PBGC Proposes Guidance on Limitations on Guaranteed Benefits

March 10, 2011 (PLANSPONSOR.com) – The Pension Benefit Guaranty Corporation (PBGC) has issued a proposed rule to amend its regulation on Benefits Payable in Terminated Single-Employer Plans.

The agency explained that the regulation sets forth rules on PBGC’s guarantee of pension plan benefits, including rules on the phase-in of the guarantee. The proposed amendments implement section 403 of the Pension Protection Act of 2006, which provides 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.  

Under sections 4022(b)(1) and 4022(b)(7) of ERISA and §§ 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).  

Section 403 of PPA 2006 amended section 4022 of Employee Retirement Income Security Act (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” (UCEBs). Under new section 4022(b)(8), the phase-in rules are applied as if a plan amendment creating a 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 new provision, 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 new 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.  

The PBGC explained that 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. 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.  

The agency is asking for comments on its proposed rules.  

Comments should be identified by Regulation Information Number (RIN 1212-AB18), and may be submitted by any of the following methods: 

  • Federal eRulemaking Portal: www.regulations.gov, follow the web site instructions for submitting comments; 
  • E-mail: reg.comments@pbgc.gov; 
  • Fax: 202-326-4224; or  
  • Mail or Hand Delivery: Legislative and Regulatory Department, Pension Benefit Guaranty Corporation, 1200 K Street, NW., Washington, DC 20005-4026.