WikiLeaks Document Release http://wikileaks.org/wiki/CRS-RS22624 February 2, 2009 Congressional Research Service Report RS22624 The Pension Benefit Guaranty Corporation and Single-Employer Plan Terminations Jennifer Staman and Erika Lunder, Amrican Law Division March 14, 2007 Abstract. Recent high-profile terminations of defined benefit pension plans have focused attention on the process for terminating plans and the Pension Benefit Guaranty Corporation (PBGC). The Employee Retirement Income Security Act (ERISA) regulates plan terminations. It provides for three types of single-employer plan terminations - standard, distress, and involuntary - and imposes different responsibilities on the PBGC for each type. This report discusses ERISA's procedures for terminating single-employer plans and the PBGC's role in such terminations. ¢ ¢ ¢ http://wikileaks.org/wiki/CRS-RS22624 ¢ ¢ Prepared for Members and Committees of Congress ¢ ¢ ¢ Recent high-profile terminations of defined benefit pension plans have focused attention on the process for terminating plans and the Pension Benefit Guaranty Corporation (PBGC). The Employee Retirement Income Security Act (ERISA) regulates plan terminations. It provides for three types of single-employer plan terminations--standard, distress, and involuntary--and imposes different responsibilities on the PBGC for each type. This report discusses ERISA's procedures for terminating single-employer plans and the PBGC's role in such terminations. http://wikileaks.org/wiki/CRS-RS22624 ¢ ¢ T he Employee Retirement Income Security Act of 1974 (ERISA) includes a plan termination insurance program for defined benefit pension plans. Defined benefit plans are those where participants are promised a specified future benefit, which traditionally is an annuity beginning at retirement. Various types of pension plans are not covered by the insurance program, including defined contribution plans (individual account plans), government plans, and church plans.1 The insurance program distinguishes between single-employer plans and multiemployer plans (i.e., collectively bargained plans to which more than one company makes contributions). This report discusses only the termination of single-employer plans. The insurance program is administered by the Pension Benefit Guaranty Corporation (PBGC). The PBGC has two primary responsibilities. First, it oversees plan terminations, which is the focus of this report. Second, the PBGC pays the guaranteed benefits of terminated plans, subject to statutory limitations. For more information on the PBGC and its payment of benefits, see CRS Report 95-118, Pension Benefit Guaranty Corporation: A Fact Sheet, by John J. Topoleski. ¢ http://wikileaks.org/wiki/CRS-RS22624 ERISA provides for three types of single-employer plan terminations: standard, distress, and involuntary. The plan administrator initiates a standard or distress termination, whereas the PBGC initiates an involuntary termination. A standard termination occurs when a plan administrator decides to terminate a plan that has assets sufficient to meet its benefit liabilities.2 The plan administrator initiates the termination by giving written notice to each affected party3 of the intent to terminate the plan between 60 and 90 days in advance of the proposed termination date.4 He or she must then report information about the plan to the PBGC, including a certification by an enrolled actuary that the plan's assets are sufficient to meet all benefit liabilities.5 The plan administrator is also responsible for informing the plan participants and beneficiaries of the benefits due them, including the data and underlying actuarial assumptions used to compute the benefits.6 The PBGC's involvement in a standard termination is minimal, and its role is basically to confirm that the above requirements have been met. Upon receiving the plan information, the PBGC generally has 60 days to review it and either approve the termination or send out a notice of noncompliance.7 If the PBGC determines the requirements have been met, the termination proceeds. The plan administrator then distributes the plan's assets to participants and beneficiaries 1 ERISA § 4021(b); 29 U.S.C. § 1321(b). 