[Federal Register Volume 79, Number 87 (Tuesday, May 6, 2014)]
[Rules and Regulations]
[Pages 25667-25675]
From the Federal Register Online via the Government Printing Office [http://www.gpo.gov/]
[FR Doc No: 2014-10357]
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PENSION BENEFIT GUARANTY CORPORATION
29 CFR Part 4022
RIN 1212-AB18
Benefits Payable in Terminated Single-Employer Plans; Limitations
on Guaranteed Benefits; Shutdown and Similar Benefits
AGENCY: Pension Benefit Guaranty Corporation.
ACTION: Final rule.
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SUMMARY: This final rule amends PBGC's regulation on Benefits Payable
in Terminated Single-Employer Plans, which sets forth rules on PBGC's
guarantee of pension plan benefits, including rules on the phase-in of
the guarantee. The amendments implement the Pension Protection Act of
2006 provision that the phase-in period for the guarantee of benefits
that are contingent upon the occurrence of an ``unpredictable
contingent event,'' such as a plant shutdown, starts no earlier than
the date of the shutdown or other unpredictable contingent event.
DATES: Effective June 5, 2014.
FOR FURTHER INFORMATION CONTACT: Catherine B. Klion, Assistant General
Counsel for Regulatory Affairs, Office of the General Counsel, Pension
Benefit Guaranty Corporation, 1200 K Street NW., Washington, DC 20005,
202-326-4224 or klion.catherine@pbgc.gov. (TTY/TDD users may call the
Federal relay service toll-free at 1-800-877-8339 and ask to be
connected to 202-326-4224.)
SUPPLEMENTARY INFORMATION:
Executive Summary
This rule is needed to conform PBGC's benefit payment regulation to
Pension Protection Act of 2006 changes to the phase-in of PBGC's
guarantee of benefits that are contingent upon the occurrence of an
``unpredictable contingent event,'' such as a plant shutdown.
PBGC's legal authority for this action comes from section
4002(b)(3) of the Employee Retirement Income Security Act of 1974
(ERISA), which authorizes PBGC to issue regulations to carry out the
purposes of Title IV of ERISA, and section 4022 of ERISA, which sets
forth rules on PBGC's guarantee of benefits in terminated single-
employer plans.
This final regulation codifies the Pension Protection Act of 2006
provision that the phase-in period for the guarantee of benefits that
are contingent upon the occurrence of an ``unpredictable contingent
event,'' such as a plant shutdown, starts no earlier than the date of
the shutdown or other unpredictable contingent event. The regulation
incorporates the definition of an unpredictable contingent event
benefit under Title II of ERISA and Treasury regulations; provides that
the guarantee of an unpredictable contingent event benefit is phased in
from the latest of the date the benefit provision is adopted, the date
the benefit is effective, or the date the event that makes the benefit
payable occurs; and includes eight examples that show how the phase-in
rules apply in various situations.
PBGC received one public comment on its 2011 proposed regulation.
PBGC has made a change to the final regulation in response to the
comment.
Background
The Pension Benefit Guaranty Corporation (PBGC) administers the
single-employer pension plan termination insurance program under Title
IV of the Employee Retirement Income Security Act of 1974 (ERISA). The
program covers certain private-sector, single-employer defined benefit
plans, for which premiums are paid to PBGC each year.
Covered plans that are underfunded may terminate either in a
distress termination under section 4041(c) of ERISA or in an
involuntary termination (one initiated by PBGC) under section 4042 of
ERISA. When such a plan terminates, PBGC typically is appointed
statutory trustee of the plan, and becomes responsible for paying
benefits in accordance with the provisions of Title IV.
Under sections 4022(b)(1) and 4022(b)(7) of ERISA and Sec. Sec.
4022.24 through .26 of PBGC's regulation on Benefits Payable in
Terminated Single-Employer Plans, 29 CFR part 4022, PBGC's guarantee of
new pension benefits and benefit increases is ``phased in'' over a
five-year period, which begins on the date the new benefit or benefit
increase is adopted or effective, whichever is later.
The Pension Protection Act of 2006, Public Law 109-280 (PPA 2006),
amended section 4022 of ERISA by adding a new section 4022(b)(8), which
changes the start of the phase-in period for plant shutdown and other
``unpredictable contingent event benefits.'' Under section 4022(b)(8),
the phase-in rules are applied as if a plan amendment creating an
unpredictable contingent event benefit (UCEB) was adopted on the date
the unpredictable contingent event (UCE) occurred rather than as of the
actual adoption date of the amendment, which is almost always earlier.
As a result of the change, the guarantee of benefits arising from plant
shutdowns and other UCEs that occur within five years of plan
termination (or the date the plan sponsor entered bankruptcy, if
applicable under PPA 2006, as explained below) generally will be lower
than under prior law. This provision, which does not otherwise change
the existing phase-in rules, applies to benefits that become payable as
a result of a UCE that occurs after July 26, 2005.
Phase-In of PBGC Guarantee
Under section 4022(b)(7) of ERISA, the guarantee of benefits under
a new plan or of a new benefit or benefit increase under an amendment
to an existing plan (all of which are referred to in PBGC's regulations
as ``benefit increases'') is ``phased in'' based on the number of full
years the benefit increase is in the plan. The time period that a
benefit increase has been provided under a plan is measured from the
later of the adoption date of the provision creating the benefit
increase or the effective date of the benefit increase. Generally, 20
percent of a benefit increase is guaranteed after one year, 40 percent
after two years, etc., with full phase-in of the guarantee after five
years. If the amount of the monthly benefit increase is below $100, the
annual rate of phase-in is $20 rather than 20 percent.
The phase-in limitation generally serves to protect the insurance
program from losses caused by benefit increases that are adopted or
made effective shortly before plan termination. This protection is
needed because benefit increases can create large unfunded liabilities.
An example is a plan amendment that significantly increases credit
under the plan benefit formula for service performed prior to the
amendment. Such increases generally are funded over time under the
ERISA minimum funding rules. Congress determined that an immediate full
guarantee would result in an inappropriate loss for PBGC if a plan
terminated before an employer significantly funded a benefit increase.
Phase-in of the guarantee allows time for some funding of new
liabilities before they are fully guaranteed.
Funding of liabilities created by a benefit increase generally
starts at the
[[Page 25668]]
same time as the PBGC guarantee first applies under the phase-in rule.
Under ERISA and the Internal Revenue Code (Code), liability created by
a benefit increase must be reflected in a plan's required contribution
no later than the plan year following adoption of the benefit increase.
For example, a benefit increase that is adopted and effective in the
2009 plan year must be reflected in the minimum funding contribution
calculations for a plan year not later than the 2010 plan year.
Similarly, such a benefit increase would become partially guaranteed
during the 2010 plan year.
