing date.
If such a plan has more than one contributing sponsor:
(1) If all contributing sponsors entered bankruptcy on the same
date, that date is the bankruptcy filing date;
(2) If all contributing sponsors did not enter bankruptcy on the
same date (or if not all contributing sponsors are in bankruptcy), PBGC
will determine the date that will be treated as the bankruptcy filing
date based on the facts and circumstances, which may include such
things as the relative sizes of the contributing sponsors, the relative
amounts of their minimum required contributions to the plan, the timing
of the different bankruptcies, and the expectations of participants.
Basic-type benefit * * * In a PPA 2006 bankruptcy termination, it
also includes a benefit accrued by a participant, or to which a
participant otherwise became entitled, on or before the plan's
termination date but that is not guaranteed solely because of the
provisions of Sec. Sec. 4022.3(b) or 4022.4(c).
* * * * *
Non-PPA 2006 bankruptcy termination means a plan termination that
is not a PPA 2006 bankruptcy termination.
* * * * *
Sufficient for guaranteed benefits * * * In a PPA 2006 bankruptcy
termination, the determination whether a plan is sufficient for
guaranteed benefits is made taking into account the limitations in
sections 4022(g) and 4044(e) of ERISA (and corresponding provisions of
these regulations). The determinations of which benefits are guaranteed
and which benefits are in priority category 3 under section 4044(a)(3)
of ERISA are made by reference to the bankruptcy filing date, but the
present values of those benefits are determined as of the proposed
termination date and the date of distribution.
* * * * *
PART 4022--BENEFITS PAYABLE IN TERMINATED SINGLE-EMPLOYER PLANS
0
3. The authority citation for part 4022 continues to read as follows:
Authority: 29 U.S.C. 1302, 1322, 1322b, 1341(c)(3)(D), and 1344.
Sec. 4022.2 [Amended]
0
4. In Sec. 4022.2, amend the introductory text by removing the words
``annuity, Code'' and adding in their place ``annuity, bankruptcy
filing date, Code''; and by removing the words ``nonforfeitable
benefit, normal retirement age'' and adding in their place
``nonforfeitable benefit, non-PPA 2006 bankruptcy termination, normal
retirement age''.
0
5. In Sec. 4022.3:
0
a. Designate the introductory text as paragraph (a) with the heading
``General.''
0
b. Redesignate paragraphs (a), (b), and (c) as paragraphs (1), (2), and
(3).
0
c. Add new paragraph (b) to read as follows:
Sec. 4022.3 Guaranteed benefits.
* * * * *
(b) PPA 2006 bankruptcy termination. (1) Substitution of bankruptcy
filing date. In a PPA 2006 bankruptcy termination, ``bankruptcy filing
date'' is substituted for ``termination date'' each place that
``termination date'' appears in paragraph (a) of this section.
(2) Condition for entitlement satisfied between bankruptcy filing
date and termination date. If a participant becomes entitled to a
subsidized early retirement or other benefit before the termination
date (or on or before the termination date, in the case of a
requirement that a participant attain a particular age, earn a
particular amount of service, become disabled, or die) but on or after
the bankruptcy filing date (or after the bankruptcy filing date, in the
case of a requirement that a participant attain a particular age, earn
a particular amount of service, become disabled, or die), the subsidy
or other benefit is not guaranteed because the participant had not
satisfied the conditions for entitlement by the bankruptcy filing date.
In such a case, the participant may have been put into pay status with
the subsidized early retirement or other benefit by the plan
administrator, because the plan was ongoing at the time. Even though
the subsidy or other benefit is not guaranteed, the participant may be
entitled to another benefit from PBGC (at that time or in the future).
If so, PBGC will continue paying the participant a benefit, but in an
amount reduced to reflect that the subsidy or other benefit is not
guaranteed. PBGC will also allow a similarly situated participant who
had not started receiving a subsidized early retirement or other
benefit before PBGC became trustee of the plan to begin receiving a
benefit (if the participant would have been allowed under the plan to
begin receiving benefits and has reached his Earliest PBGC Retirement
Date, as defined in Sec. 4022.10), but in an amount that does not
include the subsidy or other benefit.