2 ERISA § 4041(b); 29 U.S.C. § 1341(b). 3 Affected parties include plan participants, beneficiaries of deceased participants, alternate payees under qualified domestic relations orders, employee organizations representing plan participants, and any person who has been designated to receive notice on behalf of the affected party. ERISA § 4001(a)(21); 29 U.S.C. § 1301(a)(21). 4 ERISA § 4041(a)(2); 29 U.S.C. § 1341(a)(2); 29 C.F.R. § 4041.23(a). 5 ERISA § 4041(b)(2)(A); 29 U.S.C. § 1341(b)(2)(A). 6 ERISA § 4041(b)(2)(B); 29 U.S.C. § 1341(b)(2)(B). 7 ERISA § 4041(b)(2)(C); 29 U.S.C. § 1341(b)(2)(C). ¢ ¢ by purchasing annuities from a commercial insurer or by other permissible means.8 If there are missing participants, the plan administrator may, after a diligent search, transfer their distributions to the PBGC, which will hold them until the participants are found.9 The plan administrator's final action is to certify to the PBGC that the assets have been distributed,10 and the plan is terminated. A distress termination occurs when a plan administrator seeks to terminate a plan that does not have sufficient assets to cover all the benefits owed to plan participants and beneficiaries.11 The plan may be terminated only if its contributing sponsor, or a member of the sponsor's controlled group,12 has (1) filed a petition for liquidation or reorganization in bankruptcy or insolvency proceedings or (2) demonstrated that termination is required to enable payment of debts while staying in business or to avoid unreasonably burdensome pension costs caused by a declining workforce. The plan administrator initiates a distress termination by giving written notice to each affected http://wikileaks.org/wiki/CRS-RS22624 party between 60 and 90 days in advance of the proposed termination date.13 He or she then must file a distress termination notice with the PBGC.14 The notice includes information required by the PBGC to determine whether the plan meets the criteria for a distress termination and a certification by an enrolled actuary detailing the value of the plan assets and benefit liabilities. Based on this information, the PBGC determines whether the distress termination criteria are met and must notify the plan administrator as soon as practicable regarding its determination.15 If the distress criteria have not been met, the plan continues to operate. If the criteria are met, the next step is for the PBGC to determine whether the plan's assets are sufficient to pay the benefits guaranteed by the PBGC and/or meet all benefit liabilities. These amounts may be different because, as mentioned, the benefits guaranteed by the PBGC under the plan insurance termination program are subject to statutory limitations; therefore, the benefit liabilities owed under the plan may exceed the benefits guaranteed by the PBGC. If the plan's assets are not sufficient to pay the guaranteed benefits, the PBGC must commence involuntary termination proceedings (discussed below).16 Otherwise, the distress termination generally continues with the plan administrator distributing the plan's assets to participants and beneficiaries by purchasing annuities from a commercial insurer or by other permissible means.17 If the plan administrator discovers during the distribution that the plan's assets are not sufficient to cover benefits, he or she must notify the 8 ERISA § 4041(b)(3); 29 U.S.C. § 1341(b)(3). 9 ERISA § 4050; 29 U.S.C. § 1350. 10 ERISA § 4041(b)(3)(B); 29 U.S.C. § 1341(b)(3)(B). 11 ERISA § 4041(c); 29 U.S.C. § 1341(c). 12 For purposes of the plan termination provisions, "controlled group means, in connection with any person, a group consisting of such person and all other persons under common control with such person," as determined under PBGC regulations. ERISA § 4001(14); 29 U.S.C. § 1301(14). 13 ERISA § 4041(a)(2); 29 U.S.C. § 1341(a)(2); 29 C.F.R. § 4041.23(a). 14 ERISA § 4041(c)(2)(A); 29 U.S.C. § 1341(c)(2)(A). 15 ERISA § 4041(c)(2)(C); 29 U.S.C. § 1341(c)(2)(C). 16 ERSIA § 4041(c)(3)(B)(iii); 29 U.S.C. § 1341(c)(3)(B)(iii). 