Source: https://www.pbgc.gov/prac/staff-responses-prac-questions
Timestamp: 2019-04-20 09:12:41+00:00

Document:
The interpretations presented below reflect the views of the staff of PBGC. They are not rules, regulations, or statements of the Corporation.
These positions do not necessarily contain a discussion of all material considerations necessary to reach the conclusions stated, and they are not binding due to their informal nature. Accordingly, these responses are intended as general guidance and should not be relied on as definitive. There can be no assurance that the information presented in these interpretations is current, as the positions expressed may change without notice.
Is the determination as to whether the total of missed contributions, including interest, exceeds $1,000,000 such that an IRC § 430(k) line arises, always made on a plan-by-plan basis?
Yes, determinations are made on a plan-by-plan basis. For example, if an employer sponsors two PBGC-insured defined benefit plans, each with $750,000 missed contributions (including interest), the missed contributions for the two plans are not aggregated and a lien does not arise under IRC § 430(k).
Assume that an IRC §430(k) lien arises because the total of missed contributions, including interest, exceeds $1M, and that thereafter the full amount of missed contributions including interest is paid so that the IRC § 430(k) lien amount is zero. Under IRC § 430(k), the lien continues to exist until the end of the first plan year in which the total of missed contributions, including interest, no longer exceeds $1M. Assume further that, during that same plan year, one or more other contributions are missed, at least in part, and that the highest total of such missed contributions, including interest, does not exceed $1M.
Does the original lien that had been reduced to zero apply to these additional missed contributions, including interest, or does the original lien remain at zero, with the additional missed contributions, including interest, resulting in a lien only if and when they cross over the $1M threshold?
The lien continues to exist until the end of the first plan year in which the total no longer exceeds $1M. Until then, the lien amount on any date equals the total amount of missed contributions plus interest.
When a lien arises under IRC § 430(k), the lien “may be perfected and enforced only by the [PBGC], or at the direction of the [PBGC], by the contributing sponsor (or any member of the controlled group of the contributing sponsor).” IRC § 430(k)(5). Has PBGC ever directed a plan’s contributing sponsor or a member of its controlled group to perfect or to enforce an IRC § 430(k) lien?
PBGC does not make a practice of directing a plan’s contributing sponsor or a member of its controlled group to perfect or to enforce an IRC § 430(k) lien.
Is PBGC able to perfect IRC § 430(k) liens after termination of the plan? After trusteeship?
Yes and yes – unless the liens have become unenforceable by reason of lapse of time.
Can PBGC perfect IRC § 430(k) liens for missed contributions that come due after a plan’s date of plan termination? For example, assume a catch-up payment is due for a 2016 calendar plan on 9/15/17 but the plan has terminated with a date of plan termination of 6/30/17.
Yes. Any time a plan terminates in a distress or PBGC-initiated (involuntary) termination, the termination creates a short plan year under IRS regulations. That means a final “quarterly” contribution will come due 15 days after the plan termination date. Thus, for the example above, the contribution was due on 7/15/17, with a final catch-up contribution due 8 ½ months after the plan termination date. Also, the minimum required contribution for the short plan year is prorated based on where the plan termination date falls, which is exactly at the halfway point of the normal plan year for the example above. So, if the minimum required contribution was $10M, it will now be $5M and the remaining unpaid amount, if any, will come due on those two dates. Once either of those post-termination date required contributions is missed, PBGC may file IRC § 430(k) lien notices if the total missed contributions and interest as of the due date exceeds $1M.
Is the determination as to whether the total of missed contributions, including interest, exceeds $1M such that an IRC § 430(k) lien arises, determined only at the time of a missed contribution, or is it determined on a continuing basis by adding interest for the period following the most recent missed contribution date? For example, if the total of missed contributions (including interest) once the first quarterly contribution for a plan year is missed is $999K, could an IRC § 430(k) lien arise before the next required contribution is due and missed at least in part?
The determination whether the $1M lien threshold is crossed occurs only at the time a required contribution is due. Therefore, in the hypothetical presented, an IRC § 430(k) lien could not arise until the next required contribution is due.
In what types of situations does PBGC withdraw IRC § 430(k) lien notices?
To qualify for a distress termination of a plan, each member of the controlled group maintaining the plan must qualify for at least one of the four distress tests. Under what circumstances will PBGC approve a distress termination where there is a controlled group member that does not qualify for any of the distress tests, but is essentially a shell (i.e., it has no or only minimal assets, no employees, and no ongoing business), and thus clearly cannot assist in maintaining an ongoing plan?
PBGC usually finds that shell entities have a de minimis value. Thus, PBGC typically disregards shell corporations that are part of a controlled group for purposes of determining whether a plan meets the distress termination criteria. PBGC makes such findings on a case‐by‐case basis.
Can a distress termination convert to a PBGC-initiated termination?
