[Federal Register Volume 83, Number 192 (Wednesday, October 3, 2018)]
[Rules and Regulations]
[Pages 49799-49806]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-21551]
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PENSION BENEFIT GUARANTY CORPORATION
29 CFR Parts 4001, 4022, 4043, and 4044
RIN 1212-AB24
Owner-Participant Changes to Guaranteed Benefits and Asset
Allocation
AGENCY: Pension Benefit Guaranty Corporation.
ACTION: Final rule.
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SUMMARY: The Pension Benefit Guaranty Corporation (PBGC) is amending
its regulations on guaranteed benefits and asset allocation. These
amendments incorporate statutory changes to the rules for participants
with certain ownership interests in a plan sponsor.
DATES: Effective Date: This rule is effective November 2, 2018.
Applicability: Like the provisions of the Pension Protection Act of
2006 (PPA 2006) that this rule incorporates, the amendments in this
final rule are applicable to plan terminations--
(A) under section 4041(c) of the Employee Retirement Income
Security Act of 1974 (ERISA) with respect to which notices of intent to
terminate are provided under section 4041(a)(2) of ERISA after December
31, 2005, and
(B) under section 4042 of ERISA with respect to which notices of
determination are provided under that section after December 31, 2005.
FOR FURTHER INFORMATION CONTACT: Samantha M. Lowen
([email protected]), Attorney, Regulatory Affairs Division,
Office of the General Counsel, Pension Benefit Guaranty Corporation,
1200 K Street NW, Washington, DC 20005-4026; 202-326-4400, extension
3786. (TTY users may call the Federal relay service toll-free at 800-
877-8339 and ask to be connected to 202-326-4400, extension 3786.)
SUPPLEMENTARY INFORMATION:
Executive Summary
Purpose of the Regulatory Action
This final rule is necessary to conform the regulations of PBGC to
current law and practice. PBGC is incorporating statutory changes
affecting guaranteed benefits and asset allocation when a plan has one
or more participants with certain ownership interests in the plan
sponsor. PBGC's legal authority for this action comes from sections
4002(b)(3), 4022, and 4044 of ERISA. Section 4002(b)(3) authorizes PBGC
to issue regulations to carry out the purposes of title IV of ERISA.
Sections 4022 and 4044 authorize PBGC to prescribe regulations
regarding the determination of guaranteed benefits and the allocation
of assets within priority categories, respectively.
Major Provisions
This final rule amends PBGC's benefit payment regulation by
replacing the guarantee limitations applicable to substantial owners
with a new limitation applicable to majority owners.\1\ Additionally,
this final rule amends PBGC's asset allocation regulation by
prioritizing funding of all other benefits in priority category 4 ahead
of those benefits that would be guaranteed but for the new limitation.
The rulemaking also clarifies that plan administrators may continue to
use the simplified calculation in the existing rule to estimate
benefits funded by plan assets. Finally, it provides new examples to
aid in implementation.
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\1\ In this preamble, substantial owners and majority owners are
referred to interchangeably as ``owner-participants.''
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Background
PBGC administers the pension insurance program under title IV of
ERISA. ERISA sections 4022 and 4044 cover PBGC's guarantee of plan
benefits and allocation of plan assets, respectively, under terminated
single-employer plans. Special provisions within these sections apply
to ``owner-participants,'' who have certain ownership interests in
their plan sponsors. PPA 2006 made changes to these provisions. PBGC
has been operating in accordance with the amended provisions since they
became effective, but had not yet updated its regulations nor issued
guidance on implementation. With this rulemaking, PBGC is increasing
transparency into its operations and is clarifying for plan
administrators the impact of the statutory changes.
Before PPA 2006, the owner-participant provisions applied to any
participant who was a ``substantial owner'' at any time within the 60
months preceding the date on which the determination was made. Section
4021(d) of ERISA defines a substantial owner as an individual who owns
the entire interest in an unincorporated trade or business, or a
partner or shareholder who owns more than 10 percent of the partnership
or corporation. PPA 2006 revised the owner-participant provisions, in
large part, by making them applicable to ``majority owners'' instead of
substantial owners. Section 4022(b)(5)(A) of ERISA defines a majority
owner as an individual who owns the entire interest in an
unincorporated trade or business, or a partner or shareholder who owns
50 percent or more of the entity.
On March 7, 2018 (at 83 FR 9716), PBGC published a proposed rule to
amend parts 4001, 4022, 4041, 4043, and 4044 to incorporate statutory
changes to the rules for participants with certain ownership interests
in a plan sponsor. PBGC received no comments on the proposed rule.
