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Guest Article

Deloitte logo

(From the October 17, 2005 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

PBGC Guidance on 2005 Participant Notice Requirement for Underfunded Plans, Including Model Notice


Determining whether a pension plan administrator must issue an ERISA § 4011 Participant Notice for the 2005 plan year can be tricky business. Plans subject to the Pension Benefit Guaranty Corporation's (PBGC) variable-rate premium for 2005 generally must issue a 2005 Participant Notice. However, a 2005 Participant Notice is not required if a plan meets specific funding thresholds for certain plan years or combinations of plan years. And if a plan does not meet these thresholds using a particular interest rate, another interest rate option may be available for certain years.

PBGC Technical Update 05-1 (September 14, 2005) is a concise, definitive guide for plan administrators seeking to comply with the ERISA § 4011 2005 Participant Notice requirements. Among other things, the Technical Update includes a Worksheet (reproduced on page 10) that should help simplify the process of determining if a Participant Notice is required, and a model Notice that incorporates the PBGC's maximum benefit guarantees for 2005. The full text of Technical Update 05-1 is available on the PBGC's Web site, [click here]

Background

The purpose of the Participant Notice requirement is to ensure participants in certain underfunded pension plans are aware of the plans' funding status and the PBGC's maximum benefit guarantees. When required, the 2005 Participant Notice is due 2 months after the plan's 2004 Form 5500 due date (including extensions). (October 3, 2005 is the earliest possible 2005 Participant Notice due date for calendar year plans. Other common due dates for calendar year plans are November 15, 2005 and December 19, 2005.)

The Participant Notice Requirement

Pension plan administrators generally must issue a Participant Notice for any year the plan is required to pay the variable rate premium (VRP). But the Participant Notice is not required if the plan satisfies the "Deficit Reduction Contribution (DRC) Exception Test" for either the 2005 or 2004 plan year. A plan satisfies the DRC Exception Test for the 2005 plan year if the plan's funded current liability (FCL) percentage is:

  • At least 90 percent for the 2005 plan year; or
  • At least 80 percent for the 2005 plan year and at least 90 percent for either;
    • The 2004 plan year and the 2003 plan year, or
    • The 2003 plan year and the 2002 plan year.

A plan satisfies the DRC Exception Test for the 2004 plan year if the plan's FCL percentage is:

  • At least 90 percent for the 2004 plan year; or
  • At least 80 percent for the 2004 plan year and at least 90 percent for either;
    • The 2003 plan year and the 2002 plan year, or
    • The 2002 plan year and the 2001 plan year.

A plan's FCL percentage is calculated by dividing the actuarial value of the plan's assets by the plan's current liability, both determined as of the plan's valuation date. For this purpose the plan's current liability is determined using the applicable interest rate, which is:

  • 100 percent of the weighted average of the long-term investment-grade corporate bond rate for 2004 and 2005 plan years;
  • 120 percent of the weighted average of the 30-year Treasury rate for 2002 and 2003 plan years; and
  • 105 percent of the weighted average of the 30-year Treasury rate for the 2001 plan year.

However, the Pension Funding Equity Act (PFEA) of 2004 (P.L. 108-218) established a special rule for determining if the DRC Exception applies for the 2005 or 2004 plan year. Specifically, for this purpose plans can recalculate their FCL percentages for 2001, 2002, or 2003 plan years using 100 percent of the weighted corporate bond rate, which will always result in a higher FCL percentage.

The Interest Rate Table for 2005 Participant Notice summarizes the interest rates that must be used for various plan years to determine if a Participant Notice is required for the 2005 plan year, to view the table {click here].

To view the Plan Year 2005 Participant Notice Worksheet, [click here]


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 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, Taina Edlund 202.879.4956, Laura Edwards 202.879.4981, Mike Haberman 202.879.4963, Stephen LaGarde 202.879-5608, Bart Massey 202.220.2104, Diane McGowan 202.220.2077, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Carlisle Toppin 202.220.2067, Tom Veal 312.946.2595, Deborah Walker 202.879.4955.

Copyright 2005, Deloitte.


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