Over the years, legislative reforms, including those in PPA 2006,
have generally shortened the permitted funding period from thirty years
to seven years (or less in certain cases). This closer coordination
between the permitted funding period and five-year guarantee phase-in
period generally enhanced the effectiveness of the phase-in provisions
in protecting the PBGC insurance program against losses due to unfunded
benefit increases. However, as explained below, before the PPA 2006
changes to the phase-in of UCEBs, this coordination generally failed in
the case of UCEBs.
Unpredictable Contingent Event Benefits
UCEBs, described more specifically below, are benefits or benefit
increases that become payable solely by reason of the occurrence of a
UCE such as a plant shutdown. UCEBs typically provide a full pension,
without any reduction for age, starting well before an unreduced
pension would otherwise be payable. The events most commonly giving
rise to UCEBs are events relating to full or partial plant shutdowns or
other reductions in force. UCEBs, which are frequently provided in
pension plans in various industries such as the steel and automobile
industries, are payable with respect to full or partial plant shutdowns
as well as shutdowns of different kinds of facilities, such as
administrative offices, warehouses, retail operations, etc. UCEBs are
also payable, in some cases, with respect to layoffs and other
workforce reductions.\1\
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\1\ The Technical Explanation of PPA 2006 prepared by the Joint
Committee on Taxation Staff specifies that UCEBs include benefits
payable with respect to ``facility shutdowns or reductions in
workforce.'' Joint Committee on Taxation, Technical Explanation of
H.R. 4, the ``Pension Protection Act of 2006,'' as passed by the
House on July 26, 2006, and as considered by the Senate on August 3,
2006 (JCX-38-06), August 3, 2006, at 90 (hereinafter Technical
Explanation of PPA 2006).
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A typical shutdown benefit provision in the steel industry--the so-
called ``70/80 Rule''--generally allows participants who lose their
jobs due to the complete or partial closing of a facility or a
reduction-in-force and whose age plus service equals 70 (if at least
age 55) or 80 (at any age) to begin receiving their full accrued
pension immediately, even though they have not reached normal
retirement age. Similar UCEBs are common in the automobile industry
with respect to shutdowns and layoffs. The purpose of these benefits is
to assist participants financially in adjusting to a permanent job
loss.
Time Lag Between Start of Guarantee Phase-In and Funding of UCEBs
A UCEB provision typically has been in a plan many years before the
occurrence of the event that eventually triggers the benefit, such as a
plant shutdown. As a result, before PPA 2006, shutdown benefits, for
example, were often fully guaranteed under the phase-in rules when a
shutdown occurred. Because the benefit is contingent on the occurrence
of an unpredictable event, plan sponsors typically did not make
contributions to provide for advance funding of such benefits; funding
of such benefits often did not begin until after the UCE had occurred.
If, as often happened, plan termination occurred within a few years
after a shutdown, the time lag between the start of the phase-in period
and the start of funding resulted in an increased loss to the insurance
program.
Treatment of UCEBs in OBRA 1987
Congress first explicitly addressed UCEBs in funding reforms
contained in the Pension Protection Act of 1987, enacted as part of
Public Law 100-203, the Omnibus Budget Reconciliation Act of 1987 (OBRA
1987). The OBRA 1987 rules for deficit reduction contributions required
employers to recognize UCEBs on an accelerated basis (generally, within
five to seven years), beginning after the triggering event occurred.\2\
However, the rules did not address the mismatch of the funding and
guarantee phase-in periods discussed above. They also did not address
the fact that UCEBs are likely to be triggered when the employer is
experiencing financial difficulty, which threatens both funding and
continuation of the plan. For these reasons, in the years since OBRA
1987, PBGC has assumed more than $1 billion of unfunded benefit
liabilities from shutdown and similar benefits.
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\2\ Public Law 100-203, 10 Stat. 1330, 339-41 (codified as
amended at 26 U.S.C. 412(l) (1987)); see S. Rep. No. 100-63 at 171-
72, 175-76 (1987).
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Treatment of UCEBs in PPA 2006
Congress further addressed UCEBs in PPA 2006. PPA 2006 affected
UCEBs in two important ways.
First, PPA 2006 added new ERISA section 206(g) and parallel Code
section 436(b) that restrict payment of UCEBs with respect to a UCE if
the plan is less than 60 percent funded for the plan year in which the
UCE occurs (or would be less than 60 percent funded taking the UCEB
into account). Unless the restriction is removed during that plan year
as a result of additional contributions to the plan or an actuarial
certification meeting certain requirements, the restriction becomes
permanent and, under Treas. Reg. Sec. 1.436-1(a)(4)(iii),\3\ the plan
is treated as if it does not provide for those UCEBs.\4\ Because PBGC
guarantees only benefits that are provided under a plan, a UCEB that is
treated as not provided under the plan because of this restriction is
not guaranteeable by PBGC at all, and the phase-in rules that are the
subject of this final regulation do not come into play for such a UCEB.
Moreover, under Treas. Reg. Sec. 1.436-1(a)(3)(ii), benefit
limitations under ERISA section 206(g) that were in effect immediately
before plan termination continue to apply after termination.
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\3\ Treasury Regulations under Code sections 430 and 436 also
apply for purposes of the parallel rules in ERISA sections 303 and
206(g).
\4\ 74 FR 53004, 53062 (Oct. 15, 2009). Treas. Reg. Sec. 1.436-
1(a)(4)(iii) permits all or any portion of prohibited UCEBs to be
restored by a plan amendment that meets the requirements of section
436(c) of the Code and Treas. Reg. Sec. 1.436-1(c) and other
applicable requirements. Such an amendment would create a ``benefit
increase'' under Sec. 4022.2 and therefore PBGC's guarantee of
UCEBs restored by such an amendment would be phased in from the
later of the adoption date of the amendment or the effective date as
of which the UCEB is restored, as provided under Sec. 4022.27(c) of
the final regulation.
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Second, PPA 2006 better aligns the starting dates of the funding
and guarantee phase-in of UCEBs. Under PPA 2006, phase-in of the PBGC
guarantee does not start until the UCE actually occurs. Specifically,
ERISA section 4022(b)(8), added by section 403 of PPA 2006, provides:
``If an unpredictable contingent event benefit (as defined in section
206(g)(1)) is payable by reason of the occurrence of any event, this
section shall be applied as if a plan amendment had been adopted on the
date such event occurred.'' The provision applies to UCEs that occur
after July 26, 2005. Thus, for purposes of the phase-in limitation, the
date a UCE occurs is treated as the adoption date of the plan provision
that provides for the related UCEB. This statutory change provides
[[Page 25669]]
the PBGC insurance program a greater measure of protection than prior
law from losses due to unfunded UCEBs--most notably, benefits that
become payable by reason of a plant shutdown or similar event such as a
permanent layoff.\5\
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\5\ In addition, Treas. Reg. Sec. 1.430(d)-(1)(f)(6) requires
that calculation of the funding target for a single-employer plan
take into account, based on information as of the valuation date,
the probability that UCEBs will become payable. Under that Treasury
regulation, the probability may be assumed to be zero if there is
not more than a de minimis likelihood that the UCE will occur.
