2002-1 §4041

§4042

§4047

§4261

 26 C.F.R. §1.412(c)(1)-3 

[PBGC Letterhead]

MEMORANDUM

December 10, 2002

TO: Steven A. Kandarian

Executive Director

FROM: James J. Keightley / s /

General Counsel

SUBJECT: Legal authority for PBGC to terminate a pension plan, then immediately restore it,

in order to provide more lenient funding requirements

 

You have asked us to analyze whether PBGC has legal authority to terminate and then

restore a pension plan in order to implement more lenient funding requirements for the plan

sponsor (assuming there are defensible grounds for termination in the first instance). In our

view, PBGC has no legal authority to take such an unprecedented course of action.

Discussion

Section 4047 of ERISA is the basis for PBGC’s authority to restore a terminated pension

plan. It has two sentences. The first addresses a situation where a plan “is to be terminated” or

“is in the process of being terminated.” In such a case, PBGC is authorized to “cease”

termination activities and restore the plan to its prior status if PBGC determines that the plan

should not be terminated "as a result of such circumstances as [PBGC] determines to be
 

1 The legislative history of section 4047 confirms this understanding. The 1974

Conference Report noted that this provision would allow PBGC to abandon termination

proceedings “if the employer and plan enjoyed a favorable reversal of business trends, or if some

other factor made termination no longer advisable.” H.R. Conf. Rep. No. 1280, 93d Cong., 2d

Sess. 378, reprinted in 1974 U.S. Code Cong. & Admin. News 5038, 5157-58. This language

clearly anticipates some change, occurring during termination proceedings or after termination,

that would make termination “no longer” advisable. That concept is inconsistent with a “prepackaged” termination-restoration.

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relevant." This sentence has no application to a plan as to which no termination activity is

occurring; there is nothing to “cease.” Even if it could somehow apply, such a “cessation” of

termination activities would not help a plan sponsor seeking funding relief because the special

funding rules for restored plans, discussed below, do not apply in such a case. See 26 C.F.R.

§ 1.412(c)(1)-3(a)(1) (the restoration funding method applies “in the case of certain plans that are

or have been terminated and are later restored” by PBGC) (emphasis added).

The second sentence of section 4047 addresses the situation where a plan “has been

terminated” under section 4041 or 4042 of ERISA. It empowers PBGC "in any such case in

which [PBGC] determines such action to be appropriate and consistent with its duties under

[Title IV], to take such action as may be necessary to restore the plan to its pre-termination

status." As an initial matter, it seems clear that Congress envisioned that PBGC would exercise

this authority, as it did in the LTV case, only after a pension plan has already terminated and

PBGC decides, for some reason, that the termination should be undone.1 Thus, it seems doubtful

that this provision grants PBGC authority to determine, while a plan is still ongoing, that the plan

should be terminated and in the next instant restored.

Even if this obstacle could be overcome, we think that PBGC’s restoration authority, as

broad as it is, is not broad enough to justify restoration solely for the purpose of giving an
 

2 PBGC formed an interdepartmental group in 1991 to analyze what grounds might

justify restoration. Although no definitive list was ever finalized, the group generally agreed that

the following grounds were among those that could warrant restoration: abuse of the insurance

program, factual mistake, analytical mistake, changed financial circumstances, and changes in

other circumstances such that the factors that led to termination no longer exist. Memorandum

from David Lindeman to Diane Burkley et al. (June 10, 1991).

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employer a liberalized funding schedule. While section 4047 broadly authorizes restoration of a

terminated plan whenever PBGC determines that restoration is "appropriate and consistent" with

its Title IV duties, we do not believe it would be appropriate and consistent with PBGC’s duties

to use restoration in this manner.2 It is Congress, and to a limited extent the IRS, that determine

the minimum funding rules, not PBGC. Those statutory rules, which Congress has progressively

tightened over the years, determine the length of time over which an employer must fund its

pension liabilities. Moreover, the funding rules authorize the IRS, under specified circumstances

of business hardship, to grant an employer a waiver of the funding requirements for the year in

question. A termination-restoration transaction would run counter to that entire structure and

would arrogate to PBGC the authority to determine minimum funding requirements.

The provisions governing the funding of restored plans were implemented in order to

address the unique problems that arise when a plan is restored, not to authorize PBGC to grant

funding relief. When a pension plan is restored, its funding requirements are established under

companion regulations that PBGC and the IRS adopted in 1990 in connection with the LTV

restoration. In its regulation, the IRS used its authority to "adapt the standards of section 412 to

the extent necessary to provide rules for a special group of plans," and authorized PBGC to

establish the funding schedule for restored pension plans, subject to important restrictions. 55

Fed. Reg. 42,705 (Oct. 23, 1990). This regulation (codified at 26 C.F.R. § 1.412(c)(1)-3) creates
 

3 Restoration creates unique problems with respect to plan funding. The plan's funding

standard account is closed out at the time of termination, and must be reestablished at restoration. 