The final regulation is the same as the proposed regulation with
two exceptions discussed below: PBGC is adding clarifying language to
Sec. 4022.26 of the benefit payment regulation, concerning PPA 2006
bankruptcy terminations; and PBGC is not making the proposed amendment
to its regulation on Termination of Single-Employer Plans (29 CFR part
4041).
Guaranteed Benefits Before and After PPA 2006
ERISA section 4022 imposes several limitations on PBGC's guarantee
of plan benefits, including the ``phase-in limitation.'' As the name of
this limitation suggests, PBGC's guarantee of a plan's benefits is
phased in over a specified time period. Before PPA 2006, this time
period was drastically different for owner-participants and for all
other participants; the benefits of owner-participants were phased in
over 30 years, whereas the benefits of non-owner-participants were
phased in over five years. In addition, the extent to which an owner-
participant's benefit was phased in was unique to each owner-
participant and based on the number of years he or she was an active
participant in the plan; whereas the extent to which all other
participants' benefits were phased in was based on the number of years
a plan provision--specifically, one that increased benefits--was in
effect before the plan terminated.
PPA 2006 greatly simplified the method for determining PBGC's
guarantee of owner-participants'
[[Page 49800]]
benefits by eliminating the 30-year phase-in and making the five-year
phase-in of benefit increases applicable to owner-participants and non-
owner-participants alike. PPA 2006 then applies a separate, additional
limitation--the ``owner-participant limitation''--to an owner-
participant's otherwise guaranteed benefit. This owner-participant
limitation is similar to the five-year phase-in limitation on benefit
increases, as it is calculated based on a plan's age; however, it is
based on the length of time the original plan was in existence,
regardless of whether the plan increased benefits, and the phase-in
period is 10 years. The owner-participant limitation bears little
resemblance to the 30-year phase-in limitation, and the calculations
are much simpler. This final rule incorporates these changes to PBGC's
benefit payment regulation.
Phase-in Limitation
Before this rulemaking, Sec. Sec. 4022.25 and 4022.26 of PBGC's
benefit payment regulation provided the procedures for calculating the
five-year phase-in of benefit increases for non-owner-participants and
the 30-year phase-in of all benefits for owner-participants,
respectively. Section 4022.25 provided, generally, that benefit
increases (as defined in Sec. 4022.2) of non-owner-participants were
phased in by the greater of $20 or 20 percent of the increase for each
full year the increase was effective. Section 4022.26 provided the much
more complicated procedures for calculating the guaranteed benefits of
owner-participants--based on a 30-year phase-in--before PPA 2006;
different procedures applied depending on whether or not there had been
any benefit increases. As explained above, PPA 2006 eliminated the 30-
year phase-in limitation and made the five-year phase-in of benefit
increases applicable to all participants, including owner-participants.
Accordingly, PBGC is amending the benefit payment regulation by
removing the distinction between owner-participants and all other
participants under Sec. 4022.25, and PBGC is amending Sec. 4022.26 by
replacing the 30-year phase-in limitation with a new ``owner-
participant limitation,'' as discussed next.
Owner-Participant Limitation
PPA 2006 provided a new formula for determining PBGC's guarantee of
an owner-participant's benefit. Under this owner-participant
limitation, an owner-participant's guaranteed benefit is limited to the
product of the owner-participant's otherwise-guaranteed benefit and a
fraction, not to exceed one. The numerator of this fraction equals the
number of years that the plan was in existence (from the later of its
effective date or adoption date), and the denominator equals 10.
Compared to the 30-year phase-in under the old statute, which had
been implemented at Sec. 4022.26 of the benefit payment regulation,
the owner-participant limitation is much simpler to calculate and
generally provides a much more generous guarantee. Before PPA 2006,
PBGC needed to make individualized determinations about the length of
time each substantial owner was an active participant in a plan over a
30-year period. Additionally, a substantial owner needed to have been
an active participant for at least 30 years in order for his or her
benefit to be fully guaranteed (to the extent that other limitations on
PBGC's guarantee did not apply). Under PPA 2006, PBGC needs only to
calculate a single fraction, based on the age of the plan, and then to
multiply the benefit of each majority owner under the plan by that same
fraction. In addition, all majority owners' benefits are now fully
guaranteed (to the extent that other limitations on PBGC's guarantee do
not apply) once a plan has been in existence for 10 years.