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ERISA section 206(g)(1), as added by section 103(a) of PPA 2006,
defines ``unpredictable contingent event benefit'' as any benefit
payable solely by reason of a plant shutdown (or similar event, as
determined by the Secretary of the Treasury), or an event other than
the attainment of any age, performance of any service, receipt or
derivation of any compensation, or occurrence of death or disability.
PPA 2006 did not alter the rule that UCEBs are not guaranteed at
all unless the triggering event occurred prior to the plan termination
date (see PBGC v. Republic Tech. Int'l, LLC, 386 F.3d 659 (6th Cir.
2004)).
Treasury Final Regulation
On October 15, 2009 (at 74 FR 53004), the Department of the
Treasury (Treasury) published a final rule on Benefit Restrictions for
Underfunded Pension Plans that defines UCEB for purposes of ERISA
section 206(g)(1), and thus also for purposes of section 4022(b)(8).
Treasury's final regulation clarifies the following points regarding
UCEBs:
UCEBs include only benefits or benefit increases to the
extent such benefits or benefit increases would not be payable but for
the occurrence of a UCE.
The reference to ``plant shutdown'' in the statutory
definition of UCEB includes a full or partial shutdown.
Treasury's final regulation also states that a UCEB includes benefits
triggered by events similar to plant shutdowns. Treas. Reg. Sec.
1.436-1(j)(9) defines a UCEB at 26 CFR 1.436(j)(9).
PBGC Proposed Rule and Public Comment
On March 11, 2011 (at 76 FR 13304), PBGC published a proposed rule
to implement section 403 of PPA 2006.\6\ PBGC received one comment on
the proposed rule, from an association of labor organizations.\7\ The
commenter requested that the final rule limit PBGC's discretion to
determine the beginning date of the phase-in period for the guarantee
of a UCEB and require PBGC to notify participants affected by the
phase-in of the date of the UCE. The commenter also expressed concern
about the participant-by-participant basis for determining the date on
which a UCE occurs in the case of a reduction in force. PBCG's response
to the comment is discussed below.
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\6\ With one exception, explained below under the heading
``Bankruptcy filing date treated as deemed termination date,'' the
other provisions of PPA 2006 affecting PBGC's guarantee do not
affect phase-in of the guarantee of UCEBs and thus were not
addressed in the proposed rule.
\7\ The comment is posted on PBGC's Web site, http://www.pbgc.gov/.
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Overview of Final Regulation
The final regulation incorporates the definition of UCEB under
section 206(g)(1)(C) of ERISA and Treas. Reg. Sec. 1.436-1(j)(9). It
also provides that the guarantee of a UCEB is phased in from the latest
of the date the benefit provision is adopted, the date the benefit is
effective, or the date the UCE that makes the benefit payable occurs.
The final rule includes eight examples that show how the UCEB phase-in
rules apply in the following situations:
Shutdown that occurs later than the announced shutdown
date.
Sequential permanent layoffs.
Skeleton shutdown crews.
Permanent layoff benefit for which the participant
qualifies shortly before the sponsor enters bankruptcy.
Employer declaration during a layoff that return to work
is unlikely.
Shutdown benefit with age requirement that can be met
after the shutdown.
Retroactive UCEB.
Removal of IRC Section 436 restriction.\8\
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\8\ The examples are not an exclusive list of UCEs or UCEBs and
are not intended to narrow the statutory definition, as further
delineated in Treasury Regulations.
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The final regulation is nearly the same as the proposed regulation.
As explained below, PBGC has made one change in the regulation in
response to the public comment. In addition, PBGC has updated the dates
in the examples.
Regulatory Changes
UCEBs Covered
As explained above, ERISA section 4022(b)(8), added by section 403
of PPA 2006, changes the rules for phasing in the guarantee of UCEBs in
the case of UCEs that occur after July 26, 2005. Section 4022(b)(8)
covers shutdown-type benefits, including benefits payable by reason of
complete shutdowns of plants, and benefits payable when participants
lose their jobs or retire as a result of partial closings or
reductions-in-force at all kinds of facilities, in addition to other
UCEBs. Accordingly, Sec. 4022.27(a) expressly refers to benefits
payable as a result of ``plant shutdowns or other unpredictable
contingent events . . ., such as partial facility closings and
permanent layoffs.'' \9\
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\9\ As explained in Technical Explanation of PPA 2006, supra
note 1, ``layoff benefits,'' as that term is used in Treas. Reg.
Sec. 1.401-1(b)(1)(i), are severance benefits that may not be
included in tax-qualified pension plans. In contrast, the benefits
covered in this regulation are retirement benefits payable in the
event of certain workforce reductions. These retirement benefits--
generally subsidized early retirement benefits--may be provided in
tax-qualified plans insured by PBGC.
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As stated above, a UCEB is defined by section 206(g)(1)(C) of ERISA
to include benefits payable solely by reason of (1) a plant shutdown or
similar event, or (2) an event other than an event such as attainment
of a certain age or performance of service, that would trigger
eligibility for a retirement benefit. The final regulation provides
that PBGC will determine whether a benefit is a UCEB based on the facts
and circumstances; the substance of the benefit, not what it is called,
determines whether the benefit would be a UCEB covered by the new
phase-in rule. Accordingly, under Sec. 4022.27(b), the guarantee of
any benefit that PBGC determines, based on plan provisions and facts
and circumstances, is a shutdown benefit or is otherwise a UCEB will be
phased in as a UCEB.
The definition of UCEB under Sec. 4022.2 provides that a benefit
does not cease to be a UCEB for phase-in purposes merely because the
UCE has already occurred or its occurrence has become reasonably
predictable. This interpretation is supported by the plain language of
ERISA section 4022(b)(8), which incorporates ERISA section
206(g)(1)(C). Section 206(g)(1)(C) expressly defines a UCEB not in
terms of degree of predictability, but rather whether a benefit is
``payable solely by reason of a shutdown or similar event . . . or an
event other than the attainment of any age, performance of any service,
receipt or derivation of any compensation, or occurrence of death or
disability.'' In other words, section 206(g)(1)(C) provides that a UCEB
remains a UCEB after the UCE occurs. Because many events that are not
reliably and reasonably predictable become predictable immediately
before they occur, and the concept of predictability does not apply to
events after they have occurred, PBGC interprets ERISA section
4022(b)(8) to apply to benefits such as shutdown benefits regardless of
whether the events
[[Page 25670]]
triggering those benefits have already occurred or have become
predictable.
Date UCE Occurs
Under the final regulation, PBGC determines the date a UCE occurs
based on the plan provisions and other facts and circumstances,
including the nature and level of activity at a facility that is
closing and the permanence of the event. Statements or determinations
by the employer, the plan administrator, a union, an arbitrator under a
collective bargaining agreement, or a court about the date of the event
may be relevant but are not controlling. Where a plan provides that a
UCEB is payable only upon the occurrence of more than one UCE, the
regulation provides that the guarantee is phased in from the latest
date when all such UCEs have occurred. For example, if a UCEB is
payable only if a participant is laid off and the layoff continues for
a specified period of time, the phase-in period begins at the end of
the specified period of time. Similarly, if a UCEB is payable only if
both the plant where an employee worked is permanently shut down and it
is determined that the employer has no other suitable employment for
the employee, the phase-in period begins when it is determined that the
employer had no other suitable employment for the employee (assuming
that date was later than the shutdown date).