Yes. PBGC has authority to convert a distress termination into a PBGC-initiated termination under ERISA § 4042. PBGC will convert cases only if it determines that the ERISA § 4042 criteria are met. If a sponsor has initiated a distress termination and believes it may be appropriate to convert to a PBGC-initiated termination, the sponsor should contact PBGC case team assigned to the distress termination. PBGC may convert a distress termination to a PBGC-initiated termination on its own.
One of the criteria for initiation of a PBGC-initiated termination is that the plan “will be unable to pay benefits when due.” Under what circumstances does PBGC believe this criterion is met?
Historically, the “will be unable to pay benefits when due” PBGC-initiated termination criterion of § 4042(a)(2) has meant one of two things: either the plan is underfunded on a termination basis and is unlikely to be able to pay benefits at some point in the future, taking into consideration the plan sponsor’s ability to fund the plan; or the plan is or will be abandoned and thus no one will be present to administer the plan.
PBGC evaluates each case based on its individual facts and circumstances. Two examples of cases in which PBGC initiated a termination based on meeting the “will be unable to pay benefits when due” criterion are: (1) the plan sponsor sold the bulk of its operations and the limited business that remained was unable to fund the plan, and (2) the plan sponsor was liquidating and there was a small window of time during which the plan would continue to be administered. Many terminations involve companies that have gone out of business and liquidated outside of bankruptcy. In such cases, distress terminations are less common than PBGC-initiated terminations. A recurring problem for PBGC is not finding out about such cases until after the liquidation has been completed, and then having difficulty locating records and effectuating a smooth transition to PBGC trusteeship. PBGC encourages all employers who are under financial pressure that may affect their ability to fund their pension plans to contact PBGC as early as possible before the situation deteriorates and excise taxes or liens are triggered. PBGC will work with the employer to find solutions. PBGC welcomes suggestions as to further outreach to let its customers know of the importance of contacting PBGC early.
When PBGC becomes statutory trustee of a pension plan that underwent a distress or involuntary termination, does PBGC review the plan’s compliance with the rules governing benefit restrictions under § 436? If PBGC believes that a plan did not comply with these rules, what action, if any, does PBGC take?
Yes. PBGC takes the § 436 restrictions into account. For example, if no AFTAP calculation has been certified, PBGC will apply the § 436 funding status presumptions, which could result in a benefit freeze prior to termination. If the plan did not comply with the § 436 rules, PBGC will adjust benefits and take any other appropriate actions.
If a plan was adopted and effective more than five years ago, but did not become covered by Title IV of ERISA until the current year, is PBGC’s guarantee of plan benefits phased in under ERISA section 4022(b)(7)? If so, when does the phase-in period start?
For example, under ERISA section 4021(b)(3), a church plan (as defined in Internal Revenue Code § 414(e)) is not covered by Title IV of ERISA unless the plan makes an election under Internal Revenue Code § 410(d) and notifies PBGC that it wishes to be a covered plan. If a church plan that was adopted and effective more than five years earlier opts for Title IV coverage in this manner, benefits under the plan are subject to phase-in under section 4022(b)(7), and the phase-in period begins on the latest of (1) the date PBGC receives the notice described in ERISA § 4021(b)(3), (2) the date the section 410(d) election is made, and (3) the date the section 410(d) election is effective. Similarly, the PBGC guarantee is phased in over a five-year period for any existing plan that becomes covered by Title IV of ERISA after September 3, 1974. For instance, a professional services plan that has been excluded from Title IV coverage under ERISA section 4021(b)(13) because it never had more than 25 active participants would begin the five-year phase-in period when it acquired a 26th active participant.
Assume that Plan A, a calendar year plan, has been exempt from coverage under ERISA section 4021(b)(9) as a substantial owner plan since it was established. On December 15, 2015, Individual X, who is not a substantial owner, starts to earn participation service under Plan A, and on July 1, 2016, she becomes a Plan A participant. Individual X earns a year of service for benefit accrual purposes during the service computation period that ends on December 31, 2016.
(a) What is the date as of which the plan becomes covered under ERISA § 4021?
(b) What is the date as of which the phase-in period begins for the plan under ERISA § 4022(b)(7)?
Pursuant to a collective bargaining agreement, Plan X was amended to provide scheduled benefit increases for the three years covered under the collective bargaining agreement. The amendment was adopted on December 31, 2013. The first scheduled increase became payable on January 1, 2014; the second scheduled increase became payable on January 1, 2015; and the third scheduled increase became payable on January 1, 2016. Plan X terminates on June 30, 2018. How should this amendment be treated for phase-in purposes?
