[Federal Register: November 23, 2009 (Volume 74, Number 224)]
[Proposed Rules]
[Page 61074-61077]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23no09-21]
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PENSION BENEFIT GUARANTY CORPORATION
29 CFR Part 4041
Purchase of Irrevocable Commitments Prior to Standard Termination
AGENCY: Pension Benefit Guaranty Corporation.
ACTION: Request for public comment.
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SUMMARY: Practitioners and employers have requested guidance from PBGC
on the extent to which plan administrators may purchase irrevocable
commitments to provide plan benefits before initiating a standard
termination under section 4041(b) of ERISA. PBGC is soliciting public
comments to help develop this guidance. The issues on which PBGC seeks
comments include the extent to which such purchases of irrevocable
commitments violate statutory and regulatory termination requirements,
safeguards for participants and beneficiaries, and sanctions for
violations.
DATES: Comments must be received on or before January 22, 2010.
ADDRESSES: Comments may be submitted by any of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the Web site instructions for submitting comments.
E-mail: reg.comments@pbgc.gov.
Fax: 202-326-4224.
Mail or Hand Delivery: Legislative and Regulatory
Department, Pension Benefit Guaranty Corporation, 1200 K Street, NW.,
Washington, DC 20005-4026.
Comments received, including personal information provided, will be
posted to http://www.pbgc.gov. Copies of comments may also be obtained
by writing to Disclosure Division, Office of the General Counsel,
Pension Benefit Guaranty Corporation, 1200 K Street, NW., Washington,
DC 20005-4026 or calling 202-326-4040 during normal business hours.
(TTY and TDD users may call the Federal relay service toll-free at 1-
800-877-8339 and ask to be connected to 202-326-4040.)
FOR FURTHER INFORMATION CONTACT: Constance Markakis or Catherine B.
Klion, Attorneys, Legislative and Regulatory Department, Pension
Benefit Guaranty Corporation, Suite 12300, 1200 K Street, NW.,
Washington, DC 20005-4026, 202-326-4024. (For TTY-TTD users, call the
Federal relay service toll-free at 1-800-877-8339 and ask to be
connected to 202-326-4024.)
SUPPLEMENTARY INFORMATION: PBGC administers the termination insurance
program under Title IV of the Employee Retirement Income Security Act
of 1974 (ERISA). Under section 4041(b) of ERISA, a plan that has
sufficient assets to pay all plan liabilities may terminate in a
standard termination. Standard termination requirements (including
reporting and disclosure requirements and restrictions on distributing
plan assets during the termination process) are set forth in the
statute, PBGC's regulation on Termination of Single Employer Plans, 29
CFR part 4041, and termination forms and instructions, available on
PBGC's Web site, http://www.pbgc.gov.
Questions have been raised as to the extent to which a plan
administrator may purchase irrevocable commitments for some or all
participants during a period of time before initiating a standard
termination. Plans sometimes consider purchase of an irrevocable
commitment (an obligation by an insurer to pay benefits) to take
advantage of favorable interest rates, or to gradually prepare for a
termination.
Although PBGC understands these considerations, PBGC has concerns
about whether such purchases could circumvent the statutory and
regulatory protections afforded participants and beneficiaries under
the standard termination process. PBGC has provided only limited
informal guidance on this issue.\1\ This notice seeks public comment to
help develop more comprehensive guidance.
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\1\ 2009 Blue Book Q&A 8, available on PBGC's Web site, http://
www.pbgc.gov. Blue Books are summaries of the questions and answers
discussed at meetings between PBGC staff and representatives of the
Enrolled Actuaries Program Committee in preparation for the annual
Enrolled Actuaries Meetings. The summaries reflect the views of
individual staff members and do not represent the official position
of PBGC.
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Standard Termination Process
Under part 4041, a single-employer plan may terminate in a standard
termination if, in accordance with regulatory requirements, the plan
[[Page 61075]]
administrator provides to affected parties a notice of intent to
terminate (NOIT) and a notice of plan benefits (NOPB), files a standard
termination notice with PBGC, and distributes plan assets in
satisfaction of plan benefits.
