Guest Article

(From the January 14, 2008 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

PBGC Issues PPA Guidance

While much of the focus has been on the IRS and Department of Labor, the Pension Benefit Guaranty Corporation (PBGC) has been issuing a steady stream of guidance on various provisions of the Pension Protection Act (PPA) in the form of "technical updates." Technical Updates 07-2 and 07-3 provide helpful guidance on the effect of certain PPA changes on the ERISA § 4010 annual reporting requirements, the ERISA § 4043 reportable event requirements, and the ERISA § 4041(b) standard termination rules. Also, Technical Update 07-4 designates the present value of the PBGC maximum guaranteed benefit that must be used when applying the partial limitation on lump-sum payments by certain underfunded plans. All three technical updates are available on the PBGC's Web site, at www.pbgc.gov.

Technical Update 07-2

As noted, the PPA changed the way the ERISA § 4006 variable-rate premium (VRP) is determined. Because some of the variables used to determine the VRP also are used for purposes of the ERISA § 4010 annual employer reporting requirements and the ERISA § 4043 reportable events rules, the regulations pursuant to those provisions will need to be updated accordingly. The purpose of PBGC Technical Update 07-2 (November 28, 2007) is to provide guidance on certain issues until those regulations are updated.

Regarding the ERISA § 4010 annual employer reporting requirements, the PPA replaced the $50 million gateway test with a "less than 80 percent adjusted funding target attainment percentage" test, effective for "years beginning after 2007." According to the Technical Update, the PBGC interprets this change to apply to information years beginning after 2007. (The "information year" usually is the employer's fiscal year, which often is the calendar year.) So for information years beginning before 2008 the $50 million gateway test will continue to apply.

When applying the $50 million gateway test to information years beginning before 2008, the technical update states unfunded vested benefits (UVBs) for any plan year ending within the information year should be determined using the pre-PPA variable-rate premium (VRP) rules. The "testing date" for this purpose is the end of the plan year ending within the information year.

The technical update also clarifies certain issues relating to applying the ERISA § 4043 reportable events rules to event years beginning in 2008. Basically, ERISA § 4043(a) requires plan administrators to notify PBGC within 30 days after they know or have reason to know a reportable event occurred (i.e., "post-event reporting"), unless a waiver applies. The waivers are based on the level of UVBs or vested benefits amounts, determined as of the testing date using the VRP interest rate for the event year. The "testing date" in this case generally is the last day of the plan year preceding the event year.

Additionally, ERISA § 4043(b) generally requires certain non-public companies to notify the PBGC at least 30 days in advance of certain reportable events (i.e., "advance reporting"). This advance reporting requirement applies only to companies that satisfy a threshold test, which is based on UVBs and vested benefits determined as of the testing date using the VRP interest rate for the event year.

According to the technical update, for 2008 event year plans should determine vested benefits and UVBs using the pre-PPA VRP rules. The following example is taken from the technical update to illustrate this guidance.

Technical Update 07-3

This technical update provides guidance on the interest rate and mortality assumptions terminating plans must use when making final benefit distributions if the termination date and distribution date straddle the PPA effective date. Specifically, the PPA changed the interest and mortality assumptions plans must use to determine the present value of lump sums and other distribution forms subject to IRC § 417(e)(3) effective for plan years beginning on and after January 1, 2008. In the case of an ERISA § 4041(b) standard termination, which assumptions are used if the termination date is in 2007 and the distribution date is in 2008?

According to the technical update, "the minimum lump sum value of a participant's accrued benefit is calculated using the definition of 'applicable interest rate' and 'applicable mortality table' based on the plan provisions reflecting the law in effect on the plan's termination date, but the time for determining the specific assumptions is based on the distribution date." In other words, because the plan terminates in 2007 the interest and mortality assumptions are based on pre-PPA law, but the specific assumptions used are determined by reference to the distribution date. The technical update illustrates this rule as follows.

Significantly, the technical update states that its guidance does not apply to terminations occurring after the PPA effective date. This is important because a similar problem will arise if, for example, a plan terminates in 2008 but the distribution date is in 2009, because of the phasein of the new PPA interest rate assumptions. The PBGC "intends to issue further guidance on these issues."

Technical Update 07-4

The purpose of this technical update is to provide guidance on one of the new IRC § 436 benefit restrictions for certain underfunded plans. Specifically, IRC § 436(d)(3) imposes a limit on paying lump sums and other "prohibited payment forms" for plans with an "adjusted funding target attainment percentage" (AFTAP) of at least 60 percent but less than 80 percent. A plan in this situation may not pay a prohibited payment to the extent the payment exceeds the lesser of:

According to the technical update, the PBGC has published a table on its Web site to provide these maximum guaranteed amounts for benefits with annuity starting dates in 2008. The table, which is reproduced below, will be updated annually.

Present values for individuals less than 25 years old or more than 84 years old can be obtained by contacting the PBGC.

The 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, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2008, Deloitte.