(3) Examples. (i) Vesting. A plan provides for 5-year ``cliff''
vesting--i.e., benefits become 100% vested when the participant
completes five years of service; before the five-year mark, benefits
are 0% vested. The contributing sponsor of the plan files a bankruptcy
petition on November 15, 2006. The plan terminates with a termination
date of December 4, 2007, and PBGC becomes statutory trustee of the
plan. A
[[Page 34602]]
participant had four years and six months of service at the bankruptcy
filing date and became vested in May 2007. None of the participant's
benefit is guaranteed because none of the benefit was nonforfeitable as
of the bankruptcy filing date.
(ii) Subsidized early retirement benefit. The facts regarding the
plan are the same as in Example (i) (paragraph (b)(3)(i) of this
section), but the plan also provides that a participant may retire from
active employment at any age with a fully subsidized (i.e., not
actuarially reduced) early retirement benefit if he has completed 30
years of service. The plan also provides that a participant who is age
60 and has completed 20 years of service may retire from active
employment with an early retirement benefit, reduced by three percent
for each year by which the participant's age at benefit commencement is
less than 65. A participant was age 61 and had 29 years and 6 months of
service at the bankruptcy filing date. The participant continued
working for another six months, then retired as of June 1, 2007, and
immediately began receiving from the plan the fully subsidized ``30-
and-out'' early retirement benefit. PBGC will continue paying the
participant a benefit, but PBGC's guarantee does not include the full
subsidy for the ``30-and-out'' benefit, because the participant
satisfied the conditions for that benefit after the bankruptcy filing
date. The guarantee does include, however, the partial subsidy
associated with the ``60/20'' early retirement benefit, because the
participant satisfied the conditions for that benefit before the
bankruptcy filing date.
(iii) Accruals after bankruptcy filing date. The facts regarding
the plan are the same as in Example (i) (paragraph (b)(3)(i) of this
section). A participant has a vested, accrued benefit of $500 per month
as of the bankruptcy filing date. At the plan's termination date, the
participant has a vested, accrued benefit of $512 per month. His
guaranteed benefit is limited to $500 per month--the accrued,
nonforfeitable benefit as of the bankruptcy filing date.
0
6. In Sec. 4022.4:
0
a. Amend paragraph (a)(1) by removing ``date of the termination'' and
adding in its place ``termination date''.
0
b. Revise paragraph (a)(2) and add paragraph (c) to read as follows:
Sec. 4022.4 Entitlement to a benefit.
(a) * * *
(2) The benefit is payable in an optional life-annuity form of
benefit that the participant or beneficiary elected on or before the
termination date of the plan or, if later, the date on which PBGC
became statutory trustee of the plan.
* * * * *
(c) In a PPA 2006 bankruptcy termination, ``bankruptcy filing
date'' is substituted for ``termination date'' each place that
``termination date'' appears in paragraphs (a)(1) and (3) of this
section. In making this substitution for purposes of paragraph (a)(3)
of this section, the rule in Sec. 4022.3(b)(2) (dealing with the
situation where the condition for entitlement was satisfied between the
bankruptcy filing date and the termination date) shall apply.
0
7. In Sec. 4022.6:
0
a. Amend paragraph (a) by removing ``provided in paragraph (b) of'' and
adding in its place ``otherwise provided in''.
0
b. Add new paragraph (d) to read as follows:
Sec. 4022.6 Annuity payable for total disability.
* * * * *
(d) PPA 2006 bankruptcy termination. In a PPA 2006 bankruptcy
termination, ``bankruptcy filing date'' is substituted for
``termination date'' in paragraph (a) of this section.
0
8. In Sec. 4022.21:
0
a. Amend paragraph (a)(1) by removing ``(b), (c) and (d)'' in the first
sentence and adding in its place ``(b), (c), (d), and (e).''
0
b. Add new paragraph (e) to read as follows:
Sec. 4022.21 Limitations; in general.
* * * * *
(e) PPA 2006 bankruptcy termination. (1) Substitution of bankruptcy
filing date. In a PPA 2006 bankruptcy termination, ``bankruptcy filing
date'' is substituted for ``termination date'' each place that
``termination date'' appears in paragraph (a)(1) of this section.