17 ERISA § 4041(c)(3)(B)(i) and (ii); 29 U.S.C. § 1341(c)(3)(B)(i) and (ii). ¢ ¢ PBGC, which may then be required to initiate an involuntary termination. If there are missing participants, the plan administrator may transfer their distributions to the PBGC after a diligent search.18 The plan administrator then certifies the distribution to the PBGC and the plan is terminated. ¢ An involuntary termination occurs when the PBGC decides a plan should be terminated.19 The PBGC must initiate termination proceedings once it determines a plan does not have assets available to pay benefits currently due. The PBGC may seek to terminate a plan if · the plan has not met the minimum funding requirements or the plan has been notified by the Treasury Secretary that a notice of deficiency concerning the initial tax on a funding deficiency has been mailed; · the plan will not be able to pay benefits when due; · a lump-sum payment of at least $10,000 has been made to a participant who is a http://wikileaks.org/wiki/CRS-RS22624 substantial owner of the sponsoring company and, immediately after the distribution, the plan has unfunded nonforfeitable benefits; or · the long-run loss to the PBGC may reasonably be expected to increase unreasonably if the plan is not terminated. A trustee, who may be the PBGC, may be appointed to administer the plan until it is ordered to be terminated.20 The trustee may be appointed by a U.S. district court upon petition by the PBGC or plan administrator, or the PBGC and plan administrator may agree to the appointment without court involvement. Once appointed, the trustee is responsible for the plan's administration, including management of the plan's assets.21 After the PBGC has given notice to the plan administrator, the plan may be terminated in one of two ways. First, the PBGC may file a petition with the U.S. district court for a ruling that the plan must be terminated to protect the participants' interests, to avoid an unreasonable deterioration of the plan's financial condition, or to avoid an unreasonable increase in the PBGC's liability.22 If a trustee has been appointed, he or she may intervene in the proceeding. The PBGC may file the petition regardless of whether there is a pending proceeding (1) involving bankruptcy, mortgage foreclosure or equity receivership, (2) to reorganize, conserve or liquidate the plan or its property, or (3) to enforce a lien against the plan's property.23 Furthermore, the court may stay any pending proceedings that involve plan property.24 If the court agrees with the PBGC that the plan should be terminated, the court will then appoint a trustee, or authorize the existing trustee, to terminate the plan. 18 ERISA § 4050; 29 U.S.C. § 1350. 19 ERISA § 4042; 29 U.S.C. § 1342. 20 ERISA § 4042(b); 29 U.S.C. § 1342(b). 21 ERISA § 4042(d); 29 U.S.C. § 1342(d). 22 ERISA § 4042(c)(1); 29 U.S.C. § 1342(c)(1). 23 ERISA § 4042(e); 29 U.S.C. § 1342(e). 24 ERISA § 4042(f); 29 U.S.C. § 1342(f). ¢ ¢ Alternatively, the PBGC and plan administrator may agree to terminate the plan without court proceedings.25 There is no requirement under ERISA that plan participants and other interested parties receive notice or an opportunity to be heard prior to the PBGC and plan administrator coming to an agreement to terminate the plan.26 ¢ ¢ In a standard termination, the plan sponsor has no further liability to the PBGC or plan participants. The plan sponsor may be able to recapture any assets remaining after participants have received their share, which is known as a "reversion." A reversion may be subject to an excise tax at a 20% rate, which is increased to 50% if the plan sponsor does not take certain actions, such as establishing a qualified replacement plan.27 http://wikileaks.org/wiki/CRS-RS22624 In a distress termination, the plan sponsor and members of its controlled group are jointly and severally liable to the PBGC for the amount that the benefit liabilities exceed plan assets, with interest, at termination.28 The PBGC will have a claim to recover at least some of these amounts. If successful, the PBGC will pay some of the recovery to plan participants as additional benefits and will