For phase-in purposes, a benefit increase is in effect on the later of the date it is adopted or effective. In this case, the three scheduled increases became payable and effective on January 1 of 2014, 2015, and 2016, respectively. Therefore, the first scheduled increase was in effect for four full years as of the termination date and is phased in at the rate of 80% (or, if greater, $80 per month). The second scheduled increase was in effect for three full years and is phased in at the rate of 60% (or, if greater, $60 per month). The third scheduled increase was in effect for two full years and is phased in at the rate of 40% (or, if greater, $40 per month).
Assume that a plan is terminated in a distress or involuntary termination during the bankruptcy proceeding of the plan sponsor, that the plan allows for unsubsidized early retirement at age 55 with 10 years of service, and that the plan’s normal retirement age is age 65. Assume also the following: Participants A, B, C, and D are each at least 55 years old and no more than 64 years old at all relevant times.
Participants A and B each attain 10 years of service between the bankruptcy petition date and the plan’s termination date, and Participants C and D each attain 10 years of service between the plan’s termination date and the date the termination and trusteeship agreement is signed by the plan administrator of the plan and PBGC.
Participants A and C each go into pay status immediately upon attaining 10 years of service.
Participants B and D have not yet gone into pay status, or elected to do so, by the time the termination and trusteeship agreement is signed.
What is the “Earliest PBGC Retirement Date” for Participants A, B, C, and D?
PBGC determines a participant’s earliest PBGC retirement date (EPRD) under the rules in PBGC Reg. § 4022.10.
For Participants A and B, who met the requirements for an early retirement benefit by the plan’s termination date, EPRD is the date the participant reaches age 55 (or if later, the date he attains 10 years of service). The guaranteed benefit for each participant, however, is based on the amount of his service and the amount of his compensation, if applicable, as of the bankruptcy filing date rather than the termination date. See 29 USC § 4022(g) and 29 CFR § 4022.3(b).
For Participants C and D, who had not met the requirements for an early retirement benefit as of the plan’s termination date, EPRD is the date the participant reaches age 65, unless there is another early retirement benefit for which they have met the requirements by the plan’s termination date.
In what order does PBGC apply the three principal guarantee limitations—the “accrued-at-normal” limitation, the “maximum guarantee” limitation, and the “phase-in” limitation—to participants’ plan benefits?
PBGC applies these limitations by first determining the plan benefit, and by then applying the limitations in “A-M-P” order: i.e., first the “accrued-at-normal” limitation, then the “maximum guarantee” limitation, and then the “phase-in” limitation.
How is the accrued-at-normal limitation in § 4022.21 of PBGC’s regulations applied when there are early retirement factors and/or reductions for a form of benefit other than life-only?
Here is an example showing how the accrued-at-normal limitation is applied.
A plan has an early retirement benefit that is reduced by 5% for each year by which commencement precedes age 62. Participants who retire prior to age 62 with 30 or more years of service receive a $400 monthly early retirement supplement. The supplement ends at age 62. No Title IV limitation other than the accrued-at-normal limit applies.
Employee A retires at age 60 with a 50% J&S option, 30 years of service, and a life-only accrued benefit of $1,000. The 50% J&S option factor is 91%.
Company A is selling the assets of Subsidiary B under an agreement and plan of sale (the “asset sale agreement”) with a buyer and plans to dissolve Subsidiary B after the asset sale closes. Subsidiary B sponsors a single-employer pension plan. Company A is not a contributing sponsor.
Under the asset sale agreement, the pension plan’s sponsorship will move from Subsidiary B to Company A. What types of reportable events must be reported to PBGC and when?
Unless a waiver applies, Company A will be required to file a notice of a liquidation event. Liquidation is a reportable event that occurs when a member of the plan’s controlled group “is involved in any transaction to implement its complete liquidation.” 29 C.F.R. § 4043.30. Under this scenario, a post-event notice is due within 30 days of the signing of the asset sale agreement (the trigger for being “involved in a transaction to implement complete liquidation”). Although advance reporting under 29 C.F.R. § 4043.63 may be required if Subsidiary B meets the applicable criteria (generally, nonpublic companies with over $50 million in unfunded vested benefits and less than 90% funding, see ERISA § 4043(b) and 29 C.F.R. § 4043.61(b)), because PBGC does not expect a reportable events notice before the signing of the asset sale agreement, the post-event report will satisfy any advance reporting requirement (see 29 C.F.R. § 4043.3(a)).
Unless a waiver applies, Company A will also be required to report a change in controlled group under 29 C.F.R. § 4043.29 within 30 days of the signing of the asset sale agreement; this report would also satisfy any advance reporting requirement under 29 C.F.R. § 4043.62.
Two employers that participate in a multiple-employer plan (“the Plan”) will withdraw from the Plan, taking plan liabilities and assets in spin-off transactions. The agreement to spin-off Company A is effective immediately. The agreement to spin-off Company B is effective in 60 days. What events must be reported? Who is required to file a Form 10?