Consistent with these statutory changes, PBGC is amending the
benefit payment regulation by replacing references to ``substantial
owner'' with ``majority owner'' and by revising Sec. 4022.26 to
provide the formula for calculating the owner-participant limitation,
in the place of the 30-year phase-in limitation. In addition to the
revisions described in the proposed rule, PBGC is adding language to
Sec. 4022.26 to clarify that in a PPA 2006 bankruptcy termination, the
length of time that the plan was in existence is measured from the
later of the effective date or the adoption date of the plan to the
bankruptcy filing date.\2\
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\2\ See ``Related Regulatory Amendments'' section below.
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Asset Allocation in Priority Category 4 Before and After PPA 2006
ERISA section 4044 prescribes the method for allocating a
terminated single-employer plan's assets to its benefit liabilities.
Under section 4044, plan assets must be allocated to six priority
categories (PC1 through PC6, with PC1 being the highest) into which all
plan benefits are sorted. Benefits affected by the owner-participant
limitation are assigned to priority category 4 (PC4). PPA 2006 changed
the method for allocating assets within PC4 when there are benefits
affected by the owner-participant limitation.
PC4 includes three kinds of benefits: (1) Guaranteed benefits,
other than employee contributions and benefits that could have been in
pay status three or more years before a plan's termination (or before
the plan sponsor's bankruptcy filing date, for plans subject to ERISA
section 4022(g)); (2) benefits that would be guaranteed but for the
aggregate limit of ERISA section 4022B; and (3) benefits that would be
guaranteed but for the owner-participant limitation (based on
substantial ownership before PPA 2006 and majority ownership after PPA
2006).\3\ If a plan's assets are sufficient to cover all PC4 benefits
or are insufficient to cover any PC4 benefits, the PPA 2006 changes for
owner-participants have no bearing on the allocation; however, if
assets are sufficient to cover some, but not all, PC4 benefits (i.e.,
if assets are ``exhausted in PC4''), the allocation rules differ before
and after PPA 2006.
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\3\ Strictly speaking, this description applies to benefits in
``net PC4,'' given that ``PC4'' (or, more accurately, ``gross PC4'')
technically includes the three kinds of benefits listed, as well as
all benefits in higher priority categories. Without using the terms
``gross'' or ``net,'' PBGC's asset allocation regulation makes this
distinction at paragraph (c) of Sec. 4044.10 (``[t]he value of each
participant's basic-type benefit or benefits in a priority category
shall be reduced by the value of the participant's benefit of the
same type that is assigned to a higher priority category'').
Nevertheless, PBGC recognizes that colloquial descriptions of
benefits in a given priority category usually refer to the net
benefits in that category, and this preamble follows that common
usage, unless otherwise indicated.
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Before PPA 2006, if assets were exhausted in PC4, then assets were
to be allocated pro rata among all three kinds of PC4 benefits. Under
PPA 2006, if assets are exhausted in PC4, then assets must first be
allocated to the first two PC4 groups; only if assets cover all
benefits in these two groups will any assets be allocated to benefits
that would be guaranteed but for the majority-owner limitation. In
accordance with these statutory changes, PBGC is amending the asset
allocation regulation by prioritizing other PC4 benefits to those
affected by the majority-owner limitation.
Calculation of Estimated Benefits
In a distress termination, Sec. 4022.61 of the benefit payment
regulation--implementing section 4041(c)(3)(D) of ERISA--requires plan
administrators to limit benefit payments to estimates of the amounts
that PBGC is expected to pay, in order to minimize potential
overpayments and exhaustion of plan assets before PBGC becomes trustee
and is able to assume benefit payments. As trustee, PBGC pays each
participant the
[[Page 49801]]
greater of his or her guaranteed benefit or asset-funded benefit.\4\
Accordingly, Sec. 4022.61 requires plan administrators to limit
benefits in pay status to the greater of each participant's estimated
guaranteed benefit or estimated asset-funded benefit, beginning on the
proposed termination date.\5\
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\4\ A participant's asset-funded benefit is essentially the
portion of the participant's plan benefit that plan assets are
sufficient to fund when assets are allocated according to the
distribution rules of ERISA section 4044.
\5\ PBGC's benefit payment regulation does not currently include
the term ``estimated asset-funded benefit''; the term ``estimated
title IV benefit'' is used instead. As discussed later in this
preamble, PBGC is replacing the term ``estimated title IV benefit''
with ``estimated asset-funded benefit.'' Consistent with the
terminology change, this preamble refers to estimated asset-funded
benefits and not to estimated title IV benefits, except where
otherwise indicated.
