[Federal Register Volume 74, Number 224 (Monday, November 23, 2009)]
[Proposed Rules]
[Pages 61074-61077]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-28102]


=======================================================================
-----------------------------------------------------------------------

PENSION BENEFIT GUARANTY CORPORATION

29 CFR Part 4041


Purchase of Irrevocable Commitments Prior to Standard Termination

AGENCY: Pension Benefit Guaranty Corporation.

ACTION: Request for public comment.

-----------------------------------------------------------------------

SUMMARY: Practitioners and employers have requested guidance from PBGC 
on the extent to which plan administrators may purchase irrevocable 
commitments to provide plan benefits before initiating a standard 
termination under section 4041(b) of ERISA. PBGC is soliciting public 
comments to help develop this guidance. The issues on which PBGC seeks 
comments include the extent to which such purchases of irrevocable 
commitments violate statutory and regulatory termination requirements, 
safeguards for participants and beneficiaries, and sanctions for 
violations.

DATES: Comments must be received on or before January 22, 2010.

ADDRESSES: Comments may be submitted by any of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the Web site instructions for submitting comments.
     E-mail: [email protected].
     Fax: 202-326-4224.
     Mail or Hand Delivery: Legislative and Regulatory 
Department, Pension Benefit Guaranty Corporation, 1200 K Street, NW., 
Washington, DC 20005-4026.
Comments received, including personal information provided, will be 
posted to http://www.pbgc.gov. Copies of comments may also be obtained 
by writing to Disclosure Division, Office of the General Counsel, 
Pension Benefit Guaranty Corporation, 1200 K Street, NW., Washington, 
DC 20005-4026 or calling 202-326-4040 during normal business hours. 
(TTY and TDD users may call the Federal relay service toll-free at 1-
800-877-8339 and ask to be connected to 202-326-4040.)

FOR FURTHER INFORMATION CONTACT: Constance Markakis or Catherine B. 
Klion, Attorneys, Legislative and Regulatory Department, Pension 
Benefit Guaranty Corporation, Suite 12300, 1200 K Street, NW., 
Washington, DC 20005-4026, 202-326-4024. (For TTY-TTD users, call the 
Federal relay service toll-free at 1-800-877-8339 and ask to be 
connected to 202-326-4024.)

SUPPLEMENTARY INFORMATION: PBGC administers the termination insurance 
program under Title IV of the Employee Retirement Income Security Act 
of 1974 (ERISA). Under section 4041(b) of ERISA, a plan that has 
sufficient assets to pay all plan liabilities may terminate in a 
standard termination. Standard termination requirements (including 
reporting and disclosure requirements and restrictions on distributing 
plan assets during the termination process) are set forth in the 
statute, PBGC's regulation on Termination of Single Employer Plans, 29 
CFR part 4041, and termination forms and instructions, available on 
PBGC's Web site, http://www.pbgc.gov.
    Questions have been raised as to the extent to which a plan 
administrator may purchase irrevocable commitments for some or all 
participants during a period of time before initiating a standard 
termination. Plans sometimes consider purchase of an irrevocable 
commitment (an obligation by an insurer to pay benefits) to take 
advantage of favorable interest rates, or to gradually prepare for a 
termination.
    Although PBGC understands these considerations, PBGC has concerns 
about whether such purchases could circumvent the statutory and 
regulatory protections afforded participants and beneficiaries under 
the standard termination process. PBGC has provided only limited 
informal guidance on this issue.\1\ This notice seeks public comment to 
help develop more comprehensive guidance.
---------------------------------------------------------------------------

    \1\ 2009 Blue Book Q&A 8, available on PBGC's Web site, http://www.pbgc.gov. Blue Books are summaries of the questions and answers 
discussed at meetings between PBGC staff and representatives of the 
Enrolled Actuaries Program Committee in preparation for the annual 
Enrolled Actuaries Meetings. The summaries reflect the views of 
individual staff members and do not represent the official position 
of PBGC.
---------------------------------------------------------------------------

Standard Termination Process

    Under part 4041, a single-employer plan may terminate in a standard 
termination if, in accordance with regulatory requirements, the plan

[[Page 61075]]

administrator provides to affected parties a notice of intent to 
terminate (NOIT) and a notice of plan benefits (NOPB), files a standard 
termination notice with PBGC, and distributes plan assets in 
satisfaction of plan benefits.