55 Fed. Reg. 42,704. A plan ordinarily is underfunded upon termination, and the sponsor makes

no contributions during the time it is terminated, resulting in even greater underfunding. As the

IRS noted, "[t]his underfunding will be significantly increased if the plan has been administered

as a terminated plan for an extended period of time." 55 Fed. Reg. 42,705. 

 

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 The initial restoration amortization base must be fully amortized over not more than

30 years. § 1.412(c)(1)-3(c)(2). PBGC may grant a deferral of an annual payment only if it

determines that deferral is in the best interests of the participants and the insurance program, and

that the plan sponsor and its controlled group members are unable to make the scheduled

payments without experiencing temporary substantial business hardship. § 1.412(c)(1)-3(c)(4). 

PBGC may grant no more than five deferrals during the RPSO period, and may grant no more

than three of these deferrals during the first ten years. Id. No deferral may extend the overall

restoration payment period beyond 30 years. Any other PBGC modification of the RPSO must

comply with the requirements of the regulation, including the minimum payment requirements

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a "restoration method" that adapts the plan's underlying funding method to the "special

circumstances that exist when a plan is restored." 55 Fed. Reg. 42,706.3 The regulation creates a

special "initial restoration amortization base," which consists of the unfunded liabilities of the

plan as of its restoration, and provides that this base must be amortized pursuant to a "restoration

payment schedule order," or "RPSO," issued by PBGC (PBGC's regulation is codified at 29

C.F.R. pt. 4047). 

In authorizing PBGC to establish the funding schedule for restored plans, the IRS stressed

the importance Congress placed on the tightened contribution requirements implemented in 1974

and 1987, and emphasized that the funding requirements of section 412 were not to be

circumvented through issuance of a RPSO:

It is also appropriate and essential to the effective administration of section 412

that the Secretary prescribe certain limits with respect to the restoration funding

schedule in order to ensure that the schedule is consistent with and in

furtherance of the congressional purposes underlying section 412.

55 Fed. Reg. 42,706-07. A variety of restrictions in the regulation serve to further this goal.4
and the 30-year restriction. § 1.412(c)(1)-3(c)(3). And PBGC must conduct a funding review of

the plan at least annually, and PBGC's Executive Director must certify to the Board of Directors

and to the IRS that it is in the best interest of the plan's participants and beneficiaries and the

insurance program that the restored plan not be reterminated. § 1.412(c)(1)-3(i).

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Nor is there anything in section 4047 (or elsewhere in ERISA or the Code) that

authorizes PBGC to provide financial assistance to ongoing single-employer plans or to assist

plans in avoiding the normal funding waiver application process. Indeed, although Congress

explicitly amended ERISA to provide for financial assistance to multiemployer plans in 1980

(ERISA § 4261, 29 U.S.C. § 1431), it never authorized such assistance to single-employer

plans.

In its 28 years of existence, PBGC has exercised its section 4047 restoration authority

only once. In the LTV case, PBGC ordered restoration of three plans that had terminated nine

months earlier after LTV created new “follow-on” pension plans that made up for the benefits

not guaranteed by PBGC. This follow-on scheme, if not challenged, would have resulted in

PBGC’s effectively subsidizing an ongoing employer’s pension program. Faced with this

serious abuse of the pension insurance program, PBGC took the unprecedented step of

restoring the previously terminated plans to LTV under section 4047. Three years of litigation

ensued, with PBGC’s restoration decision finally vindicated in the U.S. Supreme Court,

followed by another three years of negotiations. The funding schedules that PBGC ultimately

provided LTV took account of that extraordinary chain of events. In no way was the LTV

restoration part of some termination-restoration package contrived to give LTV a break on its

minimum funding obligations.

In sum, while PBGC has broad discretion to determine whether restoring a plan would
 

5 The former General Counsel reiterated this concern, stating: "[PBGC]'s actions would

be governed by an arbitrary and capricious/abuse of discretion standard, and we could easily run

afoul of those standards if it were shown that we terminated (and restored) simply to allow the

sponsor a way to evade the normal minimum funding rules."

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be appropriate and consistent with its duties under Title IV of ERISA, we believe that a

purposeful effort to achieve an objective not permitted by the agency's governing statute – 

granting funding relief – would be overturned as exceeding our statutory authority. Indeed,

PBGC's internal deliberations about what grounds might justify restoration produced strong

concerns that the agency "could be criticized for using termination followed by a restoration

with a RPSO as a way to dilute the minimum funding standards or to avoid the waiver

process." Memorandum from David Lindeman to Diane Burkley et al. (June 10, 1991) at 7. 

Although there may be situations in which PBGC "could defensibly take into account the

availability of a RPSO in deciding whether to restore," restoration "simply to permit a sponsor

to evade the normal funding rules" would be indefensible. Id.

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