(2) Examples. (i) Straight-life annuity. A plan provides for normal
retirement at age 65. If a participant terminates employment at or
after age 55 with 25 years of service, the plan will pay an unreduced
early retirement benefit, plus a temporary supplement of $400 per month
until the participant reaches age 62. When the plan's contributing
sponsor files a bankruptcy petition in 2008, a participant who is still
working has a vested, accrued benefit of $1,500 per month (as a
straight-life annuity) and has satisfied the age and service
requirements for the unreduced early retirement benefit. The
participant retires eight months later, when his vested, accrued
benefit is $1,530 per month (as a straight-life annuity). He elects to
receive his benefit as a straight-life annuity, and begins receiving a
total benefit of $1,930: His $1,530 accrued benefit plus the $400
temporary supplement. The plan terminates six months later, during the
sponsor's bankruptcy. No Title IV limitations apply to the
participant's benefit, other than the limitation in paragraph (a)(1) of
this section. PBGC will guarantee $1,500, the amount of the
participant's accrued benefit (as a straight-life annuity) as of the
bankruptcy filing date.
(ii) Joint-and-survivor annuity. The facts are the same as Example
(i) (paragraph (e)(2)(i) of this section), except that the participant
elects to receive his benefit as a 50% joint-and-survivor annuity.
Before plan termination, the participant was receiving a total benefit
of $1,777: His $1,530 accrued benefit, reduced by 10% for the survivor
benefit, plus the $400 temporary supplement. From the termination date
until the participant reaches age 62, PBGC will guarantee $1,500: The
$1,500 accrued benefit (as a straight-life annuity) as of the
bankruptcy filing date, reduced to $1,350 to reflect the 10% reduction
for the survivor benefit, plus $150 of the temporary supplement that,
in combination with the $1,350, does not exceed the $1,500 accrued-at-
normal limit. When the participant reaches age 62, his guaranteed
benefit is reduced to $1,350, because under plan provisions the
temporary supplement ceases at that time.
0
9. Revise Sec. 4022.22 to read as follows:
Sec. 4022.22 Maximum guaranteeable benefit.
(a) In general. Subject to section 4022B of ERISA and part 4022B of
this chapter, and except as provided in paragraph (b) of this section,
benefits payable with respect to a participant under a plan shall be
guaranteed only to the extent that such benefits do not exceed the
actuarial value of a benefit in the form of a life annuity payable in
monthly installments, commencing at age 65, equal to the lesser of--
(1) One-twelfth of the participant's average annual gross income
from his employer during either his highest-paid five consecutive
calendar years in which he was an active participant under the plan, or
if he was not an active participant throughout the entire such period,
the lesser number of calendar years within that period in which he was
an active participant under the plan; or
(2) $750 multiplied by the fraction x/$13,200 where ``x'' is the
Social Security contribution and benefit base determined under section
230 of the Social Security Act in effect at the termination date of the
plan.
[[Page 34603]]
(b) PPA 2006 bankruptcy termination. In a PPA 2006 bankruptcy
termination--
(1) The five-year period described in paragraph (a)(1) of this
section shall not include any calendar years that end after the
bankruptcy filing date.
(2) ``Bankruptcy filing date'' is substituted for ``termination
date of the plan'' in paragraph (a)(2) of this section. Example: A
contributing sponsor files a bankruptcy petition in 2007. The sponsor's
plan terminates in a distress termination with a termination date in
2008. PBGC will compute participants' maximum guaranteeable benefits
based on the amount determined under paragraph (a)(2) for 2007
($4,125.00 as a straight-life annuity starting at age 65).
(c) Gross income. For purposes of paragraph (a)(1) of this
section--
(1) Gross income means ``earned income'' as defined in section
911(d)(2) of the Code, determined without regard to any community
property laws.
(2) If the plan is one to which more than one employer contributes,
and during any calendar year the participant received gross income from
more than one such contributing employer, then the amounts so received
shall be aggregated in determining the participant's gross income for
the calendar year.
0
10. In Sec. 4022.23, add paragraph (g) to read as follows:
Sec. 4022.23 Computation of maximum guaranteeable benefits.