Disclosure Requirements

    The NOIT must be issued to participants, beneficiaries, alternate 
payees, and employee organizations representing participants at least 
60 days, and no more than 90 days, before the proposed termination 
date. The NOIT must include a statement that after plan assets have 
been distributed in full satisfaction of all plan benefits for a 
participant or beneficiary, including by the purchase of an irrevocable 
commitment, PBGC no longer guarantees the plan benefits. The NOIT must 
include the name and address of the insurers from whom (if known), or 
(if not) from among whom, the plan administrator intends to purchase 
irrevocable commitments, as well as information on state guaranty 
association coverage of annuities.\2\
---------------------------------------------------------------------------

    \2\ If the identity-of-insurer information is not known at the 
time the NOIT is issued, the plan must provide it in a supplemental 
notice no later than 45 days before the distribution date.
---------------------------------------------------------------------------

    The NOPB must be issued to participants, beneficiaries, and 
alternate payees no later than the time the standard termination notice 
is filed with PBGC. The NOPB must include the proposed termination 
date, the amount and form of the person's plan benefits, including the 
amount and form that would be payable at the earliest benefit 
commencement date, and information on payment in a lump sum. Except in 
the case of an affected party in pay status for more than a year, the 
NOPB must include the personal data needed to calculate the affected 
party's plan benefits, along with a statement requesting that the 
affected party promptly correct any information believed to be 
incorrect. If any of the personal data needed is not available, the 
NOPB must include the best available data, along with a statement 
informing the affected party of the data not available and giving the 
affected party an opportunity to provide it.

Standard Termination Notice

    The plan must file a standard termination notice (Form 500) with 
PBGC on or before the 180th day after the proposed termination date. 
The standard termination notice includes the number of plan 
participants and beneficiaries as of the proposed termination date, the 
estimated fair market value of plan assets available to pay for plan 
benefits as of the proposed termination date, and the estimated present 
value of plan benefits (including the estimated cost of annuity 
contracts to provide plan benefits) as of the proposed distribution 
date. PBGC has 60 days (unless extended) after receipt of a standard 
termination notice to review the proposed termination for compliance 
with applicable requirements.
    PBGC will issue a notice of noncompliance during the 60-day review 
period whenever it determines that the plan administrator failed to 
issue the NOIT or the NOPB in accordance with applicable requirements, 
the plan administrator failed to file the standard termination notice 
in accordance with applicable requirements, or as of the proposed 
distribution date, plan assets will not be sufficient to satisfy all 
plan benefits. PBGC may decide not to issue a notice of non-compliance 
based on a failure to meet those reporting or disclosure requirements 
if it determines that issuance of the notice would be inconsistent with 
the interests of participants and beneficiaries.

Closeout of Plan

    If, by the end of the 60-day review period, PBGC does not issue a 
notice of noncompliance, the plan administrator must complete the 
distribution of assets to provide all plan benefits under the plan 
within 180 days. (If the plan has applied for an IRS determination 
letter by the time the standard termination notice is filed, 
distribution must be completed within 120 days after receipt of a 
favorable determination letter.) Assets are distributed by purchasing 
irrevocable commitments from an insurer or in another permitted form 
under the plan (usually payments of lump sums). To comply with Title 
IV, the plan administrator must select the insurer in accordance with 
the fiduciary standards of Title I (Sec.  4041.28(c)(3)).
    If plan benefits are provided through the purchase of an 
irrevocable commitment, the plan administrator or the insurer must, 
within 30 days after it is available, provide the participant or 
beneficiary with a certificate or a copy of the annuity contract. If 
the certificate or contract is not provided within 90 days after the 
distribution deadline, the plan administrator must, by that date, 
provide the participant or beneficiary with a notice containing the 
insurer's name, address, and contact information. The notice must also 
state that the obligation for providing the benefit has transferred to 
the insurer and that the participant or beneficiary will receive from 
the plan administrator or insurer a certificate or a copy of the 
annuity contract.
    Within 30 days after the last distribution date,\3\ the plan 
administrator must file with PBGC a post-distribution certification 
(Form 501). The latter must include the names of insurers that provided 
irrevocable commitments, numbers of participants or beneficiaries for 
whom irrevocable commitments were purchased, and the total value of the 
irrevocable commitments.
---------------------------------------------------------------------------

