PBGC Releases Bankruptcy Plan Termination Rule

July 1, 2008 (PLANSPONSOR.com) - The Pension Benefit Guaranty Corporation (PBGC) has proposed a rule to protect the agency from liability growth during employer bankruptcy proceedings.

The agency said the proposed regulation implements a portion of the Pension Protection Act (PPA) requiring that the termination of a pension plan, while the sponsoring employer is in U.S. Bankruptcy Court, be dated as of the bankruptcy case filing.

PBGC officials said the rule is intended to deal with the long-time problem developing out of a sponsoring employer's bankruptcy case during which the company's pension plan typically fell further into the red. That, in turn, caused the PBGC's liabilities for the plan to skyrocket.   

Implementing the proposal would protect the agency from liability growth during bankruptcy proceedings, reduce claims on its funds and strengthen the PBGC insurance program, the PBGC asserted in an announcement.

Rule changes in the new proposal include:

• a participant's guaranteed benefit is based on the amount of his service and the amount of his compensation as of the bankruptcy filing date;
• the Title IV guarantee limits, the maximum guaranteeable benefit, the phase-in limit, and the accrued-at-normal limit, are all determined as of the bankruptcy filing date; and
• only benefits that are nonforfeitable as of the bankruptcy filing date are guaranteed. For example, early retirement subsidies and disability benefits to which a participant became entitled after the bankruptcy filing date are not guaranteed.

The PBGC said the only time it anticipates having trouble determining a bankruptcy filing date is with a conversion from a Chapter 11 bankruptcy to a Chapter 7 bankruptcy, which will use the date of the original bankruptcy petition as the bankruptcy filing date.

According to the PBGC, participants who retired under a subsidized early retirement benefit (or a disability or other benefit) to which they became entitled between the bankruptcy filing date and the termination date will continue in pay status, or may go into pay status if they are not already receiving a benefit, but the amount of the benefit is reduced to reflect that the subsidy (or other benefit) is not guaranteed.