Disclosure Requirements
The NOIT must be issued to participants, beneficiaries, alternate
payees, and employee organizations representing participants at least
60 days, and no more than 90 days, before the proposed termination
date. The NOIT must include a statement that after plan assets have
been distributed in full satisfaction of all plan benefits for a
participant or beneficiary, including by the purchase of an irrevocable
commitment, PBGC no longer guarantees the plan benefits. The NOIT must
include the name and address of the insurers from whom (if known), or
(if not) from among whom, the plan administrator intends to purchase
irrevocable commitments, as well as information on state guaranty
association coverage of annuities.\2\
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\2\ If the identity-of-insurer information is not known at the
time the NOIT is issued, the plan must provide it in a supplemental
notice no later than 45 days before the distribution date.
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The NOPB must be issued to participants, beneficiaries, and
alternate payees no later than the time the standard termination notice
is filed with PBGC. The NOPB must include the proposed termination
date, the amount and form of the person's plan benefits, including the
amount and form that would be payable at the earliest benefit
commencement date, and information on payment in a lump sum. Except in
the case of an affected party in pay status for more than a year, the
NOPB must include the personal data needed to calculate the affected
party's plan benefits, along with a statement requesting that the
affected party promptly correct any information believed to be
incorrect. If any of the personal data needed is not available, the
NOPB must include the best available data, along with a statement
informing the affected party of the data not available and giving the
affected party an opportunity to provide it.
Standard Termination Notice
The plan must file a standard termination notice (Form 500) with
PBGC on or before the 180th day after the proposed termination date.
The standard termination notice includes the number of plan
participants and beneficiaries as of the proposed termination date, the
estimated fair market value of plan assets available to pay for plan
benefits as of the proposed termination date, and the estimated present
value of plan benefits (including the estimated cost of annuity
contracts to provide plan benefits) as of the proposed distribution
date. PBGC has 60 days (unless extended) after receipt of a standard
termination notice to review the proposed termination for compliance
with applicable requirements.
PBGC will issue a notice of noncompliance during the 60-day review
period whenever it determines that the plan administrator failed to
issue the NOIT or the NOPB in accordance with applicable requirements,
the plan administrator failed to file the standard termination notice
in accordance with applicable requirements, or as of the proposed
distribution date, plan assets will not be sufficient to satisfy all
plan benefits. PBGC may decide not to issue a notice of non-compliance
based on a failure to meet those reporting or disclosure requirements
if it determines that issuance of the notice would be inconsistent with
the interests of participants and beneficiaries.
Closeout of Plan
If, by the end of the 60-day review period, PBGC does not issue a
notice of noncompliance, the plan administrator must complete the
distribution of assets to provide all plan benefits under the plan
within 180 days. (If the plan has applied for an IRS determination
letter by the time the standard termination notice is filed,
distribution must be completed within 120 days after receipt of a
favorable determination letter.) Assets are distributed by purchasing
irrevocable commitments from an insurer or in another permitted form
under the plan (usually payments of lump sums). To comply with Title
IV, the plan administrator must select the insurer in accordance with
the fiduciary standards of Title I (Sec. 4041.28(c)(3)).
If plan benefits are provided through the purchase of an
irrevocable commitment, the plan administrator or the insurer must,
within 30 days after it is available, provide the participant or
beneficiary with a certificate or a copy of the annuity contract. If
the certificate or contract is not provided within 90 days after the
distribution deadline, the plan administrator must, by that date,
provide the participant or beneficiary with a notice containing the
insurer's name, address, and contact information. The notice must also
state that the obligation for providing the benefit has transferred to
the insurer and that the participant or beneficiary will receive from
the plan administrator or insurer a certificate or a copy of the
annuity contract.
Within 30 days after the last distribution date,\3\ the plan
administrator must file with PBGC a post-distribution certification
(Form 501). The latter must include the names of insurers that provided
irrevocable commitments, numbers of participants or beneficiaries for
whom irrevocable commitments were purchased, and the total value of the
irrevocable commitments.