The commenter expressed concern that the proposed ``facts and
circumstances'' standard granted PBGC broad discretionary authority to
reduce participants' guaranteed benefits and requested that this
discretion should be limited, in general, by granting deference to
eligibility determinations made by the plan sponsor (when acting as
plan administrator), or that PBGC should be bound by the decision of an
arbitrator, benefit agreement or judicial decision construing a
collective bargaining agreement. The commenter points out that such
deference is especially appropriate where participants are receiving
benefits and have relied upon those determinations.
Because shutdowns and similar situations are fact-specific, PBGC
continues to believe that a facts-and-circumstances approach is the
best way to implement the statute. However, PBGC agrees with the
commenter that determinations made by a plan, arbitrator, or court
regarding the date when participants became entitled to the UCEB may be
relevant. Accordingly, in response to the comment, Sec. 4022.27(d) of
the final regulation specifically includes determinations and
statements by such parties as factors that will be considered, to the
extent relevant, in establishing the UCE date. PBGC will not, however,
treat any such determinations or statements as controlling.
This change does not alter the principle that PBGC is ultimately
responsible for determining participants' guaranteed benefits. The
agency administers a program that places statutory limits on benefits,
and it is not generally bound by a private party's determination of
benefits.
Whether a UCEB phase-in determination applies on a participant-by-
participant basis, as opposed to facility-wide or some other basis,
will depend largely upon plan provisions. For example, a benefit
triggered by a reduction-in-force would be determined with respect to
each participant, and thus layoffs that occur on different dates would
generally be distinct UCEs. See Example 2 of the final regulation
(Sec. 4022.27(e)(2)). But a benefit payable only upon the complete
shutdown of the employer's entire operations applies plan-wide, and
thus the shutdown date generally is the date of the UCE for all
participants.
The commenter expressed concern that in cases of sequential
layoffs, participants laid off early in a shutdown process would obtain
a greater phase-in percentage than participants laid off later in the
process. The commenter suggested that sequential layoffs resulting in a
shutdown should be viewed as a single event, and the UCE date should be
the date on which the sponsor decided upon the layoffs, or at the
latest, the date on which the first participants are laid off. PBGC has
not adopted this suggestion.
In the case of a sequential layoff where the plan provides that
benefits become payable as of the layoff date, it is true that a
participant-by-participant determination of the UCE date could result
in participants laid off early in a shutdown process receiving a
greater phase-in percentage than participants laid off later in the
process. However, that result is dictated by plan language that
conditions a benefit upon the participant's layoff, and ERISA section
4022(b)(8), which requires that the phase-in period commence no earlier
than the date of the event that triggers the UCEB. Setting a phase-in
date that is prior to the date of the event that made the layoff
benefit payable would not accord with the statute and therefore would
be beyond PBGC's authority.\10\
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\10\ In contrast, where the plan provides that a UCEB is payable
only when all participants are laid off and the plant is permanently
shut down, the plan itself has created a benefit trigger that is
actually a single event, and therefore phase-in would commence as of
the same date for all participants.
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The commenter also requested that the final rule require that PBGC
explain in detail, as part of the benefit determination process, the
reasons for its selection of the triggering date on which the phase-in
is based, if that date is different from the triggering date used by
the plan. PBGC's regulations do not specify the amount of detail to be
included in benefit determinations, in order to preserve flexibility in
dealing with a wide variety of plans and plan provisions. In issuing
benefit determinations to participants and beneficiaries, PBGC
carefully balances providing additional information with reducing the
potential for confusion from undue complexity. However, PBGC
understands the commenter's concern and is committed to transparency in
its communications with participants and beneficiaries. In response to
the comment, PBGC's policy will be to provide the UCE date and the
information necessary to understand it, in all benefit determinations,
with the amount of additional information necessarily varying from case
to case.
Date Phase-In Begins
ERISA sections 4022(b)(1) and 4022(b)(7) provide that PBGC's
guarantee of a benefit increase is phased in from the date the benefit
increase is ``in effect,'' i.e., from the later of the adoption date or
effective date of the increase. ERISA section 4022(b)(8) (added by PPA
2006) provides that, for phase-in purposes, shutdown benefits and other
UCEBs are deemed to be ``adopted on the date . . . [the UCE] occurs.''
Thus ERISA section 4022(b)(8) protects PBGC in the typical situation
where a shutdown or permanent layoff occurs long after a shutdown
benefit provision was originally adopted.
Section 4022(b)(8) could be read to produce an incongruous result
in an unusual situation where the UCE occurs first and a UCEB is
adopted later, effective retroactive to the UCE. Because the date of
the UCE would be treated under section 4022(b)(8) as the adoption date
of the UCEB, in this situation the phase-in arguably would begin on the
date of the UCE, rather than on the actual adoption date of the plan
amendment, as under pre-PPA 2006 law. The result would be a more
generous--and more costly--guarantee of UCEBs than under pre-PPA 2006
law. To avoid this incongruous result, Sec. 4022.27(c) provides that a
benefit increase due solely to a UCEB is ``in effect'' as of the latest
of the adoption date of the plan provision that provides
[[Page 25671]]
for the UCEB, the effective date of the UCEB, or the date the UCE
occurs.
Finally, if a UCEB becomes payable because a restriction under IRC
section 436 is removed after, for example, an adequate funding
contribution is made, the effective date of the UCEB for phase-in
purposes is determined without regard to the restriction.
Allocation of Assets
When PBGC becomes trustee of a pension plan that terminates without
sufficient assets to provide all benefits, it allocates plan assets to
plan benefits in accordance with the statutory priority categories in
section 4044 of ERISA. The category to which a particular benefit is
assigned in the asset allocation can affect insurance program costs and
the extent to which participants receive nonguaranteed benefits.
Priority category 3 in the asset allocation is particularly
important, because it often includes benefits that, depending on the
level of the plan assets, may be paid by PBGC even though not
guaranteed. Priority category 3 contains only those benefits that were
in pay status at least three years before the termination date of the
plan (or that would have been in pay status if the participant had
retired before that three-year period). An individual's benefit amount
in priority category 3 is based on the plan provisions in effect during
the five-year period preceding plan termination under which the benefit
amount would be the least. Thus priority category 3 does not include
benefit increases that were adopted or became effective in the five
years before plan termination or, in some cases as discussed below, the
bankruptcy filing date.