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Estimated Guaranteed Benefits
A participant's estimated guaranteed benefit is determined as of
the proposed termination date and is the portion of the participant's
plan benefit (viz., the benefit to which the participant would be
entitled under the terms of the plan if the plan did not terminate)
that does not exceed the estimated legal limits of PBGC's guarantee.
Section 4022.62 of the benefit payment regulation prescribes the method
for estimating PBGC's guarantee limitations and for calculating a
participant's estimated guaranteed benefit.
As discussed above, the changes under PPA 2006 greatly affected the
calculation of guaranteed benefits of owner-participants. Therefore, in
order to ensure that administrators of plans with owner-participants
understand how to accurately estimate these benefits in distress
terminations, PBGC must update the calculation procedures.
Section 4022.62 provides two methods for calculating estimated
guaranteed benefits. One method--given at paragraph (c)--applies to
non-owner-participants, while the other--given at paragraph (d)--
applies to owner-participants. Both methods' calculations use the
amount calculated under paragraph (b) as a starting point. Paragraph
(b) estimates a participant's benefit that would be guaranteed before
application of any phase-in limitation. Paragraph (c) estimates the
effect of the five-year phase-in limitation on the paragraph (b)
amount. Paragraph (d) estimates the effect of the 30-year phase-in
limitation applicable to owner-participants before PPA 2006 on the
paragraph (b) amount.
In order to reflect the changes to PBGC's guarantee limitations for
owner-participants under PPA 2006, PBGC is revising paragraph (d) in
its entirety. As revised, paragraph (d) no longer estimates the effect
of the 30-year phase-in limitation on the paragraph (b) amount; rather,
paragraph (d) estimates the effect of the owner-participant limitation
(using the \n\/10 ratio that PPA 2006 introduced) on the
paragraph (c) amount. The revised paragraph (d) uses the paragraph (c)
amount instead of the paragraph (b) amount because the five-year phase-
in limitation is now applicable to all participants (including majority
owners).
Estimated Asset-Funded Benefits
A participant's estimated asset-funded benefit is the portion of
the participant's plan benefit that plan assets are expected to be
sufficient to fund through PC4, based on estimated plan assets and
benefits in each priority category. Section 4022.63 of the benefit
payment regulation prescribes two methods for calculating estimated
asset-funded benefits; one applies to non-owner-participants and the
other applies to owner-participants. Essentially, Sec. 4022.63
provides that a non-owner-participant's estimated asset-funded benefit
equals his or her estimated PC3 benefit and that an owner-participant's
estimated asset-funded benefit equals the greater of his or her
estimated PC3 benefit or estimated PC4 benefit. The PPA 2006 changes
for owner-participants have no bearing on estimated PC3 benefits;
however, the PPA 2006 change to asset allocation had the potential to
affect the calculation of estimated PC4 benefits, which are payable
only to owner-participants.
An owner-participant's estimated PC4 benefit equals the product of
what would be his or her estimated guaranteed benefit if the
participant were not an owner-participant and the ``PC4 funding
ratio.'' The PC4 funding ratio is calculated one of two ways, depending
on whether a plan has any benefits in PC3 (viz., whether a plan has
benefits that were or could have been in pay status three years before
the proposed termination date). If a plan has no PC3 benefits, the PC4
funding ratio essentially equals the estimated amount of plan assets
divided by the estimated amount of vested benefits under the plan.\6\
If a plan has PC3 benefits, the PC4 funding ratio essentially equals
the estimated amount of plan assets minus the present value of all
benefits in pay status, all divided by the estimated amount of vested
benefits not in pay status.\7\
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\6\ The PC4 funding ratio excludes assets and benefits that are
attributable to employee contributions. See 29 CFR 4022.63(d)(2).
\7\ See note 5.
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By calculating and then using a plan's PC4 funding ratio, an
administrator is able to estimate the amount of assets available to
fund all benefits in PC4. This ratio does not distinguish between
owner-participants' benefits and all other benefits in PC4, as this
distinction was not necessary before PPA 2006, when assets were to be
allocated equally among the three kinds of PC4 benefits. As a result,
while the PC4 funding ratio is a useful tool for estimating assets
available to fund all benefits in PC4 (including those of substantial
owners before PPA 2006), it does not account for the requirement under
PPA 2006 to fund the benefits of majority owners only if assets remain
after funding all other benefits in PC4.
Under PPA 2006, continued use of the PC4 funding ratio is more
likely to result in an inflated estimate of assets available to fund a
majority owner's benefit. While this potential overestimation increases
the likelihood that a majority owner's estimated benefit will exceed
his or her actual benefit entitlement, it has no bearing on--in
particular, it does not reduce--the estimated benefits of other
participants. This is because the PC4 ratio is used only when
calculating the estimated asset-funded benefit of an owner-participant.