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\3\ Under Sec. 4041.29, PBGC will assess a penalty for late
filing of a post-distribution certification only to the extent the
certification is filed more than 90 days after the distribution
deadline (including extensions).
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Administration of Plan During Termination Process
From the first day the plan administrator issues a NOIT in a
standard termination to the last day of PBGC's 60-day review period,
the plan administrator may not purchase irrevocable commitments to
provide any plan benefits (Sec. 4041.22). An exception applies if the
participant has separated from active employment or is otherwise
permitted under the Code to receive the distribution, the distribution
is consistent with prior plan practice, and the distribution is not
reasonably expected to jeopardize the plan's sufficiency for plan
benefits.
Irrevocable Commitments
An irrevocable commitment is defined in Sec. 4001.2 as ``an
obligation by an insurer to pay benefits to a named participant or
surviving beneficiary, if the obligation cannot be cancelled under the
terms of the insurance contract (except for fraud or mistake) without
the consent of the participant or beneficiary and is legally
enforceable by the participant or beneficiary.''
Some plans contain provisions permitting the purchase of immediate
annuity contracts that are irrevocable commitments when participants
retire. Plans may also purchase deferred annuity contracts that are
irrevocable commitments in connection with a plan merger, benefit
freeze, or spin-off termination, to annuitize all or part of the
accrued benefits of active or deferred vested participants. If the plan
purchases irrevocable commitments in those situations, it may hold the
certificate or give it to the participant.
A plan may also purchase annuity contracts as a funding or
investment vehicle of the plan (e.g., the contract grows at a minimum
guaranteed rate during the accumulation phase). Such contracts are not
irrevocable commitments and do not transfer the
[[Page 61076]]
liability of the plan for benefits to the insurance company or
extinguish PBGC's obligation to guarantee plan benefits. While these
contracts are often ``unallocated'' group annuity contracts, a plan may
also purchase such contracts to fund individual participants' benefits.
An annuity contract may at times be cashed in for its surrender value
(this may occur during the termination process if the asset value is
not diminished). However, a plan may not exercise a contract provision
for the conversion of the contract to irrevocable commitments before
the end of PBGC's 60-day review period, subject to the exception in
Sec. 4042.22(b) described above. Purchase of annuity contracts as a
funding or investment vehicle of the plan does not raise termination
concerns with PBGC.
For benefits provided through the purchase of irrevocable
commitments, the distribution date is the date on which the obligation
to provide the benefits passes from the plan to the insurer. Once an
insurer has made an irrevocable commitment to pay all benefits to which
a participant who is retired or separated from employment is entitled
under the plan and who is either receiving plan benefits or entitled to
begin receiving plan benefits in the future, the individual ceases to
be a participant for purposes of part 4041 (Sec. 4041.2).\4\
Similarly, an individual ceases to be a beneficiary under the plan for
such purposes once an insurer makes an irrevocable commitment to
provide all the plan benefits to which the beneficiary is entitled.
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\4\ Under IRS regulations, a plan generally is required to
reflect in the plan's funding target and target normal cost the
liability for benefits that are funded through insurance contracts
held by the plan, and to include in plan assets the value of the
corresponding insurance contracts. A plan is permitted, however, to
exclude the benefits provided under such contracts and the
corresponding contracts to the extent that a participant's or
beneficiary's right to receive those benefits is an ``irrevocable
contractual right'' based on premiums paid prior to the valuation
date. See Treas. Reg. Sec. 1.430(d)-1(c)(2), 74 FR 53004, 53038
(Oct. 15, 2009). A plan's election under IRS regulations to include
or exclude irrevocable commitments in the plan's valuation and
minimum funding requirements has no bearing on whether the
individuals for whom the irrevocable commitments are purchased are
participants for purposes of part 4041. In addition, under IRS
regulations, any payment for the purchase of an irrevocable
commitment is a ``prohibited payment'' that is subject to certain
funding-based limitations on accelerated benefit distributions under
Code section 436(d). Treas. Reg. Sec. 1.436-1(d), 74 FR at 53083.
