Last updated February 13, 2020
The interpretations presented below reflect the views of the staff of PBGC. They are not rules, regulations, guidance, or statements of the Corporation.
These positions do not necessarily contain a discussion of all material considerations necessary to reach the conclusions stated, and they are not binding due to their informal nature. There can be no assurance that the information presented in these interpretations is current, as the positions expressed may change without notice.
- Controlled Group
Is the determination as to whether the total of missed contributions, including interest, exceeds $1,000,000 such that an IRC § 430(k) line arises, always made on a plan-by-plan basis?
Yes, determinations are made on a plan-by-plan basis. For example, if an employer sponsors two PBGC-insured defined benefit plans, each with $750,000 missed contributions (including interest), the missed contributions for the two plans are not aggregated and a lien does not arise under IRC § 430(k).
- Effect of Corrective Contribution
Assume that an IRC §430(k) lien arises because the total of missed contributions, including interest, exceeds $1M, and that thereafter the full amount of missed contributions including interest is paid so that the IRC § 430(k) lien amount is zero. Under IRC § 430(k), the lien continues to exist until the end of the first plan year in which the total of missed contributions, including interest, no longer exceeds $1M. Assume further that, during that same plan year, one or more other contributions are missed, at least in part, and that the highest total of such missed contributions, including interest, does not exceed $1M.
Does the original lien that had been reduced to zero apply to these additional missed contributions, including interest, or does the original lien remain at zero, with the additional missed contributions, including interest, resulting in a lien only if and when they cross over the $1M threshold?
The lien continues to exist until the end of the first plan year in which the total no longer exceeds $1M. Until then, the lien amount on any date equals the total amount of missed contributions plus interest.
- Perfecting a Lien
When a lien arises under IRC § 430(k), the lien “may be perfected and enforced only by the [PBGC], or at the direction of the [PBGC], by the contributing sponsor (or any member of the controlled group of the contributing sponsor).” IRC § 430(k)(5). Has PBGC ever directed a plan’s contributing sponsor or a member of its controlled group to perfect or to enforce an IRC § 430(k) lien?
PBGC does not make a practice of directing a plan’s contributing sponsor or a member of its controlled group to perfect or to enforce an IRC § 430(k) lien.
- Perfecting a Lien
Is PBGC able to perfect IRC § 430(k) liens after termination of the plan? After trusteeship?
Yes and yes – unless the liens have become unenforceable by reason of lapse of time.
- Perfecting a Lien
Can PBGC perfect IRC § 430(k) liens for missed contributions that come due after a plan’s date of plan termination? For example, assume a catch-up payment is due for a 2016 calendar plan on 9/15/17 but the plan has terminated with a date of plan termination of 6/30/17.
Yes. Any time a plan terminates in a distress or PBGC-initiated (involuntary) termination, the termination creates a short plan year under IRS regulations. That means a final “quarterly” contribution will come due 15 days after the plan termination date. Thus, for the example above, the contribution was due on 7/15/17, with a final catch-up contribution due 8 ½ months after the plan termination date. Also, the minimum required contribution for the short plan year is prorated based on where the plan termination date falls, which is exactly at the halfway point of the normal plan year for the example above. So, if the minimum required contribution was $10M, it will now be $5M and the remaining unpaid amount, if any, will come due on those two dates. Once either of those post-termination date required contributions is missed, PBGC may file IRC § 430(k) lien notices if the total missed contributions and interest as of the due date exceeds $1M.
Is the determination as to whether the total of missed contributions, including interest, exceeds $1M such that an IRC § 430(k) lien arises, determined only at the time of a missed contribution, or is it determined on a continuing basis by adding interest for the period following the most recent missed contribution date? For example, if the total of missed contributions (including interest) once the first quarterly contribution for a plan year is missed is $999K, could an IRC § 430(k) lien arise before the next required contribution is due and missed at least in part?
The determination whether the $1M lien threshold is crossed occurs only at the time a required contribution is due. Therefore, in the hypothetical presented, an IRC § 430(k) lien could not arise until the next required contribution is due.
- Withdrawal of a 430(k) Lien
In what types of situations does PBGC withdraw IRC § 430(k) lien notices?
PBGC may withdraw IRC § 430(k) lien notices in a variety of circumstances including the following:
The total of missed contributions and interest equals $1M or less as of the end of a plan year. A minimum funding waiver granted by IRS with PBGC consultation reduces the lien amount to $0 or to $1M or less and the sponsor or other controlled group members have granted consensual liens in favor of the plan to secure the amount waived. PBGC agrees to withdraw a lien on specific property, typically property subject to a pending sale agreement, in exchange for a contribution of net proceeds into the plan. PBGC agrees to a termination liability settlement under which it has agreed to withdraw the lien notices.