    \3\ Under Sec.  4041.29, PBGC will assess a penalty for late 
filing of a post-distribution certification only to the extent the 
certification is filed more than 90 days after the distribution 
deadline (including extensions).
---------------------------------------------------------------------------

Administration of Plan During Termination Process

    From the first day the plan administrator issues a NOIT in a 
standard termination to the last day of PBGC's 60-day review period, 
the plan administrator may not purchase irrevocable commitments to 
provide any plan benefits (Sec.  4041.22). An exception applies if the 
participant has separated from active employment or is otherwise 
permitted under the Code to receive the distribution, the distribution 
is consistent with prior plan practice, and the distribution is not 
reasonably expected to jeopardize the plan's sufficiency for plan 
benefits.

Irrevocable Commitments

    An irrevocable commitment is defined in Sec.  4001.2 as ``an 
obligation by an insurer to pay benefits to a named participant or 
surviving beneficiary, if the obligation cannot be cancelled under the 
terms of the insurance contract (except for fraud or mistake) without 
the consent of the participant or beneficiary and is legally 
enforceable by the participant or beneficiary.''
    Some plans contain provisions permitting the purchase of immediate 
annuity contracts that are irrevocable commitments when participants 
retire. Plans may also purchase deferred annuity contracts that are 
irrevocable commitments in connection with a plan merger, benefit 
freeze, or spin-off termination, to annuitize all or part of the 
accrued benefits of active or deferred vested participants. If the plan 
purchases irrevocable commitments in those situations, it may hold the 
certificate or give it to the participant.
    A plan may also purchase annuity contracts as a funding or 
investment vehicle of the plan (e.g., the contract grows at a minimum 
guaranteed rate during the accumulation phase). Such contracts are not 
irrevocable commitments and do not transfer the

[[Page 61076]]

liability of the plan for benefits to the insurance company or 
extinguish PBGC's obligation to guarantee plan benefits. While these 
contracts are often ``unallocated'' group annuity contracts, a plan may 
also purchase such contracts to fund individual participants' benefits. 
An annuity contract may at times be cashed in for its surrender value 
(this may occur during the termination process if the asset value is 
not diminished). However, a plan may not exercise a contract provision 
for the conversion of the contract to irrevocable commitments before 
the end of PBGC's 60-day review period, subject to the exception in 
Sec.  4042.22(b) described above. Purchase of annuity contracts as a 
funding or investment vehicle of the plan does not raise termination 
concerns with PBGC.
    For benefits provided through the purchase of irrevocable 
commitments, the distribution date is the date on which the obligation 
to provide the benefits passes from the plan to the insurer. Once an 
insurer has made an irrevocable commitment to pay all benefits to which 
a participant who is retired or separated from employment is entitled 
under the plan and who is either receiving plan benefits or entitled to 
begin receiving plan benefits in the future, the individual ceases to 
be a participant for purposes of part 4041 (Sec.  4041.2).\4\ 
Similarly, an individual ceases to be a beneficiary under the plan for 
such purposes once an insurer makes an irrevocable commitment to 
provide all the plan benefits to which the beneficiary is entitled.
---------------------------------------------------------------------------

    \4\ Under IRS regulations, a plan generally is required to 
reflect in the plan's funding target and target normal cost the 
liability for benefits that are funded through insurance contracts 
held by the plan, and to include in plan assets the value of the 
corresponding insurance contracts. A plan is permitted, however, to 
exclude the benefits provided under such contracts and the 
corresponding contracts to the extent that a participant's or 
beneficiary's right to receive those benefits is an ``irrevocable 
contractual right'' based on premiums paid prior to the valuation 
date. See Treas. Reg. Sec.  1.430(d)-1(c)(2), 74 FR 53004, 53038 
(Oct. 15, 2009). A plan's election under IRS regulations to include 
or exclude irrevocable commitments in the plan's valuation and 
minimum funding requirements has no bearing on whether the 
individuals for whom the irrevocable commitments are purchased are 
participants for purposes of part 4041. In addition, under IRS 
regulations, any payment for the purchase of an irrevocable 
commitment is a ``prohibited payment'' that is subject to certain 
funding-based limitations on accelerated benefit distributions under 
Code section 436(d). Treas. Reg. Sec.  1.436-1(d), 74 FR at 53083.
---------------------------------------------------------------------------

