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.

While the proposal puts a greater emphasis on a bankruptcy filing date, the termination date continues to be important for other purposes, PBGC said. For example, although the monthly amount of benefits guaranteed and the monthly amount of benefits in priority category three will be determined by reference to the bankruptcy filing date, the value of those benefits is determined, as before enactment of the PPA, as of the plan's termination date.

PBGC said it intends to issue:

  • a separate proposed rule to implement Section 4022(b)(8) that provides for a special phase-in rule for shutdown benefits and other "unpredictable contingent event benefits."
  • a separate proposed rule to implement Section 4022(h) that provides for when special minimum funding rules are met. Section 4022 is to be applied by treating the first day of the first applicable plan year for the special airline funding rules as the termination date of the plan.
  • a separate proposed rule to implement PPA Section 407 for a special phase-in rule that applies only to benefits of "majority owners," generally defined as those owning 50% or more of the business.

The proposed rule would apply to termination occurring during a bankruptcy proceeding of the contributing sponsor of a plan that was initiated on or after September 16, 2006.    

Written comments on the proposed rule are due by September 2 to Legislative and Regulatory Department, Pension Benefit Guaranty Corporation, 1200 K Street N.W., Washington, D.C. 20005; via the federal eRulemaking portal at http://www.regulations.gov ; by e-mail to reg.comments@pbgc.gov ; or by fax to (202) 326-4224.

The proposed rule is available  here .