PBGC Publishes Final Regulations on the Phase-In Period for Guarantee of Benefits for an Unpredictable Contingent Event

by Thompson Coburn LLP
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Reprinted with permission from Employee Benefit Review - July 2014

The Pension Benefit Guarantee Corporation (“PBGC”) recently published final regulations related to the phase-in period for its guarantee of benefits that are contingent upon the occurrence of an “unpredictable contingent event” (“UCE”) such as a plant shutdown. The regulations were published to conform the PBGC guarantee practices to changes made under the Pension Protection Act of 2006 (“PPA 2006”).

Background

The Employee Retirement Income Security Act of 1974 (“ERISA”) established the PBGC to guarantee or insure certain benefits under terminated single-employer defined benefit retirement plans. Prior to such establishment, workers in a private defined benefit plan could lose retirement benefits under the plan when a company went out of business and the plan disappeared.

The PBGC’s benefit guarantees are generally paid for through insurance premiums set by Congress and paid by sponsors of defined benefit plans. Covered plans that are underfunded and are terminated in either distress or involuntary terminations come under the trusteeship of the PBGC. It then becomes responsible for paying benefits in accordance with Title IV of ERISA and the regulations the PBGC promulgates under ERISA (collectively, the “Rules”). The PBGC is authorized to promulgate the regulations related to its mission of guaranteeing benefits.

Under the Rules, when an employer either establishes a new pension benefit or increases a current benefit, the PBGC’s guarantee of the new or increased amount is generally phased in over a 5-year period that starts on the later of adoption or the effective date of the amendment establishing the new or increased benefit in the Plan. When the PPA 2006 was passed, it changed the start date for the 5-year phase-in in the case of a UCE.  Under the PPA 2006, the phase-in rules are applied as if a plan amendment creating an “unpredictable contingent event benefit” (“UCEB”) was adopted on the date of the UCE, rather than as of the actual adoption date of the amendment. This results in lower guaranteed benefits arising from a UCE that occurs within 5 years of the plan termination than perhaps would have been guaranteed pre-PPA.

UCEBs

A UCEB is a benefit that becomes payable solely by reason of a UCE. Typically, the benefit is one that permits a full retirement benefit, unreduced for age starting at a time before the time an unreduced benefit would have been paid in the absence of the UCE. The types of UCEs that can trigger UCEBs include occurrences like full or partial plant shut-downs and reductions-in-force.

Phase-In Rules

Under ERISA, when a plan provides for a new or increased benefit, the PBGC’s guarantee of the change is generally “phased in” in incremental amounts based on the number of years that the benefit is in the plan. The basic phase-in timeline is 20% per year with the full 100% guaranteed after 5 years. The purpose of phasing in the guarantee or increase is to protect the PBGC’s guarantee benefit program from losses caused by new or increased benefit changes made shortly before a plan’s distress or involuntary termination. The logic behind the phase-in relates to the fact that an ongoing plan generally funds its benefits over time, and as the preamble to the final regulations notes, Congress determined that an immediate full guarantee just prior to termination would result in an inappropriate loss for the PBGC. The phase-in protects the PBGC from such a situation.

Under PPA 2006, significant changes to plan funding rules were instituted. In general, employers were required to fund ongoing plans more quickly. This acceleration of funding actually created greater parity between employer funding and the PBGC phase-in in most situations. However, as the preamble indicates, that coordination did not work in the case of UCEB which became payable solely because of a UCE. The provision granting such a UCEB may have been in the plan for more than 5 years before the UCE, resulting in the phase-in not applying. Because the event triggering the benefit was unpredictable, however, the employer would not fund it in advance. Under PPA 2006 and these new final regulations, the PBGC has addressed this disconnect by providing a special rule for the starting date of the phase-in with respect to a UCEB.

Final Regulations

Under the final regulations, the PBGC incorporated the definition of UCEB as the definition under Section 206(g)(i)(C) of ERISA and Treasury Regulation Section 1.436 1(j)(g). It also changed the timing of the phase-in to the latest of the date the benefit provision is adopted, the date the benefit is effective, or the date on which a UCE that makes the benefit payable actually occurs. The final regulations provide different illustrative examples demonstrating how the UCEB rules apply in different scenarios. The examples include a facility closing after a number of steps (UCE is closing date and phase-in period begins then) and sequential layoffs (UCE for each group is the date each group was permanently laid off and phase-in timing for each group begins then). It also should be noted that the regulations do build in that determinations made by a plan, arbitrator or court regarding the date when participants become entitled to a UCEB may be important to the determination of when participants become entitled to the additional benefit, but are not controlling. The PBGC ultimately retains the authority to make the determination.

Effective Date

Given that these new regulations generally reflect the PPA 2006 changes, the regulations are effective for UCEBs that become payable as a result of a UCE that occurs after July 26, 2005.

Conclusion

The final regulations and the examples therein help clarify the application of the phase-in period for guaranteed benefits related to a UCE. The rules help protect the PBGC from large losses related to such UCEs that may have been in the plan for a long time, but were not funded by the employer on account of the unpredictable nature. Given the number of plans the PBGC has had to take on in recent years, both the faster funding under PPA 2006 and these regulations related to unpredictable events may help the PBGC stay solvent.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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