As stated above, the estimated asset-funded benefits of non-owner-
participants equal the participants' estimated PC3 benefits. Because
PC3 benefits receive higher allocation priority than PC4 benefits, the
estimated asset-funded benefit of any non-owner-participant will not be
affected by the allocation of assets in PC4.
Even without any potential harm to other participants, the concern
remains for potentially overpaying majority owners who receive
estimated benefits. Weighed against this concern is consideration of
the potential burden on plan administrators that more robust estimation
procedures would impose. Modifying the PC4 funding ratio to account for
the funding prioritization of other PC4 benefits ahead of those of
majority owners would require additional calculations that would
undermine the requirement of administrators to ``estimate'' asset-
funded benefits, as opposed to performing more precise calculations
outright. Moreover, far fewer participants are likely to be majority
owners, compared to the number likely to have been substantial owners
before PPA 2006. This is because majority
[[Page 49802]]
owners must have an ownership interest of at least 50 percent and
because the majority-owner limitation does not apply to any plan that
existed for at least 10 years before terminating.
Having weighed the concerns and chiefly recognizing the limited
number of cases where a plan will have one or more majority owners as
well as assets sufficient to fund some, but not all, benefits in PC4,
PBGC is leaving its estimated asset-funded benefit provisions at Sec.
4022.63 substantively unchanged, with the sole exception of revising
Example 2 under paragraph (e). Example 2 illustrates how to calculate
the estimated asset-funded benefit of an owner-participant and
describes the related calculation of the owner-participant's estimated
guaranteed benefit under Sec. 4022.62. The revisions to Example 2
reflect the changes to Sec. 4022.62 discussed above.
Related Regulatory Amendments
PBGC is making conforming amendments to its regulations on
Terminology and Reportable Events and Certain Other Notification
Requirements.
The final rule retains the long-standing definition of ``majority
owner'' in Sec. 4041.2 of PBGC's regulation on Termination of Single-
Employer Plans for the limited purposes of that part. The changes in
PPA 2006, including adding a definition of ``majority owner'' to
section 4022(b)(5)(A) of ERISA, were aimed at other purposes. PBGC is
retaining its definition of majority owner in Sec. 4041.2 so that the
individuals who are permitted to elect an alternative treatment of
their benefits are not changed.\8\
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\8\ Section 4041.21(b)(2) of PBGC's regulation on Termination of
Single-Employer Plans provides that a majority owner may forgo a
portion of his or her benefit to the extent needed to allow an
underfunded plan to terminate in a standard termination.
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PBGC is correcting paragraph (e) of Sec. 4022.62, which currently
provides that in a PPA 2006 bankruptcy termination, ``bankruptcy filing
date'' is substituted for ``proposed termination date'' in paragraph
(c) of Sec. 4022.62, by making the substitution applicable to both
paragraph (c) (applicable to non-owner-participants) and paragraph (d)
(applicable to owner-participants) of Sec. 4022.62. It is clear from
the preamble to the final rule that added paragraph (e) that PBGC
intended, consistent with PPA 2006, to have the applicable ``bankruptcy
filing date'' substituted when calculating the estimated benefits of
all participants, regardless of ownership status.\9\
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\9\ See 76 FR 34590, 34596 (June 14, 2011) (``[t]he final
regulation provides that for any PPA 2006 bankruptcy termination,
those estimated benefits [calculated under 29 CFR 4022.62-4022.63]
are based on the rules described above relating to the bankruptcy
filing date'').
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In addition, PBGC is adding language to the revised Sec. 4022.26
to clarify that in a PPA 2006 bankruptcy termination, the length of
time that the plan was in existence is measured from the later of the
effective date or the adoption date of the plan to the bankruptcy
filing date. This new language mirrors the application of ERISA section
4022(g) elsewhere in the benefit payment regulation. Section 4022(g)
provides that in a PPA 2006 bankruptcy termination, PBGC is to treat
the bankruptcy filing date as the plan's termination date when applying
ERISA section 4022.
ERISA section 4022(b)(5)(B) specifies that the numerator of the
\n\/10 fraction used in calculating an owner-participant's
guaranteed benefit is the number of years from the later of the
effective or adoption date of the plan to the plan's termination date.
Therefore, as Section 4022(g) requires, this final rule provides that
``bankruptcy filing date'' is substituted for ``termination date'' in
the formula for calculating a majority owner's guaranteed benefit in a
PPA 2006 bankruptcy termination.