What bankruptcy claims does PBGC file?
- PBGC files unpaid minimum funding contribution claims, on behalf of a plan, under 26 USC §§ 412 and 430 and 29 USC §§ 1082, 1342, and 1362(c).
- PBGC files claims for unfunded benefit liabilities, on its own behalf as statutory guarantor, under 29 USC § 1362(b).
- PBGC files claims for unpaid flat-rate, variable, or termination premiums, on its own behalf as statutory guarantor, under 29 USC § 1362(b).
- Controlled Group
To qualify for a distress termination of a plan, each member of the controlled group maintaining the plan must qualify for at least one of the four distress tests. Under what circumstances will PBGC approve a distress termination where there is a controlled group member that does not qualify for any of the distress tests, but is essentially a shell (i.e., it has no or only minimal assets, no employees, and no ongoing business), and thus clearly cannot assist in maintaining an ongoing plan?
PBGC usually finds that shell entities have a de minimis value. Thus, PBGC typically disregards shell corporations that are part of a controlled group for purposes of determining whether a plan meets the distress termination criteria. PBGC makes such findings on a case‐by‐case basis.
- Conversion to PBGC-Initiated Termination under § 4042
Can a distress termination convert to a PBGC-initiated termination?
Yes. PBGC has authority to convert a distress termination into a PBGC-initiated termination under ERISA § 4042. PBGC will convert cases only if it determines that the ERISA § 4042 criteria are met. If a sponsor has initiated a distress termination and believes it may be appropriate to convert to a PBGC-initiated termination, the sponsor should contact PBGC case team assigned to the distress termination. PBGC may convert a distress termination to a PBGC-initiated termination on its own.
- Meaning of “Will be Unable to Pay Benefits when Due” Involuntary Termination
One of the criteria for initiation of a PBGC-initiated termination is that the plan “will be unable to pay benefits when due.” Under what circumstances does PBGC believe this criterion is met?
Historically, the “will be unable to pay benefits when due” PBGC-initiated termination criterion of § 4042(a)(2) has meant one of two things: either the plan is underfunded on a termination basis and is unlikely to be able to pay benefits at some point in the future, taking into consideration the plan sponsor’s ability to fund the plan; or the plan is or will be abandoned and thus no one will be present to administer the plan.
PBGC evaluates each case based on its individual facts and circumstances. Two examples of cases in which PBGC initiated a termination based on meeting the “will be unable to pay benefits when due” criterion are: (1) the plan sponsor sold the bulk of its operations and the limited business that remained was unable to fund the plan, and (2) the plan sponsor was liquidating and there was a small window of time during which the plan would continue to be administered. Many terminations involve companies that have gone out of business and liquidated outside of bankruptcy. In such cases, distress terminations are less common than PBGC-initiated terminations. A recurring problem for PBGC is not finding out about such cases until after the liquidation has been completed, and then having difficulty locating records and effectuating a smooth transition to PBGC trusteeship. PBGC encourages all employers who are under financial pressure that may affect their ability to fund their pension plans to contact PBGC as early as possible before the situation deteriorates and excise taxes or liens are triggered. PBGC will work with the employer to find solutions. PBGC welcomes suggestions as to further outreach to let its customers know of the importance of contacting PBGC early.
- PBGC Review of Compliance with § 436
When PBGC becomes statutory trustee of a pension plan that underwent a distress or involuntary termination, does PBGC review the plan’s compliance with the rules governing benefit restrictions under § 436? If PBGC believes that a plan did not comply with these rules, what action, if any, does PBGC take?
Yes. PBGC takes the § 436 restrictions into account. For example, if no AFTAP calculation has been certified, PBGC will apply the § 436 funding status presumptions, which could result in a benefit freeze prior to termination. If the plan did not comply with the § 436 rules, PBGC will adjust benefits and take any other appropriate actions.
Overview on Distress Terminations, Procedural Information, and Forms
- Phase-In for Newly Covered Plans
If a plan was adopted and effective more than five years ago, but did not become covered by Title IV of ERISA until the current year, is PBGC’s guarantee of plan benefits phased in under ERISA section 4022(b)(7)? If so, when does the phase-in period start?
In the case of a plan that was not a covered plan on September 3, 1974 (the day after ERISA was enacted), PBGC’s guarantee of plan benefits is phased in. The phase-in period begins on the date when the plan becomes a covered plan. ERISA section 4022(b)(1) states that, “except to the extent [phased in under section 4022(b)(7),] . . . no benefits provided by a plan which has been in effect for less than 60 months at the time the plan terminates shall be guaranteed . . . ,” and section 4022 (b)(2) states that “[f]or purposes of determining what benefits are guaranteed . . . in the case of a plan to which § 4021 does not apply on [September 3, 1974], the 60-month period referred to in [ERISA § 4022(b)(1)] shall be computed beginning on the first date on which [section 4021] does apply to the plan.”
