On June 14, 2011, the Pension Benefit Guaranty Corporation (PBGC) issued final regulations that apply to single-employer pension plans maintained by employers in bankruptcy. These regulations implement a change made by the Pension Protection Act of 2006 (PPA). The change affects the amount of benefits payable by the PBGC to participants.
If an underfunded pension plan terminates during the plan sponsor’s bankruptcy, the termination date is either agreed to by the plan administrator and the PBGC, or the date is set judicially. Before the PPA, the plan termination date was used to determine both the amount of and eligibility for benefits guaranteed by the PBGC to participants.
The PPA amended the Employee Income Retirement Security Act of 1974 (ERISA) to substitute the bankruptcy filing date for the plan termination date for these two important purposes: determining the amount of participants’ guaranteed benefits under Section 4022 of ERISA and determining whether benefits are guaranteed under Section 4044 of ERISA.
The new PBGC regulations include these provisions:
- Guaranteed benefits are based on the amount of a participant’s service and compensation as of the bankruptcy filing date.
- The maximum guaranteed benefit, the phase-in limit, and the accrued-at-normal limit are all determined as of the bankruptcy filing date.
- Only nonforfeitable benefits as of the bankruptcy filing date are guaranteed.
- Subsidized early retirement benefits (or disability or other benefits) to which a participant becomes entitled between the bankruptcy filing date and the actual termination date of the plan will continue in pay status (or may go into pay status), but the amount of the benefit is reduced to reflect that the subsidy (or other benefit) is not guaranteed.
- Benefits in priority category 3 under Section 4044 of ERISA are benefits in pay status or that could have been in pay status three years before the bankruptcy filing date (priority category 3 benefits are guaranteed by the PBGC).
- If a plan has more than one contributing sponsor and all contributing sponsors did not file for bankruptcy on the same date, PBGC will determine the bankruptcy filing date based on the individual facts and circumstances.
Importantly, under PPA the bankruptcy filing date was not substituted for the plan termination date for all purposes. The termination date still controls for purposes of determining both the amount of a plan’s unfunded liabilities and the parties responsible for those liabilities under Section 4062 of ERISA.
The regulations have an effective date of July 14, 2011, but the PPA change applies if bankruptcy proceedings were initiated on or after September 16, 2006. Plan sponsors that have filed for bankruptcy or are considering such a filing should contact their regular McDermott attorney to discuss the effect of the new regulations.