keep the remaining amount to help cover its losses. The employer's payment for the liability is due on the plan's termination date. The PBGC is authorized to make arrangements with the liable parties for the payments,29 and any amount in excess of 30% of the collective net worth of the sponsor and controlled group will be paid under commercially reasonable terms.30 In addition, the PBGC may claim a lien for up to 30% of the collective net worth of the sponsor and controlled group.31 The PBGC may bring a civil action in U.S. district court to enforce the lien, which generally must be filed within six years of the plan's termination date. The lien has the same priority as a federal tax lien in section 6323 of the Internal Revenue Code and is treated as a federal tax lien in bankruptcy proceedings.32 ¢ In an involuntary termination, the sponsor and controlled group are jointly and severally liable to the PBGC for the unfunded liabilities in the same manner as discussed above for a distress termination. The sponsor and controlled group are also liable to the trustee for the outstanding balance of the accumulated funding deficiencies, the outstanding balance of the funding 25 ERISA § 4042(c)(1); 29 U.S.C. § 1342(c)(1). 26 See In Re Jones & Laughlin Hourly Pension Plan v. LTV Steel Co., 824 F.2d 197 (2nd Cir. 1987). 27 Internal Revenue Code § 4980. 28 ERISA § 4062(b)(1); 29 U.S.C. § 1362(b)(1). 29 ERISA § 4067; 29 U.S.C. § 1367. 30 ERISA § 4062(b)(2)(B); 29 U.S.C. § 1362(b)(2)(B). 31 ERISA § 4068; 29 U.S.C. § 1368. 32 ERISA § 4068(c); 29 U.S.C. § 1368(c). ¢ ¢ deficiencies waived prior to termination, and the outstanding balance of the decreases in the minimum funding standard allowed prior to termination.33 These amounts are due, plus interest, on the date of termination. ¢ If a company sells or transfers a business with an underfunded pension plan in order to evade liability and the plan is ended within five years of the sale or transfer, ERISA provides that the company can still be treated as a contributing sponsor at the plan's termination date.34 Thus, the company may be held liable for the unfunded liabilities. The PBGC is broadly authorized to make any investigation it deems necessary to enforce ERISA35 and may assess a penalty against anyone who fails to provide a required notice or other material information.36 The penalty is limited to $1,000 for each day the failure occurs. In addition, plan participants, beneficiaries, fiduciaries, and sponsors who are adversely affected by http://wikileaks.org/wiki/CRS-RS22624 an action of another (other than the PBGC) that violates the termination provisions may file suit in U.S. district court to enjoin the action or obtain other equitable relief.37 Employee organizations representing affected participants and beneficiaries are also able to file a claim, and the PBGC has the right to intervene in any action. If the PBGC determines that a plan should not be terminated, it may stop the termination proceedings and restore the plan.38 The PBGC may even restore a terminated plan. When determining whether a plan should be restored, the PBGC may look at subsequent pension plans sponsored by the employer.39 The PBGC may be particularly interested in any subsequent plan that appears to be a "follow-on plan." A follow-on plan is designed so that when its benefits are added to the benefits being paid by the PBGC under the termination insurance program for the first plan, the total benefits are roughly the same as the first plan's benefits. Thus, the employees receive approximately what they expected to receive under the first plan, but the PBGC, rather than the employer, is responsible for paying some of the benefits. 33 ERISA § 4062(c); 29 U.S.C. § 1362(c). 34 ERISA § 4069; 29 U.S.C. § 1369. 35 ERISA § 4003(a); 29 U.S.C. § 1303(a). 36 ERISA § 4071; 29 U.S.C. § 1371. 37 ERISA § 4070; 29 U.S.C. § 1370. 38 ERISA § 4047; 29 U.S.C. § 1347. 39 See PBGC v. LTV Corp., 496 U.S. 633 (1990). ¢ ¢ Jennifer Staman Erika Lunder Legislative Attorney Supervisory Legislative Attorney jstaman@crs.loc.gov, 7-2610 elunder@crs.loc.gov, 7-4538 http://wikileaks.org/wiki/CRS-RS22624