PBGC considered whether the UCEBs that are not guaranteed under the
PPA 2006 changes should be excluded from priority category 3. Under
that approach, plan assets would go farther to pay for other benefits,
especially guaranteed benefits, and participants would be less likely
to receive UCEBs that are not guaranteed. Alternatively, if UCEBs that
are not guaranteed under the PPA 2006 changes were included in priority
category 3--as they are under pre-PPA law and PBGC's current regulation
on Allocation of Assets (part 4044)--plan assets would be less likely
to reach other benefits, especially guaranteed benefits, and
participants would be more likely to receive UCEBs that are not
guaranteed.
Because section 403 of PPA 2006 does not make any reference to
section 4044,\11\ PBGC concluded that the latter interpretation is the
better one, and thus the final regulation, like the proposed
regulation, does not amend part 4044.
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\11\ By contrast, three other provisions of PPA 2006 that
changed PBGC's guarantee of benefits specifically provide changes to
the asset allocation scheme under section 4044. See PPA 2006
sections 404 (treatment of bankruptcy filing date as deemed
termination date), 402(g)(2)(A) (special termination rules for
commercial airlines), and 407 (relating to majority owners),
enacting respectively sections 4044(e), 4022(h), and 4044(b)(3) of
ERISA.
---------------------------------------------------------------------------
Bankruptcy Filing Date Treated as Deemed Termination Date
On June 14, 2011 (76 FR 34590), PBGC published a final rule,
``Bankruptcy Filing Date Treated as Plan Termination Date for Certain
Purposes; Guaranteed Benefits; Allocation of Plan Assets; Pension
Protection Act of 2006,'' to implement section 404 of PPA 2006, which
added a new section 4022(g) to ERISA. This section provides that when
an underfunded plan terminates while its contributing sponsor is in
bankruptcy, the amount of guaranteed benefits under section 4022 will
be determined as of the date the sponsor entered bankruptcy (bankruptcy
filing date) rather than as of the termination date. The provision
applies to plans terminating while the sponsor is in bankruptcy, if the
bankruptcy filing date is on or after September 16, 2006.\12\
---------------------------------------------------------------------------
\12\ See definition of ``PPA 2006 bankruptcy termination'' in
Sec. 4001.2.
---------------------------------------------------------------------------
Section 4022(g) applies to all types of plan benefits, including
UCEBs. Under this provision, if a permanent shutdown (or other UCE)
occurs after the bankruptcy filing date, UCEBs arising from the UCE are
not guaranteed because the benefits are not nonforfeitable as of the
bankruptcy filing date. Similarly, if the shutdown (or other UCE)
occurs before the bankruptcy filing date, the five-year phase-in period
for any resulting UCEBs is measured from the date of the UCE to the
bankruptcy filing date, rather than to the plan termination date. For
example, if a permanent shutdown occurs three years before the
bankruptcy filing date, the guarantee of any resulting UCEBs will be
only 60 percent phased in, even if the shutdown was more than five
years before the plan's termination date. This rule is illustrated by
Examples 4 and 5 in the regulation (Sec. 4022.27(e)(4) and (5),
respectively).
PBGC considered whether UCEBs could be excepted from the section
4022(g) bankruptcy provision on the ground that the general phase-in
rule in section 4022(g) is superseded by the specific section
4022(b)(8) phase-in rule for UCEBs. However, PBGC concluded that the
language of the bankruptcy and UCEB statutory provisions does not allow
for any such exception. The UCEB provision alters the starting date for
phase-in of UCEBs, while the bankruptcy provision alters the date
beyond which no further phase-in is allowed for any benefit increase,
including a UCEB. PBGC sees no conflict in applying both provisions to
UCEBs.
Estimated Guaranteed Benefits
ERISA section 4041(c)(3)(D)(ii)(IV) requires administrators of
plans terminating in a distress termination to limit payment of
benefits to estimated guaranteed benefits and estimated non-guaranteed
benefits funded under section 4044, beginning on the proposed
termination date. Section 4022.62 of PBGC's regulation on Benefits
Payable in Terminated Single-Employer Plans contains rules for
computing estimated guaranteed benefits, including provisions for
estimating guaranteed benefits when a new benefit or benefit increase
was added to the plan within five years before plan termination. The
final regulation, like the proposed regulation, amends Sec. 4022.62 to
provide that the date the UCE occurs is treated as the date the UCEB
was adopted, i.e., the date the plan was amended to include the UCEB.
Applicability
The amendments in this final rule, like section 403 of PPA 2006,
will apply to UCEBs that become payable as a result of a UCE that
occurs after July 26, 2005.
Regulatory Procedures
Executive Order 12866 ``Regulatory Planning and Review'' and Executive
Order 13563 ``Improving Regulation and Regulatory Review''
PBGC has determined, in consultation with the Office of Management
and Budget, that this final rule not is a ``significant regulatory
action'' under Executive Order 12866.
Executive Orders 12866 and 13563 direct agencies to assess all
costs and benefits of available regulatory alternatives and, if
regulation is necessary, to select regulatory approaches that maximize
net benefits (including potential economic, environmental, public
health and safety effects, distributive impacts, and equity). Executive
Order 13563 emphasizes the importance of quantifying both costs and
benefits, of reducing costs, of harmonizing rules, and of promoting
flexibility. Executive Orders 12866 and 13563 require that a
comprehensive regulatory impact
[[Page 25672]]
analysis be performed for any economically significant regulatory
action, defined as an action that would result in an annual effect of
$100 million or more on the national economy or which would have other
substantial impacts. In accordance with OMB Circular A-4, PBGC has
examined the economic and policy implications of this final rule and
has concluded that the action's benefits justify its costs.
Under Section 3(f)(1) of Executive Order 12866, a regulatory action
is economically significant if ``it is likely to result in a rule that
may . . . [h]ave an annual effect on the economy of $100 million or
more or adversely affect in a material way the economy, a sector of the
economy, productivity, competition, jobs, the environment, public
health or safety, or State, local, or tribal governments or
communities.'' This final rule does not cross the $100 million
threshold for economic significance and is not otherwise economically
significant.
The economic effect of the final rule is entirely attributable to
the economic effect of section 403 of PPA 2006. Three factors tend to
reduce the economic impact of section 403.
First, before section 403 went into effect, PBGC often
involuntarily terminated plans with shutdown liabilities before
company-wide shutdowns, under the ``long-run loss'' provision in
section 4042(a)(4) of ERISA. That provision allows PBGC to initiate
termination proceedings if its long-run loss ``may reasonably be
expected to increase unreasonably if the plan is not terminated.'' A
sudden increase in PBGC's liabilities resulting from a shutdown could
create just such an unreasonable increase in long-run loss. Section 403
avoids the need for PBGC to make case-by-case decisions whether to
initiate such ``pre-emptive'' terminations. Although it is difficult to
make assumptions about PBGC's ability and intent to pursue such
terminations if section 403 had not gone into effect, this factor tends
to reduce its economic impact.
