PBGC Final Rule on Benefits Payable in Terminated Single-employer Plans

Practical Law Legal Update 2-567-0965 (Approx. 5 pages)

PBGC Final Rule on Benefits Payable in Terminated Single-employer Plans

by Practical Law Employee Benefits & Executive Compensation

Phase-in of PBGC's Guarantee

The PBGC is responsible for the single-employer pension plan termination insurance program which covers private sector single-employer defined benefit plans and for which premiums are paid to the PBGC each year. When covered plans that are underfunded terminate in a distress or involuntary termination, the PBGC:

Is appointed statutory trustee of the plan.
Becomes responsible for paying benefits.

(See Practice Note, Defined Benefit Plans: Distress and Involuntary Terminations.)

Under ERISA and PBGC regulations, the PBGC's guarantee of new pension benefits and benefit increases is phased-in over five-years, which begins on the later of the date the new benefit increase is either:

Adopted.
Increased.

Generally, 20% of a benefit increase is guaranteed after one year, 40% after year two, and so on, with full phase-in after five years. The phase-in protects the PBGC insurance program from losses caused by benefit increases that are adopted or made effective right before plan termination because benefit increases can create large unfunded liabilities. The phase-in of the guarantee allows time for funding of new liabilities before they are fully guaranteed by the PBGC.

Unpredictable Contingent Event Benefits

Unpredictable contingent event benefits (UCEBs) provide a full pension, without any reduction for age, starting before unreduced benefits would be payable. Common types of UCEBs are:

Full or partial plant shutdowns.
Other reductions in force.

UCEBs are typically provided in pension plans in the steel and automobile industries and are payable for:

Full or partial plant shutdowns.
Shutdowns of different kinds of facilities. For example, administrative offices, warehouses or retail operations.
Layoffs and other workforce reductions.

UCEBs are usually provided in plans many years before the event that triggers the benefit occurs. Because UCEBs are contingent on unpredictable events or UCEs, plan sponsors do not typically fund these contributions in advance of the UCE (see Practice Note, Qualified Retirement Plans in Mergers and Acquisitions: PPA Funding Rules). Additionally, since plan terminations usually occur a few years after a shutdown, the time between the start of the phase-in period and the start of funding caused losses for the PBGC insurance program.

(See Practice Note, Benefit Restrictions under IRC Section 436: Shutdown Benefits and Other Unpredictable Contingent Event Benefits).

Pension Protection Act of 2006

The Pension Protection Act of 2006 (PPA):

Added ERISA Section 206(g) (29 U.S.C. § 1056) and parallel IRC Section 436(b) that restricts payment of UCEBs for a UCE if the plan is less than 60% funded for the plan year in which the UCE occurs. The certification becomes permanent unless the restriction is removed:
- during that plan year; or
- as a result of additional contributions to the plan or an actuarial certification meeting certain requirements.
Since the PBGC guarantees only benefits provided under a plan, UCEBs that are treated as not provided under the plan because of this restriction are not guaranteed by the PBGC and the phase-in rules do not apply.
Changed the start of the phase-in period for plant shutdown and other UCEBs until the UCE occurs. The PPA rules are applied as if a plan amendment creating an UCEB is adopted on the date of the UCE and not the actual adoption date of the amendment. The actual adoption date of the amendment is almost always earlier than the date of the UCE so the guarantee of benefits that occurs within five years of plan termination generally is lower than under the prior law. This provision applies to benefits that become payable as a result of a UCE that occurs after July 26, 2005.

PBGC Final Regulations

The final regulations are nearly identical to the proposed regulations issued on March 11, 2011 and:

Incorporate the definition of UCEB under ERISA Section 206(g)(1)(C) and Treas. Reg. Section 1.436-1(j)(9).
Provide that the guarantee of a UCEB is phased-in from the latest of the date:
- the benefit provision is adopted;
- the benefit is effective; or
- the UCE that makes the benefit payable occurs.
Includes eight examples that show how the UCEB phase-in rules apply in certain situation.

The final regulations, like the PPA provisions, apply to UCEBs that become payable as a result of a UCE that occurs after July 26, 2005.

Practical Implications

This rule was needed to conform the PBGC's benefit payment regulation to the PPA changes to the phase-in of the PBGC's guarantee of benefits that are contingent upon the occurrence of an UCE, such as a plant shutdown. Delaying the phase-in to the date of the UCE rather than the date of the amendment of the UCEBs will provide participants with smaller benefits that are guaranteed by the PBGC but will likely provide the PBGC with lower funding losses then under the prior rule.

PBGC Final Rule on Benefits Payable in Terminated Single-employer Plans | Practical Law