* * * * *
(g) PPA 2006 bankruptcy termination. (1) In a PPA 2006 bankruptcy
termination, except as provided in the next sentence, ``bankruptcy
filing date'' is substituted for ``termination date'' and ``date of
plan termination'' each place that ``termination date'' or ``date of
plan termination'' appears in paragraphs (c), (d), and (f) of this
section. In any case in which an event (such as the death of a
participant or beneficiary who was alive on the bankruptcy filing date)
that affects who is receiving or will receive a benefit from PBGC has
occurred on or before the termination date, PBGC will determine the
factors in paragraphs (d), (e), and (f) based on the form of benefit
that was being paid (or was payable) and the person who was receiving
or was entitled to receive the benefit from PBGC as of the termination
date. (The case of Participant C in the example below illustrates this
exception.)
(2) Example. (i) Facts. The contributing sponsor of a plan files a
bankruptcy petition in July 2007, and the sponsor's plan terminates in
a PBGC-initiated termination with a termination date in July 2008. At
the bankruptcy filing date:
(A) Participant A was age 64 and receiving a benefit from the plan
in the form of a 10-year certain-and-continuous annuity, with 4 years
remaining in the certain period.
(B) Participant B was age 60 and 6 months and was still working.
She began receiving a benefit from the plan in the form of a 50% joint-
and-survivor annuity when she turned 61 in January 2008. Her spouse was
the same age as she.
(C) Participant C was age 60 and was receiving a $3,000/month
benefit from the plan in the form of a 50% joint-and-survivor annuity,
with his spouse, age 58, as his beneficiary. Participant C he died in
February 2008 and in March 2008 his spouse began receiving a 50%
survivor annuity of $1,500/month.
(D) Participant D was age 59 and was still working; he began
receiving a straight-life annuity from the PBGC in July 2010 when he
was 62 years old.
(ii) Conclusions. In accordance with Sec. 4022.22(b)(2), PBGC
computes the maximum guaranteeable monthly benefit for Participants A,
B, and D and for the spouse of Participant C based on the $4,125.00
amount determined under Sec. 4022.22(a)(2) for 2007. (The gross-
income-based limitation in Sec. 4022.22(a)(1) does not apply to any of
these participants.)
(A) Participant A's maximum guaranteeable monthly benefit is
$3,759.53 [$4,125.00 x .93 (7% reduction for a benefit starting at age
64) x .98 (2% reduction for a certain-and-continuous annuity with 4
years remaining in the certain period)].
(B) Participant B's maximum guaranteeable monthly benefit is
$2,673.00 [$4,125.00 x .72 (28% reduction for a benefit starting at age
61) x .90 (10% reduction due to the 50% joint-and-survivor feature)].
(C) Participant C's spouse's maximum guaranteeable monthly benefit
is $2,351.25 [$4,125.00 x .57 (43% reduction for a benefit starting at
age 58; no reduction for the form of benefit because the spouse's
survivor benefit is a straight-life annuity)]. Because that amount
exceeds the spouse's $1,500 monthly survivor benefit, the spouse's
benefit is not reduced by the maximum guaranteeable benefit limitation.
(D) Participant D's maximum guaranteeable monthly benefit is
$3,258.75 [$4,125.00 x .79 (21% reduction for a benefit starting at age
62)].
0
11. In Sec. 4022.24, add paragraph (f) to read as follows:
Sec. 4022.24 Benefit increases.
* * * * *
(f) PPA 2006 bankruptcy termination. In a PPA 2006 bankruptcy
termination, except as provided in the next sentence, ``bankruptcy
filing date'' is substituted for ``termination date'' each place that
``termination date'' appears in paragraphs (a) and (c) of this section.
In any case in which an event (such as the death of a participant or
beneficiary who was alive on the bankruptcy filing date) that affects
who is receiving or will receive a benefit from PBGC has occurred on or
before the termination date, PBGC will compute the benefit based on the
form of benefit that was being paid (or was payable) and the person who
was receiving or was entitled to receive the benefit from PBGC as of
the termination date, consistent with Sec. 4022.23(g).
0
12. In Sec. 4022.25, add paragraph (f) to read as follows:
Sec. 4022.25 Five-year phase-in of benefit guarantee for participants
other than substantial owners.