By contrast, ERISA section 4022(b)(5)(A) provides that the 60-month
time period for determining majority-owner status ends on ``the date
the determination is being made.'' The statute is unclear as to whether
the Section 4022(g) substitution rule should apply if PBGC generally
treats the date of determination as the plan's termination date. This
rulemaking clarifies that the time period for determining whether a
participant is a majority owner--viz., the time period prescribed in
ERISA section 4022(b)(5)(A) as ``the 60-month period ending on the date
the determination is being made''--ends on the plan's termination date,
even in a PPA 2006 bankruptcy termination. This is consistent with
PBGC's valuation of a plan's assets and liabilities as of the plan's
termination date, and PBGC's determination of the liable controlled
group as of that date. It is also consistent with PBGC's interpretation
of Section 4022(g) in its final rule on PPA 2006 bankruptcy
terminations.\10\ Section 4022(g) serves to limit PBGC's guarantee of
benefits to a participant's accrued plan benefit at the bankruptcy
filing date. Substituting the bankruptcy filing date for the
termination date in applying the owner-participant guarantee limitation
furthers this purpose; substituting the bankruptcy filing date for the
termination date in determining majority-owner status does not.
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\10\ See 76 FR 34590, 34595-96 (June 14, 2011) (noting that an
overly broad interpretation of section 4022(g) or the similar
section 4044(e) of ERISA would present some anomalies).
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Amendments Unrelated to PPA 2006
PBGC is making minor, non-substantive changes to the examples not
involving owner-participants at Sec. Sec. 4022.62 and 4022.63 of the
benefit payment regulation, in order to improve readability.
Additionally, PBGC is correcting two clerical errors that were made
when PBGC previously amended the regulation; the first duplicated
paragraph (f) of Sec. 4022.62, and the second duplicated the
designation of paragraph (c)(1) of Sec. 4022.63. Lastly, PBGC is
replacing the term ``estimated title IV benefit'' with ``estimated
asset-funded benefit'' at Sec. 4022.63.
The use of the term ``estimated title IV benefit'' at Sec. 4022.63
of the benefit payment regulation is confusing, in light of the
definition of ``title IV benefit'' at Sec. 4001.2 of the terminology
regulation. Section 4001.2 provides, generally, that a participant's
title IV benefit equals the greater of his or her guaranteed benefit or
asset-funded benefit. Given this definition, one might assume that the
estimated title IV benefit equals the greater of the estimate of a
participant's guaranteed benefit or the estimate of a participant's
asset-funded benefit; however, Sec. 4022.63 provides that the
estimated title IV benefit is essentially an estimate of a
participant's asset-funded benefit (through PC4) only. Accordingly,
PBGC is renaming the ``estimated title IV benefit'' referred to in
Sec. 4022.63 as the ``estimated asset-funded benefit.'' This term only
appears in Sec. 4022.63; the change does not require any conforming
amendments elsewhere in PBGC's regulations.
Compliance With Rulemaking Guidelines
Executive Orders 12866, 13563, and 13771
PBGC has determined that this rulemaking is not a ``significant
regulatory action'' under Executive Order 12866 and, accordingly, that
the provisions of Executive Order 13771 do not apply. Because this
rulemaking is not a significant regulatory action, OMB has not reviewed
this final rule. Executive Orders 12866 and 13563 direct agencies to
assess all costs and benefits of available regulatory alternatives and,
if regulation is necessary, to select regulatory
[[Page 49803]]
approaches that maximize net benefits (including potential economic,
environmental, public health and safety effects, distributive impacts,
and equity). Executive Order 13563 emphasizes the importance of
quantifying both costs and benefits, of reducing costs, of harmonizing
rules, and of promoting flexibility. If a regulatory action is
significant under Executive Order 12866, Executive Order 13771 imposes
additional requirements on the agency.
Although this is not a significant regulatory action under
Executive Order 12866, PBGC has examined the economic implications of
this final rule. PBGC has concluded that because the key aspects of
this final rule merely incorporate statutory changes that have been
effective since 2006, neither the public nor PBGC will assume any
additional costs due to this regulatory action. Moreover, because PBGC
has been following the statute as amended in 2006, and not the
inconsistent provisions in its regulations, this rule improves the
transparency of PBGC operations to the public and provides helpful
guidance to plan administrators. By leaving unchanged the estimated
asset-funded benefit calculation procedures under Sec. 4022.63, PBGC
enables plan administrators to continue to rely confidently on these
relatively simple procedures, rather than creating more complex
procedures that could have been contemplated in light of the statutory
changes. Finally, the revisions to the examples at Sec. Sec. 4022.62
and 4022.63 will assist plan administrators in complying with the law.