Second, another PPA 2006 amendment provides that if a plan
terminates while the sponsor is in bankruptcy, the amount of benefits
guaranteed by PBGC is fixed at the date of the bankruptcy filing rather
than at the plan termination date. Because of that provision, if a
plant shutdown or other UCE occurred between the bankruptcy filing date
and the termination date, the resulting UCEB would not be guaranteed at
all, and thus section 403 would have no economic effect.
Third--and perhaps most important--as also discussed above, other
PPA 2006 provisions restrict payment of UCEBs if a plan is less than 60
percent funded. If, because of those restrictions, a UCEB was not
payable at all, section 403 again would have no economic effect.
As stated above in Applicability, section 403 of PPA 2006 applies
to any UCEB that becomes payable as a result of a UCE that occurs after
July 26, 2005. PBGC estimates that, to date, the total effect of
section 403--in terms of lower benefits paid to participants and
associated savings for PBGC--is less than $4 million. Although PBGC
cannot predict with certainty which plans with UCEBs will terminate,
the funding level of such plans, or what benefits will be affected by
the guarantee limits, given the relatively low estimate of the effect
of the statutory provision to date, PBGC has determined that the annual
effect of the rule will be less than $100 million.
Regulatory Flexibility Act
PBGC certifies under section 605(b) of the Regulatory Flexibility
Act that this final rule will not have a significant economic impact on
a substantial number of small entities. The amendments implement and in
some cases clarify statutory changes made in PPA 2006; they do not
impose new burdens on entities of any size. Virtually all of the
statutory changes affect only PBGC and persons who receive benefits
from PBGC. Accordingly, sections 603 and 604 of the Regulatory
Flexibility Act do not apply.
List of Subjects in 29 CFR Part 4022
Pension insurance, Pensions, Reporting and recordkeeping
requirements.
For the reasons given above, PBGC is amending 29 CFR part 4022 as
follows:
PART 4022--BENEFITS PAYABLE IN TERMINATED SINGLE-EMPLOYER PLANS
0
1. The authority citation for part 4022 continues to read as follows:
Authority: 29 U.S.C. 1302, 1322, 1322b, 1341(c)(3)(D), and
1344.
0
2. In Sec. 4022.2:
0
a. Amend the definition of ``benefit increase'' by removing the final
``and'' in the second sentence and adding in its place, ``an
unpredictable contingent event benefit, and''; and
0
b. Add in alphabetical order definitions for unpredictable contingent
event (UCE) and unpredictable contingent event benefit (UCEB) to read
as follows:
Sec. 4022.2 Definitions.
* * * * *
Unpredictable contingent event (UCE) has the same meaning as
unpredictable contingent event in section 206(g)(1)(C) of ERISA and
Treas. Reg. Sec. 1.436-1(j)(9) (26 CFR 1.436-1(j)(9)). It includes a
plant shutdown (full or partial) or a similar event (such as a full or
partial closing of another type of facility, or a layoff or other
workforce reduction), or any event other than the attainment of any
age, performance of any service, receipt or derivation of any
compensation, or occurrence of death or disability.
Unpredictable contingent event benefit (UCEB) has the same meaning
as unpredictable contingent event benefit in section 206(g)(1)(C) of
ERISA and Treas. Reg. Sec. 1.436-1(j)(9) (26 CFR 1.436-1(j)(9)). Thus,
a UCEB is any benefit or benefit increase to the extent that it would
not be payable but for the occurrence of a UCE. A benefit or benefit
increase that is conditioned upon the occurrence of a UCE does not
cease to be a UCEB as a result of the contingent event having occurred
or its occurrence having become reasonably predictable.
0
3. Revise Sec. 4022.24(e) to read as follows:
Sec. 4022.24 Benefit increases.
* * * * *
(e) Except as provided in Sec. 4022.27(c), for the purposes of
Sec. Sec. 4022.22 through 4022.28, a benefit increase is deemed to be
in effect commencing on the later of its adoption date or its effective
date.
* * * * *
Sec. 4022.27 [Redesignated as Sec. 4022.28]
0
4. Section 4022.27 is redesignated as Sec. 4022.28.
0
5. New Sec. 4022.27 is added to read as follows:
Sec. 4022.27 Phase-in of guarantee of unpredictable contingent event
benefits.
(a) Scope. This section applies to a benefit increase, as defined
in Sec. 4022.2, that is an unpredictable contingent event benefit
(UCEB) and that is payable with respect to an unpredictable contingent
event (UCE) that occurs after July 26, 2005.
(1) Examples of benefit increases within the scope of this section
include unreduced early retirement benefits or other early retirement
subsidies, or other benefits to the extent that such benefits would not
be payable but for the occurrence of one or more UCEs.
(2) Examples of UCEs within the scope of this section include full
and partial closings of plants or other
[[Page 25673]]
facilities, and permanent workforce reductions, such as permanent
layoffs. Permanent layoffs include layoffs during which an idled
employee continues to earn credited service (creep-type layoff) for a
period of time at the end of which the layoff is deemed to be
permanent. Permanent layoffs also include layoffs that become permanent
upon the occurrence of an additional event such as a declaration by the
employer that the participant's return to work is unlikely or a failure
by the employer to offer the employee suitable work in a specified
area.
(3) The examples in this section are not an exclusive list of UCEs
or UCEBs and are not intended to narrow the statutory definitions, as
further delineated in Treasury Regulations.
(b) Facts and circumstances. If PBGC determines that a benefit is a
shutdown benefit or other type of UCEB, the benefit will be treated as
a UCEB for purposes of this subpart. PBGC will make such determinations
based on the facts and circumstances, consistent with these
regulations; how a benefit is characterized by the employer or other
parties may be relevant but is not determinative.
(c) Date phase-in begins. (1) The date the phase-in of PBGC's
guarantee of a UCEB begins is determined in accordance with subpart B
of this part. For purposes of this subpart, a UCEB is deemed to be in
effect as of the latest of--
(i) The adoption date of the plan provision that provides for the
UCEB,
(ii) The effective date of the UCEB, or
(iii) The date the UCE occurs.
(2) The date the phase-in of PBGC's guarantee of a UCEB begins is
not affected by any delay that may occur in placing participants in pay
status due to removal of a restriction under section 436(b) of the
Code. See the example in paragraph (e)(8) of this section.
(d) Date UCE occurs. For purposes of this section, PBGC will
determine the date the UCE occurs based on plan provisions and other
facts and circumstances, including the nature and level of activity at
a facility that is closing and the permanence of the event. PBGC will
also consider, to the extent relevant, statements or determinations by
the employer, the plan administrator, a union, an arbitrator under a
collective bargaining agreement, or a court, but will not treat such
statements or determinations as controlling.
(1) The date a UCE occurs is determined on a participant-by-
participant basis, or on a different basis, such as a facility-wide or
company-wide basis, depending upon plan provisions and the facts and
circumstances. For example, a benefit triggered by a permanent layoff
of a participant would be determined with respect to each participant,
and thus layoffs that occur on different dates would generally be
distinct UCEs. In contrast, a benefit payable only upon a complete
plant shutdown would apply facility-wide, and generally the shutdown
date would be the date of the UCE for all participants who work at that
plant. Similarly, a benefit payable only upon the complete shutdown of
the employer's entire operations would apply plan-wide, and thus the
shutdown date of company operations generally would be the date of the
UCE for all participants.
