PBGC Q & A

The Joint Committee on Employee Benefits (JCEB) of the American Bar Association met with representatives from the Pension Benefit Guaranty Corporation (PBGC) on May 8, 2019 for an informal discussion of a number of broad topics that were agreed upon in advance. JCEB representatives prepared a summary of matters discussed at the meeting and here is my précis:

I. SINGLE EMPLOYER PROGRAM

Link to Reportable Events reference sheet for small plans

PBGC staff said that PBGC had completed audits of about 400 plans that had terminated in standard terminations, and required that corrective action be taken in about 25% of those plans. Common problems requiring correction included:

• Improperly calculated lump sums—e.g., not using the proper stability or look-back period, overlooking plan assumptions where the plan document provides that the lump sum is the greater of that determined under IRC § 417(e) or the plan;
• Improper calculation of amounts sent to PBGC under the missing participants rule;
• Failure to give proper notice of the location of rolled-over distributions;
• Impermissible benefit waivers (a participant must be a 50% or more owner for a benefit waiver to be valid);
• Deducting processing fees (impermissible in defined benefit plans); and
• Failure to comply with requirement that participants who separated from service before plan termination without a 5-year break in service be fully vested upon plan termination.

Staff also said that PBGC reviews situations in which vested participants have received distributions shortly before plan termination, noting that if such distributions are not consistent with past plan practice they are improper, and saying that generally PBGC considers those participants to be part of the standard termination.

About 25% of the approximately 1,400 plans a year terminating in standard terminations are audited, including all plans with more than 300 participants.

II. MULTIEMPLOYER PROGRAM

PBGC staff said that, as of the end of FY 2018, the net position (assets minus liabilities) of PBGC’s multiemployer program was negative $54 billion, which represents a slight improvement from the prior FY; however, the slight improvement is not attributable to positive trends. According to PBGC’s most recent analysis, the program is likely to become insolvent in2025. Staff said that, absent program changes, PBGC’s ability to provide financial assistance at the current guaranteed level will be severely compromised.

Staff indicated their view that a solution that broadly reforms the multiemployer system would require compromise and time is running out.

PBGC staff said that, since the 2014 passage of the Multiemployer Pension Reform Act of 2014 (MPRA), PBGC has approved three partition applications, with the agency also having approved three such applications before MPRA’s enactment.PBGC recently approved partition applications filed with respect to the Plasterers and Cement Masons Local No. 94 Pension Plan and the Teamsters Local 805 Pension and Retirement Fund.

III. OTHER PROGRAM UPDATES

PBGC staff said that most defined contribution plans that have used the Missing Participants program have been small, although one defined contribution plan transferred $8 million in benefits to the program. About 40 defined contribution plans have used the program to date, and another 15 have requested case numbers and indicated that they intend to use the program, staff said.

IV. REGULATION UPDATE

Proposed new form to request a PBGC coverage determination highlighting the four plan types for which coverage determinations are most frequently requested:

• church plans as listed in ERISA section 4021(b)(3) of ERISA;
• plans that are established and maintained exclusively for the benefit of plan sponsors’ substantial owners as listed in ERISA 4021(b)(9) of ERISA;
• plans covering, since September 2, 1974, no more than 25 active participants that are established and maintained by professional services employers as listed in ERISA section 4021(b)(13) of ERISA; and
• Puerto Rico-based plans within the meaning of ERISA section 1022(i)(1).

PBGC issued a final rule on Terminated and Insolvent Multiemployer Plans and Duties of Plan Sponsors. The rule, effective July 1, 2019, will affect about 140 multiemployer plans and is intended to simplify reporting and disclosure requirements. The new rule:

• eliminates the requirement to provide most annual updates to notices of insolvency benefit level and requires such notices to be provided only to participants who are newly in pay status;
• allows the plan sponsor of a plan terminated by mass withdrawal to perform an actuarial valuation only every 5 years if the present value of the plan’s nonforfeitable benefits is $50 million or less (under current regulations, an actuarial valuation is required every 3 years if the present value of the plan’s nonforfeitable benefits is $25 million or less);
• adds reporting requirements to file actuarial valuations and withdrawal liability information through PBGC’s e-filing portal.