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Guest Article

Deloitte logo

(From the July 21, 2008 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

PBGC Does Not Guarantee Post-Bankruptcy Filing Date Benefits


Consistent with changes made by Pension Protection Act (PPA), PBGC has proposed regulations to provide that, when a single-employer pension plan terminates during the contributing sponsor's bankruptcy proceedings, the bankruptcy filing date will be treated as the plan's termination date for purposes of determining the benefits guaranteed by PBGC. 73 FR 37390 (July 1, 2008).

Effective for bankruptcy filings on or after September 16, 2006, PPA § 404 amended ERISA to provide that the benefits which are guaranteed by PBGC and the benefits which are entitled to priority in the statutory hierarchy -- under ERISA §§ 4022 and 4044(a)(3), respectively -- will be determined by treating the bankruptcy filing date as the plan termination date in the event the plan is terminated after the sponsor files for bankruptcy. The effect of the PPA amendment is that the benefits earned after the bankruptcy filing date are not guaranteed.

As explained by the PBGC:

A persistent problem for the PBGC insurance program has been that the funded status of plans often deteriorates significantly while the plan sponsor is in bankruptcy. Many sponsors have failed to make minimum funding contributions to their plans during the bankruptcy, while the plan continues to pay retiree benefits as usual and employees continue to earn additional benefits. Because the termination date often comes after the sponsor has been in bankruptcy for some time, the result has been that PBGC's losses often increase substantially during the course of a bankruptcy proceeding.

As noted by the PBGC in the preamble, the regulations provide the following changes consistent with the PPA:

  • The participant's guaranteed benefit is based on service and compensation (if applicable) as of the bankruptcy filing date.
  • All the PBGC guarantee limits (i.e., the maximum guaranteed benefit, the phase-in limit, and the accrued-at-normal limit) are determined as of the bankruptcy filing date.
  • Only those benefits that are nonforfeitable as of the bankruptcy filing date are guaranteed. Therefore, early retirement subsidies and disability benefits to which a participant becomes entitled after the bankruptcy filing date are not guaranteed.
  • Participants who retire under a subsidized early retirement benefit or other benefit, to which they became entitled between the bankruptcy filing date and the termination date, will continue in (or may go into) pay status, but the amount of the benefit is reduced to reflect that the subsidy or other benefit is not guaranteed.
  • Benefits in priority category 3 under ERISA § 4044(a) are benefits in pay status, or that could have been in pay status, three years before the bankruptcy filing date, generally taking into account only those benefit increases that were effective throughout the five-year period ending on the bankruptcy filing date.
  • Benefits under ERISA § 4022(c) are based in part on the value of the plan's unfunded nonguaranteed benefits. The PPA amendments cause changes in the unfunded nonguaranteed benefits and, therefore, the ERISA § 4022(c) benefits also are changed.

If the plan has more than one contributing sponsor and all the contributing sponsors did not file for bankruptcy on the same date, PBGC will determine the date to treat as the bankruptcy filing date based on the facts and circumstances.


Deloitte logoThe information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.

If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Mark Neilio 202.378.5046, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Tom Veal 312.946.2595, Deborah Walker 202.879.4955.

Copyright 2008, Deloitte.


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