Accordingly, this final rule will result in a net benefit to the
public.
Regulatory Flexibility Act
Under the Regulatory Flexibility Act (5 U.S.C. 601 et seq.),
federal agencies must comply with additional requirements when engaging
in certain rulemaking activities that are subject to notice and public
comment. An agency must satisfy these requirements if a final rule is
likely to have a significant economic impact on a substantial number of
small entities. Unless an agency determines that a final rule is not
likely to have a significant economic impact on a substantial number of
small entities, section 603 of the Regulatory Flexibility Act requires
that the agency present an initial regulatory flexibility analysis at
the time of the publication of the final rule. The agency's analysis
must describe the impact of the rule on small entities, and the agency
must seek public comment on the impact. Small entities include small
businesses, organizations, and governmental jurisdictions.
For purposes of the Regulatory Flexibility Act, with respect to
this final rule, PBGC considers a small entity to be a plan with fewer
than 100 participants. This criterion is consistent with certain
requirements in title I of ERISA \11\ and the Internal Revenue
Code,\12\ as well as the definition of a small entity that the
Department of Labor (DOL) has used for purposes of the Regulatory
Flexibility Act.\13\ While some large employers maintain both small and
large plans, most small plans are maintained by small employers. In
light of this, PBGC believes that assessing the impact of the final
rule on small plans is an appropriate substitute for evaluating the
effect on small entities. Notably, the definition of small entity
considered appropriate for this purpose differs from the definition of
small business--based on size standards--at 13 CFR 121.201, which the
Small Business Administration promulgated pursuant to the Small
Business Act. Therefore, PBGC requested public comment on the
appropriateness of the size standard used in evaluating the impact of
the proposed rule on small entities. PBGC did not receive any such
comments.
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\11\ See, e.g., ERISA section 104(a)(2), which permits the
Secretary of Labor to prescribe simplified annual reports for
pension plans that cover fewer than 100 participants.
\12\ See, e.g., Code section 430(g)(2)(B), which permits single-
employer plans with 100 or fewer participants to use valuation dates
other than the first day of the plan year.
\13\ See, e.g., DOL's final rule on Prohibited Transaction
Exemption Procedures, 76 FR 66637, 66644 (Oct. 27, 2011).
---------------------------------------------------------------------------
PBGC certifies under section 605(b) of the Regulatory Flexibility
Act that this final rule will not have a significant economic impact on
a substantial number of small entities. This certification is based on
the fact that this final rule is not likely to have a significant
economic impact on any entity, regardless of size. This is because
nearly all aspects of this final rule will merely incorporate statutory
changes that have been effective for more than a decade, while, as
discussed in the context of Executive Order 12866 above, the remaining
few will provide clarity on the accurate estimation of benefits
required by law, at no additional cost to the public.
List of Subjects
29 CFR Part 4001
Business and industry, Employee benefit plans, Pension insurance.
29 CFR Parts 4022 and 4043
Employee benefit plans, Pension insurance, Reporting and
recordkeeping requirements.
29 CFR Part 4044
Employee benefit plans, Pension insurance.
In consideration of the foregoing, PBGC is amending 29 CFR parts
4001, 4022, 4043, and 4044 as follows:
PART 4001--TERMINOLOGY
0
1. The authority citation for part 4001 continues to read as follows:
Authority: 29 U.S.C. 1301, 1302(b)(3).
0
2. In Sec. 4001.2:
0
a. Add in alphabetical order a definition for ``Majority owner''; and
0
b. Remove the definition of ``Substantial owner''.
The addition reads as follows:
Sec. 4001.2 Definitions.
* * * * *
Majority owner means, with respect to a contributing sponsor of a
single-employer plan, an individual who owns, directly or indirectly
(taking into account the constructive ownership rules of section 414(b)
and (c) of the Code)--
(1) The entire interest in an unincorporated trade or business;
(2) 50 percent or more of the capital interest or the profits
interest in a partnership; or
(3) 50 percent or more of either the voting stock of a corporation
or the value of all of the stock of a corporation.
* * * * *
PART 4022--BENEFITS PAYABLE IN TERMINATED SINGLE-EMPLOYER PLANS
0
3. The authority citation for part 4022 continues to read as follows:
Authority: 29 U.S.C. 1302, 1322, 1322b, 1341(c)(3)(D), and
1344.