Audit and Enforcement

    PBGC currently conducts post-termination audits of all plans that 
terminate in a standard termination with a participant count of 300 or 
more. For plans with fewer than 300 participants, PBGC randomly selects 
plans to audit. PBGC also may audit a plan when the agency has reason 
to believe there may be a problem. The focus of the standard 
termination audits is to ensure that participants receive the benefits 
to which they were entitled. PBGC also audits compliance with 
termination disclosure and reporting requirements. Failure to provide 
required termination-related notices and disclosures is subject to 
information penalties under section 4071 of ERISA.\5\
---------------------------------------------------------------------------

    \5\ Under section 4071 of ERISA and PBGC's information penalty 
regulation (part 4071), PBGC may assess a penalty of up to $1,100 a 
day if material information is not timely provided. PBGC's current 
information penalty policy (60 FR 36837, Jul. 18. 1995) provides for 
a guideline information penalty of $25 per day for the first 90 days 
of delinquency and $50 per day thereafter. Penalties are reduced 
proportionately for plans with fewer than 100 participants, and the 
total penalty is capped at $100 times the number of plan 
participants. The guideline penalty may be adjusted up or down based 
on the facts and circumstances--for example, willful failure to 
comply, pattern or practice of violation, or substantial harm to 
participants or PBGC. PBGC may waive an information penalty for 
``reasonable cause.''
---------------------------------------------------------------------------

    Starting in 2006, PBGC has been auditing all plans that make a 
final distribution of plan assets before or without filing a standard 
termination notice in accordance with the standard termination 
regulations. After PBGC identifies such a plan, generally when it fails 
to pay premiums, it requires the plan to file a standard termination 
notice and post-distribution certification. PBGC can have difficulty, 
however, identifying plans that purchase irrevocable commitments prior 
to termination, particularly when the irrevocable commitments are 
purchased for a group of participants (e.g., retirees), but not all 
participants.
    Section 4044.4 of PBGC's regulation on Allocation of Assets in 
Single-Employer Plans (part 4044) provides that a distribution in 
anticipation of termination is considered to be an allocation of plan 
assets upon termination. A plan administrator violates ERISA if plan 
assets are allocated or distributed upon plan termination in a manner 
other than that prescribed under section 4044 of ERISA and part 4044. 
The anticipation-of-termination rules generally do not come into play 
where the plan terminates in a standard termination. Those rules could 
be relevant, however, where plan assets are not sufficient to pay plan 
benefits at the time of any distribution upon termination.

PBGC Concerns

    ERISA section 4041(a) provides that the rules in section 4041(b) 
for a standard termination or in section 4041(c) for a distress 
termination are the exclusive means by which a single-employer plan may 
voluntarily terminate. Under section 4041(b), PBGC must issue a notice 
of noncompliance to the plan administrator if it determines that 
participants and beneficiaries have not received all required notices 
and information or that there is reason to believe that the plan is not 
sufficient for benefit liabilities. PBGC has two substantial concerns 
when a plan purchases irrevocable commitments before initiating a 
related standard termination.
    The first concern is that the purchase circumvents the statutory 
and regulatory protections afforded under the standard termination 
process. A participant whose plan benefits are fully satisfied through 
purchase of an irrevocable commitment prior to the first day a NOIT is 
issued in a related termination would not receive disclosures required 
as part of the standard termination process, including advance notice 
of the termination, advance information about the insurer, and a 
statement that PBGC no longer guarantees those plan benefits. Such 
participants may not have the same opportunity to correct personal 
information used to calculate their benefits or provide personal data 
not available to the plan. In addition, PBGC would not receive 
information necessary to determine whether participants received the 
correct benefits, including information on the number of persons for 
whom irrevocable commitments were purchased and the benefits provided 
through the purchase of irrevocable commitments.
    The second concern is that plan assets could be insufficient for 
plan benefits at the time of any distribution upon termination, since 
plan assets used to purchase irrevocable commitments (and the 
investment returns on those assets) would no longer be available to pay 
other plan benefits. If the plan was sufficient for guaranteed 
benefits, it might still terminate as a distress termination, but some 
participants would lose nonguaranteed benefits. If the plan was not 
sufficient for guaranteed benefits, PBGC might have to terminate and 
trustee the plan, and some participants and PBGC could be harmed. This 
concern generally does not arise with irrevocable commitments purchased 
after the first day a NOIT is provided, because the exception in Sec.  
4041.22(b) applies only if the distribution is not reasonably expected 
to jeopardize the plan's sufficiency.
    Neither concern applies if a plan purchases an annuity contract as 
a funding or investment vehicle of the

[[Page 61077]]

plan before or after the NOIT is provided, so long as it is not an 
irrevocable commitment. However, the same concerns would arise if the 
plan converted such a contract to irrevocable commitments before or 
after initiating a standard termination.