For example, under ERISA section 4021(b)(3), a church plan (as defined in Internal Revenue Code § 414(e)) is not covered by Title IV of ERISA unless the plan makes an election under Internal Revenue Code § 410(d) and notifies PBGC that it wishes to be a covered plan. If a church plan that was adopted and effective more than five years earlier opts for Title IV coverage in this manner, benefits under the plan are subject to phase-in under section 4022(b)(7), and the phase-in period begins on the latest of (1) the date PBGC receives the notice described in ERISA § 4021(b)(3), (2) the date the section 410(d) election is made, and (3) the date the section 410(d) election is effective. Similarly, the PBGC guarantee is phased in over a five-year period for any existing plan that becomes covered by Title IV of ERISA after September 3, 1974. For instance, a professional services plan that has been excluded from Title IV coverage under ERISA section 4021(b)(13) because it never had more than 25 active participants would begin the five-year phase-in period when it acquired a 26th active participant.
- Newly Covered Substantial Owner Plan; Effective Date
Assume that Plan A, a calendar year plan, has been exempt from coverage under ERISA section 4021(b)(9) as a substantial owner plan since it was established. On December 15, 2015, Individual X, who is not a substantial owner, starts to earn participation service under Plan A, and on July 1, 2016, she becomes a Plan A participant. Individual X earns a year of service for benefit accrual purposes during the service computation period that ends on December 31, 2016.
(a) What is the date as of which the plan becomes covered under ERISA § 4021?
(b) What is the date as of which the phase-in period begins for the plan under ERISA § 4022(b)(7)?
(a) July 1, 2016.
(b) July 1, 2016.
- Phase-in of Scheduled Benefit Increases
Pursuant to a collective bargaining agreement, Plan X was amended to provide scheduled benefit increases for the three years covered under the collective bargaining agreement. The amendment was adopted on December 31, 2013. The first scheduled increase became payable on January 1, 2014; the second scheduled increase became payable on January 1, 2015; and the third scheduled increase became payable on January 1, 2016. Plan X terminates on June 30, 2018. How should this amendment be treated for phase-in purposes?
For phase-in purposes, a benefit increase is in effect on the later of the date it is adopted or effective. In this case, the three scheduled increases became payable and effective on January 1 of 2014, 2015, and 2016, respectively. Therefore, the first scheduled increase was in effect for four full years as of the termination date and is phased in at the rate of 80% (or, if greater, $80 per month). The second scheduled increase was in effect for three full years and is phased in at the rate of 60% (or, if greater, $60 per month). The third scheduled increase was in effect for two full years and is phased in at the rate of 40% (or, if greater, $40 per month).
- Application of “Earliest PBGC Retirement Date” Rules
Assume that a plan is terminated in a distress or involuntary termination during the bankruptcy proceeding of the plan sponsor, that the plan allows for unsubsidized early retirement at age 55 with 10 years of service, and that the plan’s normal retirement age is age 65. Assume also the following: Participants A, B, C, and D are each at least 55 years old and no more than 64 years old at all relevant times.
Participants A and B each attain 10 years of service between the bankruptcy petition date and the plan’s termination date, and Participants C and D each attain 10 years of service between the plan’s termination date and the date the termination and trusteeship agreement is signed by the plan administrator of the plan and PBGC.
Participants A and C each go into pay status immediately upon attaining 10 years of service.
Participants B and D have not yet gone into pay status, or elected to do so, by the time the termination and trusteeship agreement is signed.
What is the “Earliest PBGC Retirement Date” for Participants A, B, C, and D?
PBGC determines a participant’s earliest PBGC retirement date (EPRD) under the rules in PBGC Reg. § 4022.10.
For Participants A and B, who met the requirements for an early retirement benefit by the plan’s termination date, EPRD is the date the participant reaches age 55 (or if later, the date he attains 10 years of service). The guaranteed benefit for each participant, however, is based on the amount of his service and the amount of his compensation, if applicable, as of the bankruptcy filing date rather than the termination date. See 29 USC § 4022(g) and 29 CFR § 4022.3(b).
For Participants C and D, who had not met the requirements for an early retirement benefit as of the plan’s termination date, EPRD is the date the participant reaches age 65, unless there is another early retirement benefit for which they have met the requirements by the plan’s termination date.
- Application of Title IV Guarantee Limitations to Participants’ Plan Benefits
In what order does PBGC apply the three principal guarantee limitations—the “accrued-at-normal” limitation, the “maximum guarantee” limitation, and the “phase-in” limitation—to participants’ plan benefits?