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Audit and Enforcement
PBGC currently conducts post-termination audits of all plans that
terminate in a standard termination with a participant count of 300 or
more. For plans with fewer than 300 participants, PBGC randomly selects
plans to audit. PBGC also may audit a plan when the agency has reason
to believe there may be a problem. The focus of the standard
termination audits is to ensure that participants receive the benefits
to which they were entitled. PBGC also audits compliance with
termination disclosure and reporting requirements. Failure to provide
required termination-related notices and disclosures is subject to
information penalties under section 4071 of ERISA.\5\
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\5\ Under section 4071 of ERISA and PBGC's information penalty
regulation (part 4071), PBGC may assess a penalty of up to $1,100 a
day if material information is not timely provided. PBGC's current
information penalty policy (60 FR 36837, Jul. 18. 1995) provides for
a guideline information penalty of $25 per day for the first 90 days
of delinquency and $50 per day thereafter. Penalties are reduced
proportionately for plans with fewer than 100 participants, and the
total penalty is capped at $100 times the number of plan
participants. The guideline penalty may be adjusted up or down based
on the facts and circumstances--for example, willful failure to
comply, pattern or practice of violation, or substantial harm to
participants or PBGC. PBGC may waive an information penalty for
``reasonable cause.''
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Starting in 2006, PBGC has been auditing all plans that make a
final distribution of plan assets before or without filing a standard
termination notice in accordance with the standard termination
regulations. After PBGC identifies such a plan, generally when it fails
to pay premiums, it requires the plan to file a standard termination
notice and post-distribution certification. PBGC can have difficulty,
however, identifying plans that purchase irrevocable commitments prior
to termination, particularly when the irrevocable commitments are
purchased for a group of participants (e.g., retirees), but not all
participants.
Section 4044.4 of PBGC's regulation on Allocation of Assets in
Single-Employer Plans (part 4044) provides that a distribution in
anticipation of termination is considered to be an allocation of plan
assets upon termination. A plan administrator violates ERISA if plan
assets are allocated or distributed upon plan termination in a manner
other than that prescribed under section 4044 of ERISA and part 4044.
The anticipation-of-termination rules generally do not come into play
where the plan terminates in a standard termination. Those rules could
be relevant, however, where plan assets are not sufficient to pay plan
benefits at the time of any distribution upon termination.
PBGC Concerns
ERISA section 4041(a) provides that the rules in section 4041(b)
for a standard termination or in section 4041(c) for a distress
termination are the exclusive means by which a single-employer plan may
voluntarily terminate. Under section 4041(b), PBGC must issue a notice
of noncompliance to the plan administrator if it determines that
participants and beneficiaries have not received all required notices
and information or that there is reason to believe that the plan is not
sufficient for benefit liabilities. PBGC has two substantial concerns
when a plan purchases irrevocable commitments before initiating a
related standard termination.
The first concern is that the purchase circumvents the statutory
and regulatory protections afforded under the standard termination
process. A participant whose plan benefits are fully satisfied through
purchase of an irrevocable commitment prior to the first day a NOIT is
issued in a related termination would not receive disclosures required
as part of the standard termination process, including advance notice
of the termination, advance information about the insurer, and a
statement that PBGC no longer guarantees those plan benefits. Such
participants may not have the same opportunity to correct personal
information used to calculate their benefits or provide personal data
not available to the plan. In addition, PBGC would not receive
information necessary to determine whether participants received the
correct benefits, including information on the number of persons for
whom irrevocable commitments were purchased and the benefits provided
through the purchase of irrevocable commitments.
The second concern is that plan assets could be insufficient for
plan benefits at the time of any distribution upon termination, since
plan assets used to purchase irrevocable commitments (and the
investment returns on those assets) would no longer be available to pay
other plan benefits. If the plan was sufficient for guaranteed
benefits, it might still terminate as a distress termination, but some
participants would lose nonguaranteed benefits. If the plan was not
sufficient for guaranteed benefits, PBGC might have to terminate and
trustee the plan, and some participants and PBGC could be harmed. This
concern generally does not arise with irrevocable commitments purchased
after the first day a NOIT is provided, because the exception in Sec.
