Pray for the PBGC

The Pension Benefit Guaranty Corporation (PBGC) is severely underfunded itself yet on Friday there was this press release:

Reversing a prior position, the Pension Benefit Guaranty Corporation announced today that it will pay pension benefits for more than 800 former employees of the Hospital Center at Orange, which provided primary and emergency care in Orange Township, N.J. before closing in 2004.

The Hospital’s pension plan was originally covered by ERISA and protected by PBGC. However, in 2003, after the hospital became affiliated with Cathedral Healthcare System Inc., the Internal Revenue Service determined that the hospital’s pension plan had become a church plan, which removed it from PBGC’s protection. Soon after that, the hospital began winding down its operations and laying off employees.

Over the past several years, at the request of the Pension Rights Center, PBGC worked with the hospital’s former staff and the IRS to revisit that designation. IRS recently set the designation aside and PBGC can now cover the pensions. The plan is within months of running out of money, so if PBGC had not stepped up benefit payments would have stopped.

“Why did PBGC push to take on this substantial financial responsibility?” said PBGC Director Josh Gotbaum. “The answer is simple. Our job is to provide a safety net for pensions. In this case, we realized we could restore the safety net — so we did.”

In a letter posted on May 10th, the Pension Rights Center praised PBGC for pushing to protect the hospital’s retirees. “The PBGC’s actions helped rectify an injustice that the law never intended, and illustrate your agency’s strong commitment to the protection of pension plans and participants.”

According to PBGC estimates, as of Jan. 1, 2009 (the plan termination date), the plan had $11 million in assets to pay $41 million in benefits. The agency expects to cover the entire $30 million shortfall and expects to pay the benefits owed under the plan.

Retirees will continue to get benefits without interruption, and future retirees can apply for benefits as soon as they are eligible.

What were they thinking?

Church plans are not covered by the PBGC for a very good reason: ERISA funding rules don’t apply to them either as part of the church plan exemption*.  Fifteen years ago (according to public records as compiled by Larkspur) this plan had $26 million in assets and was paying out $1.5 million annually. PBGC premiums were modest back then as most plans terminated routinely without need for the PBGC backstop.

When the Hospital Center of Orange moved to church plan status they were theoretically on their own and it appears they stopped contributing but kept promising. $26 million dwindled to $11 in 2009 and $0 by the end of this year. Who is responsible for the contributions that would have been required had the plan not had the church plan exemption for the last decade?

The PBGC may see itself as having a moral obligation to protect all pensions but the money they are using to pay for past promises cavalierly made without adequate oversight is coming from higher premiums that are discouraging the establishment of defined benefit plans for future retirees**.  Who are they to pray to for their pensions?

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* Though I do some church plans the exemption from ERISA is puzzling as if the IRS felt religious organizations didn’t need the discipline of funding rules to keep promises they make.

** I have not set up a new PBGC covered Defined Benefit Plan in about 10 years though I have taken over a few – usually freezing accruals if they weren’t already frozen.  PBGC premiums for underfunded plans can be as much as the actual cost of the benefit accrued for a participant these days as the PBGC is desperate to exploit what they believe to be a captive revenue source.  However all plans are not covered by the PBGC, professional service companies with less then 25-participants being the main exemption though they do need to follow IRS funding rules, and options available under Defined Contribution plans make it a real possibility that the only plans left to pay PBGC premiums are those that almost certainly will need the protection.

3 responses to this post.

  1. Posted by Tough Love on May 13, 2013 at 1:05 pm

    Quoting …”When the Hospital Center of Orange moved to church plan status they were theoretically on their own and it appears they stopped contributing but kept promising. $26 million dwindled to $11 in 2009 and $0 by the end of this year. Who is responsible for the contributions that would have been required had the plan not had the church plan exemption for the last decade?”

    I had read about this and was quite stunned. While the situation for the individuals involved was very unfortunate why are they PBCG “covered” if the Plan was not paying PBGC Premiums ? Could this be the Obama Admin. protecting their voter base?

    Another big question is WHY are PBCG-covered Plans allowed to convert to Church Plans w/o participant notification. And lastly … re you quote above …. it seems like one heck of a fraud was perpetrated upon these workers. Management can just ignore making contributions w/o ANY consequence ?

    Reply

    • Posted by Tough Love on May 13, 2013 at 1:06 pm

      And yes, I know it’s PBGC, not PBCG

      Reply

    • This originally came to me as a local New Jersey story titled ‘Triumph of Justice’:
      http://www.nj.com/essex/index.ssf/2013/05/triumph_of_justice_some_800_pe.html

      so I didn’t expect much detail and even thought they may have been misreporting something. Then I went to the PBGC website and saw the official announcement last Friday and was even more confused. The IRS can’t just tell you that you’re a church plan. And Church plans can even elect to be covered by ERISA if they want.

      There’s more here that’s not coming out and it looks like some slick negotiation got these people covered (and taxpayers further on the hook).

      Reply

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