PBGC applies these limitations by first determining the plan benefit, and by then applying the limitations in “A-M-P” order: i.e., first the “accrued-at-normal” limitation, then the “maximum guarantee” limitation, and then the “phase-in” limitation.
How is the accrued-at-normal limitation in § 4022.21 of PBGC’s regulations applied when there are early retirement factors and/or reductions for a form of benefit other than life-only?
Here is an example showing how the accrued-at-normal limitation is applied.
A plan has an early retirement benefit that is reduced by 5% for each year by which commencement precedes age 62. Participants who retire prior to age 62 with 30 or more years of service receive a $400 monthly early retirement supplement. The supplement ends at age 62. No Title IV limitation other than the accrued-at-normal limit applies. Employee A retires at age 60 with a 50% J&S option, 30 years of service, and a life-only accrued benefit of $1,000. The 50% J&S option factor is 91%.
Application of the accrued-at-normal limitation:
A participant’s guaranteed benefit under § 4022.21 is limited to his or her life-only accrued benefit payable at normal retirement. For Employee A, this limit is $1,000. Therefore, PBGC would guarantee payment of $1,000 to Employee A from ages 60 to 62 and $819 after age 62. Employee A’s early retirement benefit adjusted for form is $1,000 x .9 x .91 = $819. The plan would pay Employee A $819 for life plus a $400 supplement from ages 60 to age 62 (for a total of $1,219 before age 62).
- Merger With a Multiemployer Plan
If a single-employer defined benefit plan is merged into a multiemployer defined benefit plan, and the multiemployer plan subsequently receives financial assistance from PBGC, is the benefit of any former participant (active, deferred, or in pay status) in the single-employer plan subject to PBGC’s guarantee limit for multiemployer plans or the guarantee limit for single-employer plans?
The entire accrued benefit of a participant whose benefit liabilities are transferred to a multiemployer plan would be subject to the multiemployer guarantee limit under § 4022A(c) of ERISA.
Plan M is a multiemployer plan. Because of withdrawals, only one employer is required to make contributions to Plan M. Is the plan subject to PBGC’s guarantee limit for multiemployer plans or the guarantee limit for single-employer plans?
The accrued benefit of a participant in Plan M would be subject to the multiemployer guarantee limit under § 4022A(c) of ERISA. See Opinion Letter 01-2.
- Partial Lump Sum Payments
How does PBGC take into account a partial lump-sum payment previously received by a participant from the same plan (as part of the accrued benefit) for purposes of determining guaranteed benefits under ERISA § 4022?
For purposes of determining guaranteed benefits under ERISA § 4022, when a participant has received part of his or her benefit in the form of a lump-sum payment, PBGC will offset the participant’s maximum guaranteeable benefit by the annuity equivalent of the lump-sum payment received by the participant.
Normal Retirement Example: Assume that a participant had earned a monthly $6,000 annuity payable at age 65 (the participant’s normal retirement age under the plan) and (as permitted by the plan document) elected to take half of his benefit in the form of a lump-sum at age 63 and the other half as a $3,000 annuity payable at age 65. Assume that the only potential limitation on benefits is the maximum guarantee and that this plan’s termination date is in 2004, one week before the participant turns age 65. The limitation on the maximum guaranteeable benefit for this participant is $3,698.86 per month. However, since the participant has already received part of his benefit in a lump-sum, the $3,698.86 per month must be offset. The amount of the offset is equal to the early retirement annuity equivalent of the lump-sum, using the plan’s factors. In this case, assume an early retirement factor of .9 at age 63. Thus, the early retirement annuity equivalent is $2,700 (.9 x $3,000). Therefore, the participant’s remaining guaranteed monthly annuity from PBGC would be $998.86 ($3,698.86 - $2,700).
Early Retirement Example: Assume the same facts as in the previous example, except that the participant elected to take his benefit in two parts as follows: (1) at age 57, he received a lump-sum payment representing the value of a $3,000 monthly annuity payable at age 65; and (2) at age 60, he will start to receive a straight life annuity of $3,000 per month, reduced for early commencement. Assume the plan reduces benefits by an amount equal to 5% times the number of years prior to age 65 the benefit commences. Assume the plan’s termination date is one week before the participant turns age 60. The limitation on the maximum guaranteeable benefit for this participant is $2,404.26 per month ($3,698.86 reduced using PBGC early retirement factor of .65). However, this monthly amount is offset by $1,800. This amount represents the portion of the participant’s monthly annuity benefit that has been paid as a lump-sum, adjusted to age 57 using the plan’s early retirement factor (.6). Thus, the participant’s remaining guaranteed monthly annuity from PBGC would be $604.26 ($2,404.26 - $1,800).
