87-11

October 22, 1987

REFERENCE:

4044(a) Allocation of Assets. Requirement of Following Statutory Allocation Provisions

4044(a)(6)All Other Benefits Under the Plan

4044(d) Allocation of Assets. Distribution of Residual Assets

4044(d)(1) Allocation of Assets. Distribution of Residual Assets to Employer

OPINION:

This is in response to your request for an opinion concerning the benefits to which the plan administrator of a terminated

single-employer defined benefit pension plan must allocate assets under Section 4044(a) of ERISA before any residual

assets may be distributed to the employer pursuant to Section 4044(d). You specifically asked whether Section 4044(a)(6)

requires the payment of any benefits that participants have not accrued by the date of plan termination, but to which they

might have become entitled in the future if the plan had not terminated and they had continued working in covered

The facts, as we understand them from your request, are as follows. * * * is terminating two defined benefit pension

plans, the Retirement Benefit Plan for Salaried Employees of * * * Incorporated and the * * * Incorporated Retirement

Income Plan for Hourly-Rated Employees (collectively, the "Plans"). The respective dates of termination are April 30,

1987, and June 30, 1987. The plan administrator proposes to annuitize benefits under the Plans by purchasing group

annuity contracts from an insurance company in consideration of the payment of a one-time premium for each contract.

All benefits accrued under the Plans as of their respective dates of termination will be guaranteed under the annuity

contracts as the unconditional, irrevocable and noncancellable obligation of the insurance company from which the

contracts will be purchased. The annuity contracts will provide for all optional forms of benefit payments available under

the Plans, as well as early retirement benefits, other benefits protected from cutback by Section 301(a) of the Retirement

Equity Act of 1984, and preretirement survivor annuities. Early retirement benefits in amounts based on the participants'

accrued benefits as of the date of plan termination will be provided under the annuity contracts to participants who then

meet the age and service requirements for the subsidy or who will meet those requirements in the future. If the insurance

company fails to pay benefits at the time or in the manner set forth in the Plans and the annuity contracts, affected

participants will have a cause of action against the insurance company to enforce the payment of benefits.

Section 4044(a) of ERISA governs the allocation of plan assets to plan benefits in the case of the termination of a single-

employer pension plan. Plan assets must be allocated in succession to the benefits described in each of the six priority

categories established in Sections 4044(a)(1) through (a)(6). Section 4044(d)(1) of ERISA provides that any residual

assets remaining after satisfaction of all benefits in priority categories 1 through 6 of Section 4044(a) may be distributed

to the employer if all liabilities of the plan to participants and their beneficiaries have been satisfied, the distribution does

not contravene any provision of law, and the plan provides for such a distribution in these circumstances. Each of the

Plans you submitted with your request satisfies the second and third of these conditions.

After assets have been allocated to the benefits assigned to priority categories 1 through 5 of Section 4044(a), Section

4044(a)(6) requires that the remaining assets be allocated to the payment of "all other benefits under the plan." Under the

PBGC's regulation on the Allocation of Assets to Benefit Categories (29 C.F.R. Part 2618, Subpart B), "the benefits

assigned to priority category 6 with respect to each participant are all of the participant's benefits under the plan, whether

forfeitable or nonforfeitable." 29 C.F.R. § 2618.16. As the PBGC explained in the preamble to the proposed form of the

regulation, "priority category 6 will contain the value of accrued forfeitable benefits of a participant." 40 Fed. Reg. 51368,

51370 (Nov. 4, 1975). The PBGC accordingly construes Section 4044(a)(6) to include only accrued benefits, or, in the

case of subsidies protected by the Retirement Equity Act, benefits to which participants may become entitled in the

future. n1 See, e.g., Opinion Letters 86-1 (Jan. 15, 1986), 85-28 (Dec. 2, 1985), 85-9 (April 5, 1985).

n1 ERISA, as amended by the Retirement Equity Act, requires the payment of early retirement benefits and retirement-

type subsidies "with respect to benefits attributable to service before" plan termination. 29 U.S.C. § 1054(g); see 26

U.S.C. § 411(d)(6). In the case of a retirement-type subsidy, ERISA requires such payments of benefits accrued at the

date of plan termination to any participant who meets, either before or after plan termination, the pretermination conditions

for the subsidy. Id. Assets accordingly must be allocated under Section 4044(a) to the payment of these benefits. Section

4044(a) does not create benefit entitlements not otherwise provided for elsewhere in ERISA or under the plan. ERISA

does not require benefit accruals per se based on service not actually completed under a plan. Moreover, the Plans that

are the subject of your request for an opinion do not provide for the present award of benefit accrual credit based on hours

of service not yet completed, nor for the payment, either before or after plan termination, of "unaccrued benefits" based

on such unearned service. Section 4044(a)(6) accordingly does not require the allocation of assets to pay benefits that

might have accrued in the future if the Plans had not terminated and the participants had continued performing covered

service. Consequently, such "unaccrued benefits" cannot be considered "liabilities of the plan to participants and their

beneficiaries" under Section 4044(d)(1).

You should be aware that panels of the United States Courts of Appeals for the Fourth and Eleventh Circuits,

respectively, have decided otherwise in Tilley v. Mead, 815 F.2d 989 (4th Cir. 1987) and Blessitt v. Dixie Engine Co., No.

86-8123 (11th Cir. June 1, 1987), although both cases are currently pending on petitions for rehearing. In each of these

cases, the PBGC has filed an amicus curiae brief in support of rehearing.

I hope this letter is of assistance. If you have further questions on this matter, please contact Jeanne Beck of my staff

at the above address or at (202) 778-8824.

Gary M. Ford

General Counsel