PBGC Issues Final Rules for Bankruptcy Terminations

June 13, 2011 (PLANSPONSOR.com) – The Pension Benefit Guaranty Corporation (PBGC) is issuing a final rule implementing section 404 of the Pension Protection Act of 2006 (PPA).

The agency explained that Section 404 amended Title IV of ERISA to provide that when an underfunded, PBGC-covered, single-employer pension plan terminates while its contributing sponsor is in bankruptcy, sections 4022 and 4044(a)(3) of ERISA are applied by treating the date the sponsor’s bankruptcy petition was filed as the termination date of the plan. Section 4022 determines which benefits are guaranteed by PBGC, and section 4044(a)(3) determines which benefits are entitled to priority in “priority category 3” in the statutory hierarchy for allocating the assets of a terminated plan. Thus, under the 2006 amendments, when a plan terminates while the sponsor is in bankruptcy, the amount of benefits guaranteed by PBGC and the amount of benefits in priority category 3 are fixed at the date of the bankruptcy filing rather than at the plan termination date.   

According to the PBGC, in most cases, this reduces the amount of guaranteed benefits and the amount of benefits in priority category 3.  

The agency says the most important amended rules are: 

  • A participant’s guaranteed benefit is based on the amount of his service and the amount of his compensation (if applicable) 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; 
  • Only benefits that are nonforfeitable as of the bankruptcy filing date are guaranteed Thus, for example, early retirement subsidies and disability benefits to which a participant became entitled after the bankruptcy filing date are not guaranteed; 
  • 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; 
  • The benefits in priority category 3 under section 4044(a) of ERISA are benefits in pay status, or that could have been in pay status, three years before the bankruptcy filing date, generally taking into account only benefit increases that were in effect throughout the period beginning five years before the bankruptcy filing date and ending on the termination date; 
  • Benefits under section 4022(c) of ERISA are based on (among other things) the value of a plan’s unfunded nonguaranteed benefits. Because section 404 of PPA 2006 has changed guaranteed benefits and benefits in priority category 3, the unfunded nonguaranteed benefits are changed and therefore the section 4022(c) benefits are also changed; and 
  • Where a plan has more than one contributing sponsor and all contributing sponsors did not file for bankruptcy on the same date, PBGC determines the date to treat as the bankruptcy filing date, based on the facts and circumstances. 


The final rule will be published in the Federal Register on June 14, and will be effective 30 days following publication.