Overview of Single-Employer Guaranteed Benefits
- Asset Sales Transaction
Company A is selling the assets of Subsidiary B under an agreement and plan of sale (the “asset sale agreement”) with a buyer and plans to dissolve Subsidiary B after the asset sale closes. Subsidiary B sponsors a single-employer pension plan. Company A is not a contributing sponsor.
Under the asset sale agreement, the pension plan’s sponsorship will move from Subsidiary B to Company A. What types of reportable events must be reported to PBGC and when?
Unless a waiver applies, Company A will be required to file a notice of a liquidation event. Liquidation is a reportable event that occurs when a member of the plan’s controlled group “is involved in any transaction to implement its complete liquidation.” 29 C.F.R. § 4043.30. Under this scenario, a post-event notice is due within 30 days of the signing of the asset sale agreement (the trigger for being “involved in a transaction to implement complete liquidation”). Although advance reporting under 29 C.F.R. § 4043.63 may be required if Subsidiary B meets the applicable criteria (generally, nonpublic companies with over $50 million in unfunded vested benefits and less than 90% funding, see ERISA § 4043(b) and 29 C.F.R. § 4043.61(b)), because PBGC does not expect a reportable events notice before the signing of the asset sale agreement, the post-event report will satisfy any advance reporting requirement (see 29 C.F.R. § 4043.3(a)).
Unless a waiver applies, Company A will also be required to report a change in controlled group under 29 C.F.R. § 4043.29 within 30 days of the signing of the asset sale agreement; this report would also satisfy any advance reporting requirement under 29 C.F.R. § 4043.62.
- Spin-off Transaction Involving Multiple-Employer Plan
Two employers that participate in a multiple-employer plan (“the Plan”) will withdraw from the Plan, taking plan liabilities and assets in spin-off transactions. The agreement to spin-off Company A is effective immediately. The agreement to spin-off Company B is effective in 60 days. What events must be reported? Who is required to file a Form 10?
The planned transaction involves employers ceasing to participate in the multiple-employer plan, and it also involves a transfer of liabilities to plans sponsored by those employers. The plan administrator and each contributing sponsor must notify PBGC within 30 days after that person knows or has reason to know that the reportable event has occurred, unless a waiver or extension applies. See 29 CFR § 4043.20 and Form 10 Instructions (“The plan administrator and each contributing sponsor of a plan for which a reportable event has occurred must file a post-event reportable event notice with PBGC using PBGC Form 10.”).
Two events must be reported: (1) a Change in Contributing Sponsor or Controlled Group under 29 CFR § 4043.29, and (2) a Transfer of Benefit Liabilities under 29 CFR § 4043.32
A Change in Contributing Sponsor or Controlled Group occurs when “there is a transaction that results, or will result, in one or more persons ceasing to be members of the plan’s controlled group.” PBGC's regulations explain that “If there is a change in plan administrator or contributing sponsor, the reporting obligation applies to the person who is the plan administrator or contributing sponsor of the plan on the 30th day after the reportable event occurs.” § 4043.20. Because of the immediate effective date for the spinoff to the plan sponsored by Company A, responsibility for reporting the Change in Contributing Sponsor falls to the new plan sponsor, Company A. Because of the delayed effective date for Company B, responsibility for reporting the second change in contributing sponsor remains with the Plan and any other employers that continue to participate in the Plan. Note the distinction in timing between when reporting for the event is triggered (the date the agreement becomes binding) and who has the obligation to file (when the agreement becomes effective). § 4043.29.
A Transfer of Benefit Liabilities occurs when “the plan makes a transfer of benefit liabilities to a person, or to a plan or plans maintained by a person or persons, that are not members of the transferor plan’s controlled group.” § 4043.32(a)(1). Thus, the Plan and any employers who remain in the Plan must report the transfer of liabilities to Company A and Company B. (Unless a waiver applies.)
(Note: This transaction would also trigger § 4063 reporting obligations, not addressed here.)
- Asset Sales Transaction
Company Q is selling the assets of an operating division to Company R. Company Q sponsors a pension plan and participants in the plan are employed by the operating division. A portion of the assets and liabilities in the pension plan will be transferred from Company Q to Company R when the asset sale closes. What types of reportable events must be reported to PBGC and when?
Since a portion of the pension plan will be transferred from Company Q to Company R, a transfer of benefit liabilities reportable event must be reported 30 days after the transfer occurs. If Company Q meets the criteria to report events in advance, a transfer of benefit liabilities event must be reported 30 days before the transfer occurs. See ERISA § 4043(b).
- Change in Controlled Group or Contributing Sponsor Events
A company acquired a new business and added a new controlled group member. Does this change in the controlled group need to be reported?
