Job Creation and Worker Assistance Act of 2002
Plans that are required to pay a variable rate premium (VRP) generally are required to issue a Participant Notice under ERISA section 4011. The Job Creation and Worker Assistance Act of 2002 (JCWAA) increased the interest rate for computing the variable rate premium (VRP) for the 2002 plan year, thereby eliminating the requirement to pay the 2002 VRP premium for some plans. However, the JCWAA VRP interest rate does not apply for purposes of determining whether a plan is required to issue a 2002 Participant Notice. Therefore, a plan that is not required to pay a VRP for 2002 may nonetheless be required to issue a 2002 Participant Notice. JCWAA also increases the maximum interest rate for the Deficit Reduction Contribution current liability calculation for the 2002 plan year, which can exempt a plan from the requirement to issue a 2002 Participant Notice and increases the Funded Current Liability Percentage for the 2002 plan year that certain plans disclose in the Notice. The various provisions of the JCWAA relating to the 2002 Participant Notice are described in more detail later in this Technical Update.
The Senate is now considering a House-passed bill (H.R. 3762) under which a 2002 Participant Notice would not have to be issued by any plan that is not required to pay a VRP for the 2002 plan year. The bill also would allow plans to use the JCWAA maximum interest rate to calculate the plan's Funded Current Liability Percentage for the 2001 plan year, which could exempt more plans from the 2002 Participant Notice requirement and would increase a plan=s Funded Current Liability Percentage for 2001 that plans may disclose (in lieu of the 2002 plan year figure) in the 2002 Participant Notice.
Model Participant Notice
The Retirement Protection Act of 1994 requires certain underfunded plans to notify participants and beneficiaries annually of the plan's funding status and the limits of PBGC's guarantee. (See Section 4011 of ERISA and 29 CFR Part 4011.) The regulation includes a model notice that plans can use to meet this requirement.
For the convenience of plan administrators, this Technical Update republishes the Model Participant Notice, updated to reflect the 2002 maximum guaranteed benefits.
Participant Notice Worksheet
This Technical Update also includes a worksheet to help plan administrators determine whether they must issue a 2002 Participant Notice. Generally, the requirement to issue a 2002 Participant Notice applies to the plan administrator of any single-employer plan that: (1) pays a variable rate premium for the 2002 plan year, or (2) would pay a variable rate premium for the 2002 plan year using 85% (instead of 100%) of the yield on 30-year Treasury securities for purposes of calculating vested benefits. See discussion of Job Creation and Worker Assistance Act of 2002 (below). However, no notice is required if the plan meets certain funding requirements for the 2001 or 2002 plan year, as explained in the worksheet.
The 2002 Participant Notice is due two months after the due date (including extensions) for the 2001 Form 5500. The following table shows the common filing due dates for calendar year plans:
2001 Form 5500
2002 Participant Notice
Wednesday, July 31, 2002
Monday, September 30, 2002
Monday, September 16, 2002
Monday, November 18, 2002
Tuesday, October 15, 2002
Monday, December 16, 2002
(Due dates that fall on a weekend or Federal holiday are extended to the next business day.)
Job Creation and Worker Assistance Act of 2002
Variable Rate Premium. Section 405 of the Job Creation and Worker Assistance Act of 2002 (JCWAA) increases the required interest rate for calculating vested benefits for the PBGC variable rate premium under section 4006(a)(3)(E)(iii) of ERISA from 85% to 100% of the yield on 30-year Treasury securities (the "Treasury yield"). The statutory change applies only to plan years beginning in 2002 or 2003 and does not apply for purposes of other provisions that refer to the premium calculation. JCWAA does not allow use of 100% of the Treasury yield to determine whether a plan must issue a Participant Notice. Thus, plans must continue to use 85% of the Treasury yield for this purpose. If legislation passes to allow use of 100% of the Treasury yield for purposes of determining whether a plan must issue a 2002 Participant Notice, PBGC will issue additional guidance.
2002 Notice to Participants. Section 405 of JCWAA affects both the requirement to issue the 2002 Notice to Participants and the plan funding information required to be disclosed in the Notice.
Issuance Requirement. Section 4011 of ERISA exempts a plan from the Participant Notice requirement for a plan year if it has a "Funded Current Liability Percentage" at or above various specified levels for one or several plan years. For the 2002 Participant Notice, the relevant plan years are 1998 through 2002. (See Plan Year 2002 Participant Notice Worksheet below.) Under JCWAA, a plan will use the maximum interest rate of 120% (rather than 105%) of the specified weighted average of Treasury securities interest rates (JCWAA maximum current liability interest rate) to calculate the Funded Current Liability Percentage for the 2002 plan year but not for plan years 1998 - 2001.