* * * * *
(f) PPA 2006 bankruptcy termination. In a PPA 2006 bankruptcy
termination, ``bankruptcy filing date'' is substituted for
``termination date'' each place that ``termination date'' appears in
paragraphs (c) and (d) of this section. Example: A plan amendment that
was adopted and effective in February 2007 increased a participant's
benefit by $300 per month (as computed under Sec. 4022.24). The
contributing sponsor of the plan filed a bankruptcy petition in March
2009 and the plan has a termination date in April 2010. PBGC's
guarantee of the participant's benefit increase is limited to $120
($300 x 40%), because the increase was made more than 2 years but less
than 3 years before the bankruptcy filing date.
Subpart C--Section 4022(c) Benefits
0
13. Revise the heading for subpart C to read as set forth above.
0
14. Add new Sec. 4022.51 under subpart C to read as follows:
Sec. 4022.51 Determination of section 4022(c) benefits in a PPA 2006
bankruptcy termination.
(a) Amount of unfunded nonguaranteed benefits. For purposes of this
section, and subject to paragraph (b) of this section, a plan's amount
of unfunded nonguaranteed benefits means the plan's outstanding amount
of benefit liabilities, as defined in section 4001(a)(19) of ERISA,
determined as of the plan's termination date. A plan's amount of
unfunded nonguaranteed
[[Page 34604]]
benefits is multiplied by the applicable recovery ratio to determine
the aggregate amount to be allocated with respect to participants of
the plan under section 4022(c)(1) of ERISA.
(b) Benefits included in unfunded nonguaranteed benefits. For
purposes of computing benefits under section 4022(c) of ERISA in a PPA
2006 bankruptcy termination, unfunded nonguaranteed benefits are
benefits under a plan as of the plan's termination date that are
neither guaranteed by PBGC (taking into account section 4022(g) of
ERISA) nor funded by the plan's assets (taking into account section
4044(e) of ERISA).
(c) Determination of recovery ratio. In a PPA 2006 bankruptcy
termination, the recovery ratio under section 4022(c)(3) of ERISA is
determined as follows. The numerator is based on PBGC's recoveries
under section 4062, 4063, or 4064, valued as of the plan's (or plans')
termination date (or dates). The denominator of the recovery ratio is
based on the amount of unfunded benefit liabilities, as defined in
section 4001(a)(18) of ERISA, as of the plan's (or plans') termination
date (or dates).
0
15. In Sec. 4022.61:
0
a. Amend paragraph (c) by removing ``4022.22(b)'' and adding in its
place ``4022.22(a)(2)'' and by adding a sentence at the end.
0
b. Amend paragraph (f) introductory text by removing ``:'' and adding
in its place ``.'' and by adding a parenthetical reference at the end.
The additions read as follows:
Sec. 4022.61 Limitations on benefit payments by plan administrator.
* * * * *
(c) * * * In a PPA 2006 bankruptcy termination, the maximum
guaranteeable benefit is determined as of the bankruptcy filing date,
in accordance with Sec. Sec. 4022.22(b) and 4022.23(g).
* * * * *
(f) * * * (For examples addressing issues specific to a PPA 2006
bankruptcy termination, see Sec. Sec. 4022.21(e), 4022.22(b), and
4022.23(g).)
* * * * *
0
16. In Sec. 4022.62:
0
a. Redesignate paragraph (e) as paragraph (f).
0
b. Amend the introductory text of newly redesignated paragraph (f) by
removing ``:'' and adding in its place ``.'' and by adding a
parenthetical reference at the end.
0
c. Revise paragraphs (b)(1) and (b)(2), and add paragraph (b)(5) and
new paragraph (e) to read as follows:
Sec. 4022.62 Estimated guaranteed benefits.
* * * * *
(b) * * *
(1) Non-PPA 2006 bankruptcy termination. In a non-PPA 2006
bankruptcy termination:
(i) For benefits payable with respect to a participant who is in
pay status on or before the proposed termination date, the plan
administrator shall use the participant's age and benefit payable under
the plan as of the proposed termination date.