No. Under ERISA § 4043.29, a reportable event occurs for a plan when there is a transaction that results, or will result, in one or more persons' ceasing to be members of the controlled group (other than by merger involving members of the same controlled group). Only changes in the controlled group that result in a person ceasing to be a member of the controlled group are required to be reported.
- Change in Controlled Group or Contributing Sponsor Events
Does a change in contributing sponsor need to be reported if the sponsorship moves from one entity to another entity within the same controlled group?
No. Similar to mergers within the controlled group, changes in sponsorship within the same controlled group do not need to be reported.
- Low Default Risk Waiver
A company meets the commercial measures criterion of the low default risk waiver under PBGC’s reportable events regulation if “[t]he probability that the company will default on its financial obligations is not more than four percent over the next five years or not more than 0.4 percent over the next year, in either case determined on the basis of widely available financial information on the company's credit quality.”
What are some examples of third party commercial measures companies can use to determine whether they meet this criterion?
Companies that are investment grade rated (as indicated by Moody’s, S&P, and Fitch for example) have probabilities of default that are not more than four percent over the next five years or not more than 0.4 percent over the next year. Similarly, smaller companies may use a Dun and Bradstreet Financial Stress Score to measure their risk of default. According to current scores from DNB, companies with a DNB Financial Stress Score of 1477 or higher have a probability of default that is not more than four percent over the next five years or not more than 0.4 percent over the next year.
Does the contributing sponsor and the highest-level U.S. parent have to use the same criteria to meet the low default risk waiver requirements?
The contributing sponsor and the highest-level U.S. parent may use different criteria to meet the low default risk waiver. For example, the highest-level U.S. parent can meet the waiver requirements by satisfying the probability of default and secured debt criteria while the contributing sponsor can meet the waiver requirements by satisfying any four of the seven criteria.
For purposes of meeting the low-default risk waiver, how should holding company situations be treated?
For example, assume a holding company has no operations or separate financials of its own but has 20 wholly-owned U.S. subsidiaries, of which three are contributing sponsors, and ten are wholly-owned foreign subsidiaries. Assume the holding company would therefore be the highest-level U.S. parent.
Holding companies should be treated as the highest U.S. level parent and must meet the low default risk waiver along with the contributing sponsor. In our experience, most holding companies consolidate financial statements so that the operations of subsidiaries should provide the information necessary to determine whether the waiver is available. However, we understand that some holding companies do not consolidate financial statements. While such holding companies may generate no income from operations when not consolidated with the contributing sponsor, they do have separate financials (and are often required to file tax returns). As a result, they more than likely will have information available to determine whether the low default risk waiver is available.
Here is an example:
A holding company does not consolidate its financials with its operating subsidiaries and does not have a measure of its credit quality prepared by a third party. The holding company has no debt (since the debt is held at the operating companies) but does have assets in the form of investments in subsidiaries. A holding company may be able to meet the low default risk waiver by meeting the four criteria listed below. It can meet the first two criteria below since the secured debt is $0 and can also meet the last two criteria if there have been no loan defaults and no missed contributions.
The company’s secured debt (with some exceptions) does not exceed 10 percent of its total asset value. The company’s ratio of total-debt-to-EBITDA is 3.0 or less. The company has not missed a contribution in the past two years unless reporting is waived. The company has not experienced a loan default in the past two years regardless of whether reporting was waived.
- Public Company Waiver
A reporting waiver applies for various reportable events “if any contributing sponsor of the plan before the transaction is a public company and the contributing sponsor timely files a SEC Form 8-K disclosing the event under an item of the Form 8-K other than under Item 2.02 (Results of Operations and Financial Condition) or in financial statements under Item 9.01 (Financial Statements and Exhibits).”
What level of detail must be included in the 8-K for this waiver to apply?
The Form 8-K should include the following:
Plan Name Brief description of the pertinent facts relating to each event Date of the event Type of event
Active Participant Reduction
Single cause event - statement explaining the cause of the reduction, such as facility shutdown or sale, discontinued operations, winding down of the company, or reduction in force Attrition event – statement of factors involved in the attrition such as frozen plan, aging workforce, or improved operational efficiencies that do not require replacing departing active participants
Transfer of Benefit Liabilities
Name, contributing sponsor, and EIN/PN of transferee plan Name of transferor plan and its plan administrator or contributing sponsor Description of the transferor’s controlled-group structures, including the name of each controlled group member
Change in Contributing Sponsor or Controlled Group
Description of the change in the controlled group structure Name of each plan maintained by any member of the old and new controlled groups, its contributing sponsor(s) and EIN/PN
Extraordinary Dividend or Stock Redemption
Name and EIN of person making the distribution Date and amount of cash distribution(s) during fiscal year Description, fair market value, and date or dates of any non-cash distributions Statement whether the recipient was a member of the controlled group
- 4044 Asset Allocation
When performing a valuation under Part 4044, how does PBGC allocate the expense load?