Example 1: Plan A's Funded Current Liability Percentage for the 2002 plan year is 90% or higher when computed using 120% of the specified weighted average of Treasury securities interest rates. The plan is exempt from the requirement to issue a 2002 Participant Notice.
Example 2: Plan B's Funded Current Liability Percentage for the 2002 plan year is less than 90% when computed using 120% of the specified weighted average of Treasury securities interest rates. The plan will use the 120% rate to determine whether it has a Funded Current Liability Percentage of 80% or more for the 2002 plan year, but it may not use the 120% rate to compute the Funded Current Liability Percentage for any earlier plan year.
Notice Funding Percentage. The 2002 Participant Notice must disclose the plan's "Funded Current Liability Percentage" for the 2002 plan year or the 2001 plan year. Under JCWAA, the Funded Current Liability Percentage for the 2002 plan year (but not for the 2001 plan year) is determined using the JCWAA maximum current liability interest rate (i.e., 120% (rather than 105%) of the specified weighted average of Treasury securities interest rates).
Example 3: Plan C, a large plan, is required to issue a 2002 Participant Notice. It must disclose the plan's Funded Current Liability Percentage for either the 2002 or 2001 plan year. If the Notice discloses the plan's Funded Current Liability Percentage for the 2002 plan year, the plan will compute the Funded Current Liability Percentage using 120% of the specified weighted average of Treasury securities interest rates. If the Participant Notice discloses the plan's Funded Current Liability Percentage for the 2001 plan year, the percentage will be calculated using the 105% rate.
PBGC's Special Small Plan Rules. Section 405 of JCWAA also affects the PBGC's Special Small Plan Rules. Small plans may use these rules to determine whether they are required to issue the 2002 Participant Notice and, if so, the information to be disclosed in the Notice. The rules allow a small plan to use current liability figures reported on Schedule B of Form 5500 and to adjust them to approximate current liability calculated using the "highest allowable interest rate." Under JCWAA, the "highest allowable rate" for calculating the Current Funded Liability Percentage for the 2002 plan year is the JCWAA maximum current liability interest rate (i.e., 120% of the specified weighted average of Treasury securities interest rates). This JCWAA interest rate does not apply to calculations of the Current Liability Percentage for earlier plan years.
2002 Model Participant Notice
The following is an example of a 2002 Participant Notice that satisfies the requirements of section 4011.10 when the required information is filled in.
Notice to Participants of [Plan Name]
The law requires that you receive information on the funding level of your defined benefit pension plan and the benefits guaranteed by the Pension Benefit Guaranty Corporation (PBGC), a federal insurance agency.
YOUR PLAN'S FUNDING
As of [DATE], your plan had [INSERT NOTICE FUNDING PERCENTAGE DETERMINED IN ACCORDANCE WITH SECTION 4011.10(c)] percent of the money needed to pay benefits promised to employees and retirees.
To pay pension benefits, your employer is required to contribute money to the pension plan over a period of years. A plan's funding percentage does not take into consideration the financial strength of the employer. Your employer, by law, must pay for all pension benefits, but your benefits may be at risk if your employer faces a severe financial crisis or is in bankruptcy.
[INCLUDE THE FOLLOWING PARAGRAPH ONLY IF, FOR ANY OF THE PREVIOUS FIVE PLAN YEARS, THE PLAN HAS BEEN GRANTED AND HAS NOT FULLY REPAID A FUNDING WAIVER.]
Your plan received a funding waiver for [LIST ANY OF THE FIVE PREVIOUS PLAN YEARS FOR WHICH A FUNDING WAIVER WAS GRANTED AND HAS NOT BEEN FULLY REPAID]. If a company is experiencing temporary financial hardship, the Internal Revenue Service may grant a funding waiver that permits the company to delay contributions that fund the pension plan.
[INCLUDE THE FOLLOWING WITH RESPECT TO ANY UNPAID OR LATE PAYMENT THAT MUST BE DISCLOSED UNDER SECTION 4011.10(b)(6):]
Your plan was required to receive a payment from the employer on [LIST APPLICABLE DUE DATE(S)]. That payment [has not been made] [was made on [LIST APPLICABLE PAYMENT DATE(S)]].
When a pension plan terminates without enough money to pay all benefits, the PBGC steps in to pay pension benefits. The PBGC pays most people all pension benefits, but some people may lose certain benefits that are not guaranteed.
The PBGC pays pension benefits up to certain maximum limits.
- The maximum guaranteed benefit is $3,579.55 per month or $42,954.60 per year for a 65-year-old person in a plan that terminates in 2002.