(ii) For benefits payable with respect to a participant who enters
pay status after the proposed termination date, the plan administrator
shall use the participant's age as of the benefit commencement date and
his service and compensation as of the proposed termination date.
(2) PPA 2006 bankruptcy termination. In a PPA 2006 bankruptcy
termination:
(i) For benefits payable with respect to a participant who is in
pay status on or before the bankruptcy filing date, the plan
administrator shall use the participant's age and benefit payable under
the plan as of the bankruptcy filing date.
(ii) For benefits payable with respect to a participant who enters
pay status after the bankruptcy filing date, the plan administrator
shall use the participant's age as of the benefit commencement date and
his service and compensation as of the bankruptcy filing date.
* * * * *
(5) Nothing in this paragraph (b) overrides the provisions of
subparts A and B of part 4022 with respect to the requirements
necessary for a benefit to be guaranteed by PBGC.
* * * * *
(e) PPA 2006 bankruptcy termination. In a PPA 2006 bankruptcy
termination, ``bankruptcy filing date'' is substituted for ``proposed
termination date'' each place that ``proposed termination date''
appears in paragraph (c) of this section.
(f) * * * (For an example addressing issues specific to a PPA 2006
bankruptcy termination, see Sec. 4022.25(f).).
* * * * *
0
17. In Sec. 4022.63:
0
a. Redesignate the introductory text of paragraph (c) as paragraph
(c)(1) with the heading ``In general.''
0
b. Redesignate paragraph (c)(1) as paragraph (c)(1)(i) and redesignate
paragraph (c)(2) as paragraph (c)(1)(ii).
0
c. Add new paragraphs (b)(3) and (c)(2).
0
d. In paragraph (e), amend Example 1 by adding a paragraph at the end.
The additions read as follows:
Sec. 4022.63 Estimated title IV benefits.
* * * * *
(b) * * *
(3) PPA 2006 bankruptcy termination. In a PPA 2006 bankruptcy
termination, ``bankruptcy filing date'' is substituted for ``proposed
termination date'' in the first sentence of paragraph (b)(2) of this
section.
(c) * * *
(2) PPA 2006 bankruptcy termination. In a PPA 2006 bankruptcy
termination, ``bankruptcy filing date'' is substituted for ``proposed
termination date'' each place that ``proposed termination date''
appears in paragraph (c)(1) of this section.
* * * * *
(e) * * *
Example 1. * * *
* * * * *
PPA 2006 bankruptcy termination. In a PPA 2006 bankruptcy
termination, the methodology would be the same, but ``bankruptcy filing
date'' would be substituted for ``proposed termination date'' each
place that ``proposed termination date'' appears in the example, and
the numbers would change accordingly.
* * * * *
0
18. In Sec. 4022.81:
0
a. Redesignate paragraphs (c)(3) and (4) as paragraphs (c)(4) and (5).
0
b. Add new paragraph (c)(3) to read as follows:
Sec. 4022.81 General rules.
* * * * *
(c) * * *
(3) PPA 2006 bankruptcy termination. The provisions of paragraphs
(c)(1) and (2) of this section regarding the overpayments and
underpayments that will be included in the account balance apply
regardless of whether the termination is a PPA 2006 bankruptcy
termination.
* * * * *
0
19. In Sec. 4022.82, revise paragraph (a)(1) to read as follows:
Sec. 4022.82 Method of recoupment.
(a) * * *
(1) Computation. The PBGC will determine the fractional multiplier
by dividing the amount of the net overpayment by the present value of
the benefit payable with respect to the participant under title IV of
ERISA.
(i) Non-PPA 2006 bankruptcy termination. In a non-PPA bankruptcy
termination, the PBGC will determine the present value of the benefit
to which a participant or beneficiary is entitled under title IV of
ERISA as of the termination date, using the PBGC interest rates and
factors in effect on that date.
[[Page 34605]]
(ii) PPA 2006 bankruptcy termination. In a PPA 2006 bankruptcy
termination, PBGC will determine the amount of benefit payable with
respect to the participant under title IV of ERISA taking into account
the limitations in sections 4022(g) and 4044(e) (and corresponding
provisions of these regulations), and will determine the present value
of that amount as of the termination date, using PBGC interest rates
and factors in effect on the termination date.