The planned transaction involves employers ceasing to participate in the multiple-employer plan, and it also involves a transfer of liabilities to plans sponsored by those employers. The plan administrator and each contributing sponsor must notify PBGC within 30 days after that person knows or has reason to know that the reportable event has occurred, unless a waiver or extension applies. See 29 CFR § 4043.20 and Form 10 Instructions (“The plan administrator and each contributing sponsor of a plan for which a reportable event has occurred must file a post-event reportable event notice with PBGC using PBGC Form 10.”).
A Change in Contributing Sponsor or Controlled Group occurs when “there is a transaction that results, or will result, in one or more persons ceasing to be members of the plan’s controlled group.” PBGC's regulations explain that “If there is a change in plan administrator or contributing sponsor, the reporting obligation applies to the person who is the plan administrator or contributing sponsor of the plan on the 30th day after the reportable event occurs.” § 4043.20. Because of the immediate effective date for the spinoff to the plan sponsored by Company A, responsibility for reporting the Change in Contributing Sponsor falls to the new plan sponsor, Company A. Because of the delayed effective date for Company B, responsibility for reporting the second change in contributing sponsor remains with the Plan and any other employers that continue to participate in the Plan. Note the distinction in timing between when reporting for the event is triggered (the date the agreement becomes binding) and who has the obligation to file (when the agreement becomes effective). § 4043.29.
Company Q is selling the assets of an operating division to Company R. Company Q sponsors a pension plan and participants in the plan are employed by the operating division. A portion of the assets and liabilities in the pension plan will be transferred from Company Q to Company R when the asset sale closes. What types of reportable events must be reported to PBGC and when?
Since a portion of the pension plan will be transferred from Company Q to Company R, a transfer of benefit liabilities reportable event must be reported 30 days after the transfer occurs. If Company Q meets the criteria to report events in advance, a transfer of benefit liabilities event must be reported 30 days before the transfer occurs. See ERISA § 4043(b).
A company acquired a new business and added a new controlled group member. Does this change in the controlled group need to be reported?
No. Under ERISA § 4043.29, a reportable event occurs for a plan when there is a transaction that results, or will result, in one or more persons' ceasing to be members of the controlled group (other than by merger involving members of the same controlled group). Only changes in the controlled group that result in a person ceasing to be a member of the controlled group are required to be reported.
Does a change in contributing sponsor need to be reported if the sponsorship moves from one entity to another entity within the same controlled group?
No. Similar to mergers within the controlled group, changes in sponsorship within the same controlled group do not need to be reported.
What are some examples of third party commercial measures companies can use to determine whether they meet this criterion?
Companies that are investment grade rated (as indicated by Moody’s, S&P, and Fitch for example) have probabilities of default that are not more than four percent over the next five years or not more than 0.4 percent over the next year. Similarly, smaller companies may use a Dun and Bradstreet Financial Stress Score to measure their risk of default. According to current scores from DNB, companies with a DNB Financial Stress Score of 1477 or higher have a probability of default that is not more than four percent over the next five years or not more than 0.4 percent over the next year.
Does the contributing sponsor and the highest-level U.S. parent have to use the same criteria to meet the low default risk waiver requirements?
The contributing sponsor and the highest-level U.S. parent may use different criteria to meet the low default risk waiver. For example, the highest-level U.S. parent can meet the waiver requirements by satisfying the probability of default and secured debt criteria while the contributing sponsor can meet the waiver requirements by satisfying any four of the seven criteria.
For purposes of meeting the low-default risk waiver, how should holding company situations be treated?
For example, assume a holding company has no operations or separate financials of its own but has 20 wholly-owned U.S. subsidiaries, of which three are contributing sponsors, and ten are wholly-owned foreign subsidiaries. Assume the holding company would therefore be the highest-level U.S. parent.
Holding companies should be treated as the highest U.S. level parent and must meet the low default risk waiver along with the contributing sponsor. In our experience, most holding companies consolidate financial statements so that the operations of subsidiaries should provide the information necessary to determine whether the waiver is available. However, we understand that some holding companies do not consolidate financial statements. While such holding companies may generate no income from operations when not consolidated with the contributing sponsor, they do have separate financials (and are often required to file tax returns). As a result, they more than likely will have information available to determine whether the low default risk waiver is available.
A holding company does not consolidate its financials with its operating subsidiaries and does not have a measure of its credit quality prepared by a third party. The holding company has no debt (since the debt is held at the operating companies) but does have assets in the form of investments in subsidiaries. A holding company may be able to meet the low default risk waiver by meeting the four criteria listed below. It can meet the first two criteria below since the secured debt is $0 and can also meet the last two criteria if there have been no loan defaults and no missed contributions.

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 § 4042
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 § 436
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 § 414
 § 410
 § 4021
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 § 4022
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 § 4022
 § 4022
 § 4043
 § 4043
 § 4043
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