(2) For purposes of paragraph (c)(1)(iii) of this section, if a
benefit is contingent upon more than one UCE, PBGC will apply the rule
under Treas. Reg. Sec. 1.436-1(b)(3)(ii) (26 CFR 1.436-1(b)(3)(ii))
(i.e., the date the UCE occurs is the date of the latest UCE).
(e) Examples. The following examples illustrate the operation of
the rules in this section. Except as provided in Example 8, no benefit
limitation under Code section 436 applies in any of these examples.
Unless otherwise stated, the termination is not a PPA 2006 bankruptcy
termination.
Example 1. Date of UCE. (i) Facts: On January 1, 2006, a Company
adopts a plan that provides an unreduced early retirement benefit
for participants with specified age and service whose continuous
service is broken by a permanent plant closing or permanent layoff
that occurs on or after January 1, 2007. On January 1, 2013, the
Company informally and without announcement decides to close
Facility A within a two-year period. On January 1, 2014, the
Company's Board of Directors passes a resolution directing the
Company's officers to close Facility A on or before September 1,
2014. On June 1, 2014, the Company issues a notice pursuant to the
Worker Adjustment and Retraining Notification (WARN) Act, 29 U.S.C.
2101, et seq., that Facility A will close, and all employees will be
permanently laid off, on or about August 1, 2014. The Company and
the Union representing the employees enter into collective
bargaining concerning the closing of Facility A and on July 1, 2014,
they jointly agree and announce that Facility A will close and
employees who work there will be permanently laid off as of November
1, 2014. However, due to unanticipated business conditions, Facility
A continues to operate until December 31, 2014, when operations
cease and all employees are permanently laid off. The plan
terminates as of December 1, 2015.
(ii) Conclusion: PBGC would determine that the UCE is the
facility closing and permanent layoff that occurred on December 31,
2014. Because the date that the UCE occurred (December 31, 2014) is
later than both the date the plan provision that established the
UCEB was adopted (January 1, 2006) and the date the UCEB became
effective (January 1, 2007), December 31, 2014, would be the date
the phase-in period under ERISA section 4022 begins. In light of the
plan termination date of December 1, 2015, the guarantee of the
UCEBs of participants laid off on December 31, 2014, would be 0
percent phased in.
Example 2. Sequential layoffs. (i) Facts: The same facts as
Example 1, with these exceptions: Not all employees are laid off on
December 31, 2014. The Company and Union agree to and subsequently
implement a shutdown in which employees are permanently laid off in
stages--one third of the employees are laid off on October 31, 2014,
another third are laid off on November 30, 2014, and the remaining
one-third are laid off on December 31, 2014.
(ii) Conclusion: Because the plan provides that a UCEB is
payable in the event of either a permanent layoff or a plant
shutdown, PBGC would determine that phase-in begins on the date of
the UCE applicable to each of the three groups of employees. Because
the first two groups of employees were permanently laid off before
the plant closed, October 31, 2014, and November 30, 2014, are the
dates that the phase-in period under ERISA section 4022 begins for
those groups. Because the third group was permanently laid off on
December 31, 2014, the same date the plant closed, the phase-in
period would begin on that date for that group. Based on the plan
termination date of December 1, 2015, participants laid off on
October 31, 2014, and November 30, 2014, would have 20 percent of
the UCEBs (or $20 per month, if greater) guaranteed under the phase-
in rule. The guarantee of the UCEBs of participants laid off on
December 31, 2014, would be 0 percent phased in.
Example 3. Skeleton shutdown crews. (i) Facts: The same facts as
Example 1, with these exceptions: The plan provides for an unreduced
early retirement benefit for age/service-qualified participants only
in the event of a break in continuous service due to a permanent and
complete plant closing. A minimal skeleton crew remains to perform
primarily security and basic maintenance functions until March 31,
2015, when skeleton crew members are permanently laid off and the
facility is sold to an unrelated investment group that does not
assume the plan or resume business operations at the facility. The
plan has no specific provision or past practice governing benefits
of skeleton shutdown crews. The plan terminates as of January 1,
2015.
(ii) Conclusion: Because the continued employment of the
skeleton crew does not effectively continue operations of the
facility, PBGC would determine that there is a permanent and
complete plant closing (for purposes of the plan's plant closing
provision) as of December 31, 2014, which is the date the phase-in
period under ERISA section 4022 begins with respect to employees who
incurred a break in continuous service at that time. The UCEB of
those participants would be a nonforfeitable benefit as of the plan
termination date, but PBGC's guarantee of the UCEB would be 0
percent phased in. In the case of the skeleton
[[Page 25674]]
crew members, such participants would not be eligible for the UCEB
because they did not incur a break in continuous service until after
the plan termination date. (If the plan had a provision that there
is no shutdown until all employees, including any skeleton crew are
terminated, or if the plan were reasonably interpreted to so provide
in light of past practice, PBGC would determine that the date that
the UCE occurred was after the plan termination date. Thus the UCEB
would not be a nonforfeitable benefit as of the plan termination
date and therefore would not be guaranteeable.)
Example 4. Creep-type layoff benefit/bankruptcy of contributing
sponsor. (i) Facts: A plan provides that participants who are at
least age 55 and whose age plus years of continuous service equal at
least 80 are entitled to an unreduced early retirement benefit if
their continuous service is broken due to a permanent layoff. The
plan further provides that a participant's continuous service is
broken due to a permanent layoff when the participant is terminated
due to the permanent shutdown of a facility, or the participant has
been on layoff status for two years. These provisions were adopted
and effective in 1990. Participant A is 56 years old and has 25
years of continuous service when he is laid off in a reduction-in-
force on May 15, 2014. He is not recalled to employment, and on May
15, 2016, under the terms of the plan, his continuous service is
broken due to the layoff. He goes into pay status on June 1, 2016,
with an unreduced early retirement benefit. The contributing sponsor
of Participant A's plan files a bankruptcy petition under Chapter 11
of the U.S. Bankruptcy Code on September 1, 2017, and the plan
terminates during the bankruptcy proceedings with a termination date
of October 1, 2018. Under section 4022(g) of ERISA, because the plan
terminated while the contributing sponsor was in bankruptcy, the
five-year phase-in period ended on the bankruptcy filing date.
(ii) Conclusion: PBGC would determine that the guarantee of the
UCEB is phased in beginning on May 15, 2016, the date of the later
of the two UCEs necessary to make this benefit payable (i.e., the
first UCE is the initial layoff and the second UCE is the expiration
of the two-year period without rehire). Since that date is more than
one year (but less than two years) before the September 1, 2017,
bankruptcy filing date, 20 percent of Participant A's UCEB (or $20
per month, if greater) would be guaranteed under the phase-in rule.