(iii) Facts and circumstances. The PBGC may, however, utilize a
different date of determination if warranted by the facts and
circumstances of a particular case.
* * * * *
PART 4044--ALLOCATION OF ASSETS IN SINGLE-EMPLOYER PLANS
0
20. The authority citation for part 4044 is revised to read as follows
(note is removed):
Authority: 29 U.S.C. 1301(a), 1302(b)(3), 1341, 1344, 1362.
Sec. 4044.1 [Amended]
0
21. In Sec. 4044.1:
0
a. Amend paragraph (b)(1) by removing from the second sentence the
words ``receive or that expect to receive a Notice of Inability to
Determine Sufficiency from PBGC and,'' and by removing from the end of
the paragraph the parenthetical ``(See Note at beginning of part
4044.)''.
0
b. Amend paragraph (b)(2) by removing ``received a Notice of
Sufficiency issued by PBGC pursuant to part 2617 and has'' and by
removing ``(See Note at beginning of part 4044.)''.
Sec. 4044.2 [Amended]
0
22. In Sec. 4044.2:
0
a. Amend paragraph (a) by removing ``annuity, basic-type benefit'' and
adding in its place ``annuity, bankruptcy filing date, basic-type
benefit'' and by removing ``nonforfeitable benefit, normal retirement
age'' and adding in its place ``nonforfeitable benefit, non-PPA 2006
bankruptcy termination, normal retirement age''.
0
b. In paragraph (b), amend the definition of ``non-trusteed plan'' by
removing ``receives a Notice of Sufficiency from PBGC and'' and ``in
accordance with part 2617 of this chapter. (See Note at the beginning
of part 4044.);''; remove the definition of ``notice of sufficiency'';
and amend the definition of ``valuation date'' by removing ``date of
termination'' and adding in its place ``termination date''.
0
c. In paragraph (e), remove the definition of ``qualifying bid''.
Sec. 4044.3 [Amended]
0
23. In Sec. 4044.3(b):
0
a. Remove ``pursuant to a Notice of Sufficiency under the provisions of
subpart C of part 2617 of this chapter'' and add in its place ``under
Sec. 4041.28 or Sec. 4041.50''.
0
b. Remove ``(See Note at beginning of part 4044.)''.
Sec. 4044.10 [Amended]
0
24. In Sec. 4044.10, amend the last sentence of paragraph (b) by
adding before the period at the end: ``, but, in a PPA 2006 bankruptcy
termination, subject to the limitations in sections 4022(g) and 4044(e)
of ERISA (and corresponding provisions of these regulations)''.
0
25. In Sec. 4044.13:
0
a. Paragraph (a) is revised.
0
b. Amend paragraph (b)(2)(i) by removing ``Except as provided in the
next sentence,'' and adding in its place ``Except as provided in
paragraph (b)(3),'' and by removing the second sentence.
0
c. Amend paragraph (b)(2)(ii) by removing the word ``For'' and adding
``Except as provided in paragraph (b)(3), for'' in its place at the
beginning of the first sentence.
0
d. Paragraph (c) is added.
The revision and addition read as follows:
Sec. 4044.13 Priority category 3 benefits.
(a) Definition. The benefits in priority category 3 are those
annuity benefits that were in pay status before the beginning of the 3-
year period ending on the termination date, and those annuity benefits
that could have been in pay status (then or as of the next payment date
under the plan's rules for starting benefit payments) for participants
who, before the beginning of the 3-year period ending on the
termination date, had reached their Earliest PBGC Retirement Date (as
determined under Sec. 4022.10 of this chapter) based on plan
provisions in effect on the day before the beginning of the 3-year
period ending on the termination date. For example, in a plan with a
termination date of September 1, 2012, the benefits in priority
category 3 are those annuity benefits that were in pay status on or
before September 1, 2009, and those annuity benefits that could have
been in pay status for participants who, on or before September 1,
2009, had reached their Earliest PBGC Retirement Date based on plan
provisions in effect on September 1, 2009. Benefit increases, as
defined in Sec. 4022.2, that were in effect throughout the 5-year
period ending on the termination date, including automatic benefit
increases during that period to the extent provided in paragraph (b)(5)
of this section, shall be included in determining the priority category
3 benefit. For example, in a plan with a termination date of September
1, 2012, a benefit increase that was in effect throughout the 5-year
period from September 2, 2007, to September 1, 2012, is included in
priority category 3. Benefits are primarily basic-type benefits,
although nonbasic-type benefits will be included if any portion of a
participant's priority category 3 benefit is not guaranteeable under
the provisions of subpart A of part 4022 and Sec. 4022.21 of this
chapter.