4041.22(b) applies only if the distribution is not reasonably expected
to jeopardize the plan's sufficiency.
Neither concern applies if a plan purchases an annuity contract as
a funding or investment vehicle of the
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plan before or after the NOIT is provided, so long as it is not an
irrevocable commitment. However, the same concerns would arise if the
plan converted such a contract to irrevocable commitments before or
after initiating a standard termination.
Request for Comments
PBGC is soliciting comments on issues related to a purchase of
irrevocable commitments before the initiation of a standard
termination. PBGC seeks comments on any and all relevant issues,
including the following:
(1) Factors PBGC should take into account in determining whether
a purchase of irrevocable commitments before the initiation of a
standard termination is related to (i.e., in preparation of) the
standard termination (e.g., plan annuitizes plan benefits of all
retirees or terminated vested participants with no connection to any
other plan transaction, such as a merger).
(2) Whether there should be a rebuttable presumption that a
purchase of irrevocable commitments made within a specific time
period (e.g., a year) before the first day a NOIT is issued in a
standard termination is related to a standard termination and if so,
what time period.
(3) Whether there should be a safe harbor for a purchase of
irrevocable commitments under specified circumstances before the
first day a NOIT is issued in a standard termination. If so, what
time period should apply (e.g., one year, two years, or three years
before a NOIT is issued)? Whether a safe harbor should be
conditioned on the purpose of the purchase (e.g., to lock in rates
with an insurer in order to ensure plan sufficiency). Whether a safe
harbor should be limited to plans in which the plan assets exceed
plan benefits by a certain margin. If so, by what margin and as of
what date? What reporting and disclosure requirements should be
required with a safe harbor?
(4) How PBGC can better identify plans that purchase irrevocable
commitments for some or all participants shortly before initiating a
standard termination.
(5) Appropriate enforcement actions in the case of a purchase of
irrevocable commitments before the initiation of a related standard
termination.
(6) Appropriate information penalties for failures to provide
notices and disclosures required as part of the termination process,
including guideline information penalty amounts, and aggravating and
mitigating factors (e.g., before purchasing irrevocable commitments,
the plan administrator provided participants with the information
required in the NOIT and NOPB, or the plan reported information to
PBGC about irrevocable commitments purchased).
(7) In the case of a permissible purchase of irrevocable
commitments in accordance with Sec. 4041.22(b) made after a NOIT is
issued, what information should the plan be required to provide to
participants? To PBGC? \6\
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\6\ 2007 Blue Book Q&A 6 provides informal guidance that PBGC
staff interprets Sec. 4041.24(a) as not requiring a plan
administrator to issue a NOPB to a participant whose benefits are
paid out in accordance with Sec. 4041.22 on or before the due date
for issuing the NOPB. However, the Instructions to Form 501 provide
that the post-distribution certification must include such
participants and beneficiaries for whom annuities are purchased
after the plan's termination date in the normal course of business,
including a certification of their distributions by category and
amount (see also, 2008 Blue Book Q&A 7). 2009 Blue Book Q&A 11
provides informal guidance that a standard termination audit will
generally cover any participant or beneficiary who is an affected
party as of the plan's termination date, regardless of the timing of
the distribution for that affected party.
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(8) What are employers' experiences with ``locking in'' rates
for purchases of irrevocable commitments? What are the costs of
locking in rates and how long do locked-in rates remain in effect?
In the case of annuity contracts that are purchased as an investment
vehicle, can plans lock in rates for the conversion of these
contracts to irrevocable commitments at a future date and if so, at
what costs and for how long?
Issued in Washington, DC, this 18th day of November 2009.
Vincent K. Snowbarger,
Acting Director, Pension Benefit Guaranty Corporation.
[FR Doc. E9-28102 Filed 11-20-09; 8:45 am]
BILLING CODE 7709-01-P