Request for Comments

    PBGC is soliciting comments on issues related to a purchase of 
irrevocable commitments before the initiation of a standard 
termination. PBGC seeks comments on any and all relevant issues, 
including the following:

    (1) Factors PBGC should take into account in determining whether 
a purchase of irrevocable commitments before the initiation of a 
standard termination is related to (i.e., in preparation of) the 
standard termination (e.g., plan annuitizes plan benefits of all 
retirees or terminated vested participants with no connection to any 
other plan transaction, such as a merger).
    (2) Whether there should be a rebuttable presumption that a 
purchase of irrevocable commitments made within a specific time 
period (e.g., a year) before the first day a NOIT is issued in a 
standard termination is related to a standard termination and if so, 
what time period.
    (3) Whether there should be a safe harbor for a purchase of 
irrevocable commitments under specified circumstances before the 
first day a NOIT is issued in a standard termination. If so, what 
time period should apply (e.g., one year, two years, or three years 
before a NOIT is issued)? Whether a safe harbor should be 
conditioned on the purpose of the purchase (e.g., to lock in rates 
with an insurer in order to ensure plan sufficiency). Whether a safe 
harbor should be limited to plans in which the plan assets exceed 
plan benefits by a certain margin. If so, by what margin and as of 
what date? What reporting and disclosure requirements should be 
required with a safe harbor?
    (4) How PBGC can better identify plans that purchase irrevocable 
commitments for some or all participants shortly before initiating a 
standard termination.
    (5) Appropriate enforcement actions in the case of a purchase of 
irrevocable commitments before the initiation of a related standard 
termination.
    (6) Appropriate information penalties for failures to provide 
notices and disclosures required as part of the termination process, 
including guideline information penalty amounts, and aggravating and 
mitigating factors (e.g., before purchasing irrevocable commitments, 
the plan administrator provided participants with the information 
required in the NOIT and NOPB, or the plan reported information to 
PBGC about irrevocable commitments purchased).
    (7) In the case of a permissible purchase of irrevocable 
commitments in accordance with Sec.  4041.22(b) made after a NOIT is 
issued, what information should the plan be required to provide to 
participants? To PBGC? \6\
---------------------------------------------------------------------------

    \6\ 2007 Blue Book Q&A 6 provides informal guidance that PBGC 
staff interprets Sec.  4041.24(a) as not requiring a plan 
administrator to issue a NOPB to a participant whose benefits are 
paid out in accordance with Sec.  4041.22 on or before the due date 
for issuing the NOPB. However, the Instructions to Form 501 provide 
that the post-distribution certification must include such 
participants and beneficiaries for whom annuities are purchased 
after the plan's termination date in the normal course of business, 
including a certification of their distributions by category and 
amount (see also, 2008 Blue Book Q&A 7). 2009 Blue Book Q&A 11 
provides informal guidance that a standard termination audit will 
generally cover any participant or beneficiary who is an affected 
party as of the plan's termination date, regardless of the timing of 
the distribution for that affected party.
---------------------------------------------------------------------------

    (8) What are employers' experiences with ``locking in'' rates 
for purchases of irrevocable commitments? What are the costs of 
locking in rates and how long do locked-in rates remain in effect? 
In the case of annuity contracts that are purchased as an investment 
vehicle, can plans lock in rates for the conversion of these 
contracts to irrevocable commitments at a future date and if so, at 
what costs and for how long?

    Issued in Washington, DC, this 18th day of November 2009.
Vincent K. Snowbarger,
Acting Director, Pension Benefit Guaranty Corporation.
[FR Doc. E9-28102 Filed 11-20-09; 8:45 am]
BILLING CODE 7709-01-P