* * * * *
(c) PPA 2006 bankruptcy termination. In a PPA 2006 bankruptcy
termination:
(1) For purposes of this paragraph (c), ``applicable pre-
termination period'' means the period--
(i) Beginning on the first day of the 5-year period ending on the
bankruptcy filing date; and
(ii) Ending on the termination date. For example, if the bankruptcy
filing date is January 15, 2008, and the termination date is March 22,
2009, the applicable pre-termination period is the period beginning on
January 16, 2003, and ending on March 22, 2009.
(2) ``Applicable pre-termination period'' is substituted for ``5-
year period ending on the termination date'' each place that ``5-year
period ending on the termination date'' appears in paragraphs (a) and
(b) of this section.
(3) Except as provided in paragraph (a)(2) of this section,
``bankruptcy filing date'' is substituted for ``termination date'' and
``date of the plan termination'' each place that ``termination date''
and ``date of the plan termination'' appear in paragraphs (a) and (b)
of this section. In paragraph (b)(5) of this section, ``the bankruptcy
filing date'' is substituted for ``termination'' in the phrase ``during
the fourth and fifth years preceding termination.''
(4) Example: A plan provides for normal retirement at age 65 and
has only one early retirement benefit: a subsidized early retirement
benefit for participants who terminate employment on or after age 60
with 20 years of service. These plan provisions have been unchanged
since 1990. The contributing sponsor of the plan files a bankruptcy
petition in June 2008, and the plan terminates during the bankruptcy
with a termination date in September 2010. A participant retired in
[[Page 34606]]
July 2007, at which time he was age 60 and had 20 years of service, and
began receiving the subsidized early retirement benefit. The
participant has no benefit in priority category 3, because he was not
eligible to retire three or more years before the June 2008 bankruptcy
filing date.
Sec. 4044.14 [Amended]
0
26. Amend Sec. 4044.14 by removing ``basic-type benefits that do not
exceed the guarantee limits set forth in subpart B of part 4022 of this
chapter'' and adding in its place ``guaranteed benefits''.
Sec. 4044.41 [Amended]
0
27. Amend Sec. 4044.41, paragraph (a)(2), by removing from the second
sentence the words ``with respect to which PBGC has issued a Notice of
Sufficiency'' and removing from the end the parenthetical ``(See Note
at beginning of part 4044.)''.
Sec. 4044.71 [Amended]
0
28. Amend Sec. 4044.71 by removing ``under the qualifying bid''.
Sec. 4044.72 [Amended]
0
29. Amend Sec. 4044.72, paragraph (a)(2), by removing ``pursuant to
Sec. 2617.4(c) of this chapter'' and ``(See Note at beginning of part
4044.)''.
Sec. 4044.73 [Amended]
0
30. In Sec. 4044.73:
0
a. In paragraph (b), first sentence, remove ``pursuant to Sec. 2617.12
of part 2617 of this chapter''.
0
b. At the end of the section, remove ``(See Note at beginning of part
4044.)''.
Sec. 4044.75 [Amended]
0
31. In 4044.75:
0
a. In paragraph (a), remove ``qualifying bid'' and add in its place
``irrevocable commitment''.
0
b. At the end of the section, remove ``(See Note at beginning of part
4044.)''.
Issued in Washington, DC, this 3rd day of June 2011.
Joshua Gotbaum,
Director, Pension Benefit Guaranty Corporation.
Issued on the date set forth above pursuant to a resolution of
the Board of Directors authorizing publication of this final rule.
Judith R. Starr,
Secretary, Board of Directors, Pension Benefit Guaranty Corporation.
[FR Doc. 2011-14241 Filed 6-13-11; 8:45 am]
BILLING CODE 7709-01-P