Non-insured plan failure

[Guest BruceC]

If an employer is exepmpt from PBGC coverage for their DBP because they are, say, a service employer with fewer than 25 EEs....and the business goes bankrupt, who takes over the operation of the DBP trust and services the plan?

If the plan is underfunded, who speaks for the plan in BK court in persuing any company assets to bring the plan to full funding to pay accrued benefits?

Thanks

BruceM

[SoCalActuary]

Let's start with the Plan Administrator, a named fiduciary, who is responsible under civil law for providing participants their benefits.

If they are unable to do so, you still have the DOL who can step in and appoint a successor plan administrator.

If they just don't want to, then participants can sue them.

As to the funding, a non-PBGC plan is able to pay benefits only to the extent funded. If assets are not sufficient to make employees whole, then they are allocated as the IRS prescribes - "in a non-discriminatory manner".

The plan usually has no claim against the plan sponsor in BK, unless there were commingled assets.

[Guest BruceC]

Thanks SoCal

To your knowledge, do any states require state insurance regulators to assume control of such a plan or perhaps to be responsible to assign the plan to a TPA fiduciary licensed in the state?

BruceM

[SoCalActuary]

Thanks SoCal

To your knowledge, do any states require state insurance regulators to assume control of such a plan or perhaps to be responsible to assign the plan to a TPA fiduciary licensed in the state?

BruceM

One of the key points of ERISA is state preemption. Insurers are state-regulated, and the state DOI will take action in that area if an insurer fails. Now put that analogy completely out of your mind on pensions.

Pensions are federally regulated, and their jurisdiction is governed by the IRS, Dept Of Labor, and usually the PBGC.

In your situation, the plan sponsor might be given over to a state-regulated entity, but the pension plan could only be given over to a new trustee/administrator by Labor Dept. They have an active program for determining who should take over an "abandoned plan", and you can search the EBSA website for when and how this is done.

[Ron Snyder]

If there is a specific exclusion from coverage under ERISA, it is hard to say that a state law applicable to underfunded plans of service organizations with fewer than 25 participants would be pre-empted.

I have read several states' insurance codes and have never seen one that gave the Commissioner the right to take over a pension fund. Those laws apply to insurance companies with impaired capital. The Commissioner also has the right to shut down unlicensed insurance arrangements, but no one would argue that he can close down a pension plan.

[My 2 cents]

A pension plan is not an insurance company and thus ought to be entirely outside the scope of the state guaranty associations.

It would be unlikely that any state could step in and interfere with the termination of an insufficiently funded ERISA defined benefit plan that was not covered by the PBGC for whatever reason, since ERISA would presumably preempt any state laws that purported to assert such an authority. They would certainly not fall under any state laws regulating insurance practices, to which ERISA grants a limited exemption from preemption.

Unless the sponsor agreed to put more money in (or litigation asserting fiduciary violations compelled such an action), the plan would fail to pay some of the accrued benefits. The standard ERISA priority classes should be parroted in the plan document, and the assets would be used to pay all benefits due in the higher classes until exhausted (with the remaining assets being prorated across the entire priority class in which they are exhausted), leaving little or nothing for the lower. As I recall, they are (1) voluntary contributions then (2) mandatory contributions then (3) people who are or could have been in pay status three years earlier then (4) other benefits up to the PBGC guarantees then (5) other vested benefits then (6) other (non-vested) accrued benefits. Not being covered by the PBGC equates to there being no knights in shining armor to step in and make things right.

[Andy the Actuary]

Not being covered by the PBGC equates to there being no knights in shining armor to step in and make things right.

Would you mind if I rephrased?

"Not being covered by the PBGC equates to there being no knights (whose armor is generously shined by many who neither live nor will ever live in the kingdom) to step in and make things right for some but not all."

[david rigby]

Not being covered by the PBGC equates to there being no knights in shining armor to step in and make things right.

Are you suggesting that being covered by the PBGC is = to some "knight in shining armor"?

Yikes!

[My 2 cents]

I stand by the original sentiment - not being covered means no help is on the way. This is true even if the converse might not be (which seems to be what the subsequent comments are implying).