- The maximum benefit may be reduced for an individual who is younger than age 65. For example, it is $1,610.80 per month or $19,329.60 per year for an individual who starts receiving benefits at age 55. [IN LIEU OF AGE 55, YOU MAY ADD OR SUBSTITUTE ANY AGE(S) RELEVANT UNDER THE PLAN. FOR EXAMPLE, YOU MAY ADD OR SUBSTITUTE THE MAXIMUM BENEFIT FOR AGES 62 OR 60. THE MAXIMUM BENEFIT IS $2,827.84 PER MONTH OR $33,934.08 PER YEAR AT AGE 62; IT IS $2,326.71 PER MONTH OR $27,920.52 PER YEAR AT AGE 60. IF THE PLAN PROVIDES FOR NORMAL RETIREMENT BEFORE AGE 65, YOU MUST INCLUDE THE NORMAL RETIREMENT AGE.] [IF THE PLAN DOES NOT PROVIDE FOR COMMENCEMENT OF BENEFITS BEFORE AGE 65, YOU MAY OMIT THIS PARAGRAPH.]
- The maximum benefit will also be reduced when a benefit is provided for a survivor.
The PBGC does not guarantee certain types of benefits. [INCLUDE THE FOLLOWING GUARANTEE LIMITS THAT APPLY TO THE BENEFITS AVAILABLE UNDER YOUR PLAN.]
- The PBGC does not guarantee benefits for which you do not have a vested right when a plan terminates, usually because you have not worked enough years for the company.
- The PBGC does not guarantee benefits for which you have not met all age, service, or other requirements at the time the plan terminates.
- Benefit increases and new benefits that have been in place for less than a year are not guaranteed. Those that have been in place for less than 5 years are only partly guaranteed.
- Early retirement payments that are greater than payments at normal retirement age may not be guaranteed. For example, a supplemental benefit that stops when you become eligible for Social Security may not be guaranteed.
- Benefits other than pension benefits, such as health insurance, life insurance, death benefits, vacation pay, or severance pay, are not guaranteed.
- The PBGC generally does not pay lump sums exceeding $5,000.
WHERE TO GET MORE INFORMATION
Your plan, [EIN-PN], is sponsored by [CONTRIBUTING SPONSOR(S)]. If you would like more information about the funding of your plan, contact [INSERT NAME, TITLE, BUSINESS ADDRESS AND PHONE NUMBER OF INDIVIDUAL OR ENTITY].
For more information about the PBGC and the benefits it guarantees, you may request a free copy of AYour Guaranteed Pension@ by writing to Consumer Information Center, Dept. YGP, Pueblo, Colorado 81009. [THE FOLLOWING SENTENCE MAY BE INCLUDED:] "Your Guaranteed Pension" is also available from the PBGC Homepage on the World Wide Web at http://www.pbgc.gov.
Issued: [INSERT AT LEAST MONTH AND YEAR]
Participant Notice Worksheet
Plan Year 2002
Definitions and Special Small Plan Rules
I. Funded Current Liability Percentage
(See Special Small Plan Rules below)
The percentage obtained by dividing:
a. The actuarial value of the plan's assets (not reduced by any credit balance in the funding standard account), determined as of the plan's valuation date, by
b. The plan's current liability (determined using the highest interest rate allowable for the plan year), determined as of the plan's valuation date. See discussion of JCWAA at the end of the Technical Update above.
II. Special Small Plan Rules
In calculating its Funded Current Liability Percentage for a plan year, a plan that is a "small plan" (see definition in III. below) for that plan year may use one or both of the following rules:
a. The plan's Funded Current Liability Percentage may be calculated by substituting for items I.a. and I.b. above the following numbers that are required to be reported on the Form 5500, Schedule B, for the plan year for which the percentage is calculated. Under this special rule, the plan must substitute both of the following numbers: (1) the market value of the plan's assets as of the beginning of the plan year (for I.a. above); and (2) the plan's total current liability for all participants as of the beginning of the plan year (for I.b. above).
b. When calculating current liability under I.b. above (whether or not the plan uses the special rule in II.a. above), if the plan's current liability is calculated and reported on Schedule B using an interest rate lower than the highest allowable interest rate, the current liability at the highest rate may be determined by reducing the reported current liability by one percent for each tenth of a percent by which the highest allowable interest rate exceeds the interest rate used.
Example: Assume that a small plan's current liability as of January 1, 2002, is $250,000, based on an interest rate of 6.4%. Assume further that the highest allowable interest rate for the 2002 plan year is 7%. Because the highest allowable interest rate exceeds the interest rate used by six-tenths of a percent, current liability may be reduced by 6% to $235,000, as follows:
100% - 6(1%) = 94% x $250,000 = $235,000.
III. Definition of "Small Plan"
A plan is considered to be a "small plan" for a plan year if it had 100 or fewer participants on each day during the preceding plan year. When determining whether a plan is a "small plan," its participants must be aggregated with the participants of all other defined benefit plans maintained by the same employer or any other member of the employer's controlled group in accordance with ERISA section 302(d)(6)(C).