Example 5. Creep-type layoff benefit with provision for
declaration that return to work unlikely. (i) Facts: A plan provides
that participants who are at least age 60 and have at least 20 years
of continuous service are entitled to an unreduced early retirement
benefit if their continuous service is broken by a permanent layoff.
The plan further provides that a participant's continuous service is
broken by a permanent layoff if the participant is laid off and the
employer declares that the participant's return to work is unlikely.
Participants may earn up to 2 years of credited service while on
layoff. The plan was adopted and effective in 1990. On March 1,
2014, Participant B, who is age 60 and has 20 years of service, is
laid off. On June 15, 2014, the employer declares that Participant
B's return to work is unlikely. Participant B retires and goes into
pay status as of July 1, 2014. The employer files for bankruptcy on
September 1, 2016, and the plan terminates during the bankruptcy.
(ii) Conclusion: PBGC would determine that the phase-in period
of the guarantee of the UCEB would begin on June 15, 2014--the later
of the two UCEs necessary to make the benefit payable (i.e., the
first UCE is the initial layoff and the second UCE is the employer's
declaration that it is unlikely that Participant B will return to
work). The phase-in period would end on September 1, 2016, the date
of the bankruptcy filing. Thus 40 percent of Participant B's UCEB
(or $40 per month, if greater) would be guaranteed under the phase-
in rule.
Example 6. Shutdown benefit with special post-employment
eligibility provision. (i) Facts: A plan provides that, in the event
of a permanent shutdown of a plant, a participant age 60 or older
who terminates employment due to the shutdown and who has at least
20 years of service is entitled to an unreduced early retirement
benefit. The plan also provides that a participant with at least 20
years of service who terminates employment due to a plant shutdown
at a time when the participant is under age 60 also will be entitled
to an unreduced early retirement benefit, provided the participant's
commencement of benefits is on or after attainment of age 60 and the
time required to attain age 60 does not exceed the participant's
years of service with the plan sponsor. The plan imposes no other
conditions on receipt of the benefit. Plan provisions were adopted
and effective in 1990. On January 1, 2014, Participant C's plant is
permanently shut down. At the time of the shutdown, Participant C
had 20 years of service and was age 58. On June 1, 2015, Participant
C reaches age 60 and retires. The plan terminates as of September 1,
2015.
(ii) Conclusion: PBGC would determine that the guarantee of the
shutdown benefit is phased in from January 1, 2014, which is the
date of the only UCE (the permanent shutdown of the plant) necessary
to make the benefit payable. Thus 20 percent of Participant C's UCEB
(or $20 per month, if greater) would be guaranteed under the phase-
in rule.
Example 7. Phase-in of retroactive UCEB. (i) Facts: As the
result of a settlement in a class-action lawsuit, a plan provision
is adopted on September 1, 2014, to provide that age/service-
qualified participants are entitled to an unreduced early retirement
benefit if permanently laid off due to a plant shutdown occurring on
or after January 1, 2014. Benefits under the provision are payable
prospectively only, beginning March 1, 2015. Participant A, who was
age/service-qualified, was permanently laid off due to a plant
shutdown occurring on January 1, 2014, and therefore he is scheduled
to be placed in pay status as of March 1, 2015. The unreduced early
retirement benefit is paid to Participant A beginning on March 1,
2015. The plan terminates as of February 1, 2017.
(ii) Conclusion: PBGC would determine that the guarantee of the
UCEB is phased in beginning on March 1, 2015. This is the date the
benefit was effective (since it was the first date on which the new
benefit was payable), and it is later than the adoption date of the
plan provision (September 1, 2014) and the date of the UCE (January
1, 2014). Thus 20 percent of Participant A's UCEB (or $20 per month,
if greater) would be guaranteed under the phase-in rule.
Example 8. Removal of IRC section 436 restriction. (i)(A) Facts:
A plan provision was adopted on September 1, 1989, to provide that
age/service-qualified participants are entitled to an unreduced
early retirement benefit if permanently laid off due to a plant
shutdown occurring after January 1, 1990. Participant A, who was
age/service-qualified, was permanently laid off due to a plant
shutdown occurring on April 15, 2014. The plan is a calendar year
plan.
(B) Under the rules of Code section 436 (ERISA section 206(g))
and Treasury regulations thereunder, a plan cannot provide a UCEB
payable with respect to an unpredictable contingent event, if the
event occurs during a plan year in which the plan's adjusted funding
target attainment percentage is less than 60%. On March 17, 2014,
the plan's enrolled actuary issued a certification stating that the
plan's adjusted funding target attainment percentage for 2014 is
58%. Therefore, the plan restricts payment of the unreduced early
retirement benefit payable with respect to the shutdown on April 15,
2014.
(C) On August 15, 2014, the plan sponsor makes an additional
contribution to the plan that is designated as a contribution under
Code section 436(b)(2) to eliminate the restriction on payment of
the shutdown benefits. On September 15, 2014, the plan's enrolled
actuary issues a certification stating that, due to the additional
section 436(b)(2) contribution, the plan's adjusted funding target
attainment percentage for 2014 is 60%. On October 1, 2014,
Participant A is placed in pay status for the unreduced early
retirement benefit and, as required under Code section 436 and
Treasury regulations thereunder, is in addition paid retroactively
the unreduced benefit for the period May 1, 2014 (the date the
unreduced early retirements would have become payable) through
September 1, 2014. The plan terminates as of September 1, 2016.
(ii) Conclusion: PBGC would determine that the guarantee of the
UCEB is phased in beginning on April 15, 2014, the date the UCE
occurred. Because April 15, 2014, is later than both the date the
UCEB was adopted (September 1, 1989) and the date the UCEB became
effective (January 1, 1990), it would be the date the phase-in
period under ERISA section 4022 begins. Commencement of the phase-in
period is not affected by the delay in providing the unreduced early
retirement benefit to Participant A due to the operation of the
rules of Code section 436 and the Treasury regulations thereunder.
Thus 40 percent of Participant A's UCEB (or $40 per month, if
greater) would be guaranteed under the phase-in rule.
0
6. In Sec. 4022.62(c)(2)(i), add a sentence after the third sentence
to read as follows:
[[Page 25675]]
Sec. 4022.62 Estimated guaranteed benefit.
* * * * *
(c) * * *
(2) * * *
(i) * * * ``New benefits'' also result from increases that become
payable by reason of the occurrence of an unpredictable contingent
event (provided the event occurred after July 26, 2005), to the extent
the increase would not be payable but for the occurrence of the event;
in the case of such new benefits, the date of the occurrence of the
unpredictable contingent event is treated as the amendment date for
purposes of Table I. * * *
* * * * *
Issued in Washington, DC, this 30th day of April 2014.
Joshua Gotbaum,
Director, Pension Benefit Guaranty Corporation.
[FR Doc. 2014-10357 Filed 5-5-14; 8:45 am]
BILLING CODE 7709-02-P