PBGC determines the expense load based on the total participant count and the total benefit liability (through Priority Category 6), and then allocates the entire expense load in proportion to the liabilities in each priority category.
- Asset Allocation Category for Temporary Supplements
Plan N is being terminated. The plan was not amended during the five years prior to plan termination. The plan provides for a temporary early retirement supplement (not a QSUPP) of $300 monthly payable from early retirement to age 62. This provision is not being amended out of the plan as part of the plan termination.
One day before the beginning of the 3-year period ending on the plan termination date, Participant A retired at age 55, the plan’s earliest retirement age. At retirement, the participant’s accrued deferred retirement benefit commencing at normal retirement age (65) was $1000 monthly. The individual’s reduced early retirement benefit was $800 monthly, and the participant was eligible for the temporary supplement of $300 monthly payable until age 62. Thus, as of the plan termination three years later, the participant is age 58 and receiving $1100 monthly.
Participant B is also 58 years old and could have retired at the same time as Participant A and with the same benefits. However, Participant B is still actively employed by the plan sponsor.
Participant C is 55 years old and just retired with the same benefits as Participant A.
Participant D is 55 years old and could retire with the same benefits as Participant A, but is still actively employed.
Into which priority categories do the benefits for each of these participants fall?
For all four participants, the temporary supplement is a nonforfeitable benefit as defined for purposes of plan termination under 29 CFR § 4001.2 by reference to ERISA § 4001(a)(8). The first $200 of the monthly temporary supplement is a basic-type benefit, as defined in § 4001.2. Because of the operation of § 4022.21(a)(1), the remaining $100 of the monthly temporary supplement is a non-basic-type benefit and not guaranteed. For Participants A and B, both the $800 early retirement benefit and the entire $300 temporary supplement fall into priority category (PC) 3. Thus, even though $100 of the temporary monthly supplement is a non-basic-type benefit and not guaranteed, plan assets may be allocated to this benefit in PC3, subject to the allocation rules detailed in § 4044.10(e) and (f). For Participants C and D, the $800 early retirement benefit and $200 of the monthly temporary supplement fall into PC4 as basic-type, guaranteed benefits. The remaining $100 of monthly temporary supplement falls into PC5 as a nonforfeitable benefit that has not been assigned to an earlier priority category.
- Definition of “Normal Form” for XRA Purposes
Under 29 CFR § 4044.55(b)(1), the participant’s monthly benefit payable at unreduced retirement age is determined “in the normal form payable under the terms of the plan.” For this purpose, does “normal form” mean the automatic form of benefit payable under the terms of the plan absent an election otherwise, or the form of benefit in which the plan's formula expresses the benefit?
PBGC generally considers “normal form” for this purpose to be the form in which the plan's formula expresses the benefit.
- Social Security Supplement
A plan provides a benefit that is not protected under the anti-cutback rules of IRC § 411(d)(6), such as a social security supplement that is not a qualified social security supplement. Must that benefit be included in benefit liabilities for purposes of determining whether a plan may terminate in a standard termination under § 4041 of ERISA?
Yes. Unless the benefit is amended out of the plan on or before the termination date, the full benefit must be included in benefit liabilities for purposes of a standard termination under § 4041 of ERISA. (For information on post-termination amendments, see 29 CFR § 4041.8.)
- XRA for Ages Outside the Table Range
How does PBGC determine an Expected Retirement Age (XRA) using Tables II-A, II-B, and II-C from Appendix D to PBGC’s regulation on Allocation of Assets in Single-Employer Plans (29 CFR Part 4044) when either or both of the ages needed to enter the tables (the unreduced retirement age and the earliest retirement age) are outside the range of ages shown in the table?
PBGC uses an extended version of the tables. PBGC would consider it reasonable for a plan administrator to use these extended table to determine XRAs in cases where ages fall outside the range of the tables in Appendix D to the regulation. PBGC would not consider it reasonable to simply use the age in the Appendix D table that is at the end of the range nearest to the actual age for any age that is outside the range in the Appendix D table.
- Counting Days for Deadline Purposes
How does PBGC count days for purposes of deadlines?
The time between two dates, for purposes of PBGC’s regulations, is measured using calendar days. See 29 CFR part 4000, subpart D (§§ 4000.41-43). Those provisions contain detailed information about how to count days, special rules for weekends and holidays, etc.
- Treatment of § 4062(c) Claims
What is the relationship between due and unpaid minimum funding contributions (the “DUEC Claim”) and the claim against the employer for certain shortfall amortization charges and installments (and, where applicable, for certain waiver amortization charges and installments) under § 4062(c) (the “§4062(c) Claim”)?
PBGC interprets the PPA 2006 amendments to refer to the same liability as under the pre‐PPA provision—i.e., liability for due and unpaid minimum required contributions. Under this interpretation, there is no duplication between the DUEC Claim and the §4062(c) Claim; they are one and the same. Accordingly, we file a single claim for this liability.
- Failure to File Form 500 by Deadline
If a plan fails to file a Standard Termination Notice (Form 500) with PBGC on or before the 180th day after the proposed termination date, is it required to start over with a new notice of intent to terminate?
Other options may be available. One option is to move the proposed termination date to a later date, provided that the new date is no more than 90 days after the date the first notice of intent to terminate was issued. 29 CFR § 4041.25(2). This would move the Form 500 filing deadline. If a plan moves the proposed termination date, the plan must include the new proposed termination date in the notice of plan benefits, reflect any additional accruals in the notice of plan benefits and in the distribution, and promptly issue the notice of intent to terminate and the notice of plan benefits to any additional affected parties, as of the later proposed termination date. Additional statutory or regulatory requirements (e.g., regarding tax qualification) may apply if a later termination date is used.
Another option, available under § 4041.30, is to request an extension of the deadline for filing the Form 500. There is no prescribed format for requesting an extension; however, a request filed later than 15 days before the deadline expires must include a justification for not filing the request earlier. An extension may be granted where there are compelling reasons why it is not administratively feasible for the plan administrator to meet the deadline and the delay is brief. Considerations include the length of the delay and whether the plan is exercising ordinary business care and prudence in attempting to meet the deadline.
Finally, a plan may start over. Starting over requires issuing a new notice of intent to terminate, which may be included in the same mailing as the notice of plan benefits. Although the new proposed termination date must be at least 60 days after the notice of intent to terminate is issued, that 60-day minimum period may run concurrently with PBGC’s 60-day review period if the Form 500 is filed immediately. (Remember that day zero of the 60-day minimum period before the proposed termination date is the date the last notice of intent to terminate is issued to affected parties, while day zero of PBGC's 60-day review period is the date the standard termination notice is received by PBGC.) Although starting over need not significantly delay the distribution date, it will delay the termination date.
- Constructive Ownership Rules
Who may forgo a portion of their benefit in an election of alternative treatment under 29 CFR § 4041.21(b)(2) to make a plan sufficient to complete a standard termination?
Only majority owners may forgo a portion of their benefits under 4041.21(b)(2). Majority owner is defined under 29 CFR § 4041.2 as an individual who owns, directly or indirectly, 50% or more of a contributing sponsor of a single employer plan. The constructive ownership rules under 29 CFR § 4041.21(b)(2) apply. See Internal Revenue Code § 1563(e)(5) and Treas. Reg. § 1-414(b)-1 when determining who is a majority owner.
Alternative Treatment of Majority Owner's Benefits
A plan is terminating in a standard termination. A majority owner elected alternative treatment of his plan benefits to make the plan sufficient to satisfy plan benefits. There are plan assets remaining after the plan benefits of all other participants are satisfied. May those remaining plan assets be distributed to those other participants or revert to the employer, under the terms of the plan?
Under 29 CFR § 4041.21(b)(2), a majority owner may elect to forgo receipt of his or her plan benefits to the extent necessary to enable the plan to satisfy all other plan benefits (through priority category 6 under section 4044(a) of ERISA) in a standard termination. Any plan assets remaining after all such other plan benefits are satisfied must be distributed to the majority owner to satisfy his plan benefits (through priority category 6). Any plan assets remaining after these majority owner’s plan benefits are satisfied must be distributed to the other participants or revert to the employer, under the terms of the plan and applicable law. See preamble to final rule, 57 FR 59206 at 59212 (Dec. 14, 1992).
Allocation of Shortfall Among Multiple Majority Owners Electing Alternative Treatment of Their Benefits
Under the rules governing majority owner “alternative treatment” elections, it is possible for there to be two or more majority owners who may make such an election (as majority owner status is based on 50% or more ownership and because of the controlled group attribution rules). Assume that there are two or more majority owners, that each of them makes such an election, and that plan assets are sufficient to satisfy some, but not all, of the benefits of all of these majority owners. How should the shortfall be allocated among the majority owners?
The alternative benefit treatment election and plan language determines how the shortfall should be allocated among the majority owners. To the extent that no amounts or order of alternative benefit treatment elections has been specified, and all majority owners have elected an alternative treatment of their benefit to the extent necessary to fund all other benefits, the shortfall should be allocated to ensure that the shortfall is allocated proportionately to each majority owner’s benefit under the plan.