Sec. 4022.2 [Amended]
0
4. In Sec. 4022.2 introductory text:
0
a. Remove the words ``guaranteed benefit'' and add in their place the
words ``guaranteed benefit, majority owner''; and
0
b. Remove the words ``substantial owner,''.
0
5. Amend Sec. 4022.24 by revising paragraphs (a) and (b) to read as
follows:
Sec. 4022.24 Benefit increases.
(a) Scope. This section applies to all benefit increases, as
defined in Sec. 4022.2, that have been in effect for less than five
years preceding the termination date.
[[Page 49804]]
(b) General rule. Benefit increases described in paragraph (a) of
this section are guaranteeable only to the extent provided in Sec.
4022.25.
* * * * *
Sec. 4022.25 [Amended]
0
6. In Sec. 4022.25:
0
a. Amend the section heading by removing the words ``for participants
other than substantial owners''; and
0
b. Amend paragraph (a) by removing the words ``with respect to
participants other than substantial owners''.
0
7. Revise Sec. 4022.26 to read as follows:
Sec. 4022.26 Benefit guarantee for participants who are majority
owners.
(a) Scope. This section applies to the guarantee of all benefits
described in subpart A of this part (subject to the limitations in
Sec. 4022.21) with respect to participants who are majority owners at
the termination date or who were majority owners at any time within the
five-year period preceding that date.
(b) Formula. Benefits provided by a plan are guaranteed to the
extent provided in the following formula: The amount of the
participant's benefit that PBGC would otherwise guarantee under section
4022 of ERISA and this part if the participant were not a majority
owner, multiplied by a fraction not to exceed one, the numerator of
which is the number of full years from the later of the effective date
or the adoption date of the plan to the termination date, and the
denominator of which is 10.
(c) PPA 2006 bankruptcy termination. In a PPA 2006 bankruptcy
termination, ``bankruptcy filing date'' is substituted for
``termination date'' in paragraph (b) of this section.
0
8. In Sec. 4022.62:
0
a. Amend paragraphs (a) and (c) introductory text by removing the four
instances of the word ``substantial'' and adding in their place the
word ``majority'';
0
b. Revise paragraph (d);
0
c. Amend paragraph (e) by removing the words ``paragraph (c)'' and
adding in their place the words ``paragraphs (c) and (d)'';
0
d. Remove the first paragraph (f); and
0
e. Revise remaining paragraph (f).
The revisions read as follows:
Sec. 4022.62 Estimated guaranteed benefit.
* * * * *
(d) Estimated guaranteed benefit payable with respect to a majority
owner. For benefits payable with respect to each participant who is a
majority owner, the estimated guaranteed benefit is the benefit to
which he or she would be entitled under paragraph (c) of this section
but for his or her status as a majority owner, multiplied by a
fraction, not to exceed one, the numerator of which is the number of
full years from the later of the effective date or the adoption date of
the plan to the proposed termination date and the denominator of which
is 10.
* * * * *
(f) Examples. This section is illustrated by the following
examples. (For an example addressing issues specific to a PPA 2006
bankruptcy termination, see Sec. 4022.25(f).)
(1) Example 1--(i) Facts. A participant who is not a majority owner
retired on December 31, 2011, at age 60 and began receiving a benefit
of $600 per month. On January 1, 2009, the plan had been amended to
allow participants to retire with unreduced benefits at age 60.
Previously, a participant who retired before age 65 was subject to a
reduction of \1/15\ for each year by which his or her actual retirement
age preceded age 65. On January 1, 2012, the plan's benefit formula was
amended to increase benefits for participants who retired before
January 1, 2012. As a result, the participant's benefit was increased
to $750 per month. There have been no other pertinent amendments. The
proposed termination date is December 15, 2012.
(ii) Estimated guaranteed benefit. (A) No reduction is required
under Sec. 4022.61(b) or (c) because the participant's benefit does
not exceed either the participant's accrued benefit at normal
retirement age or the maximum guaranteeable benefit. (Post-retirement
benefit increases are not considered as increasing accrued benefits
payable at normal retirement age.)
(B) The amendment as of January 1, 2009, resulted in a ``new
benefit'' because the reduction in the age at which the participant
could receive unreduced benefits increased the participant's benefit
entitlement at actual retirement age by \5\/15, which is
more than the 20-percent increase threshold under paragraph (c)(2)(i)
of this section. The amendment of January 1, 2012, which increased the
participant's benefit to $750 per month, is a ``benefit improvement''
because it is an increase in the amount of benefit for persons in pay
status. (No percentage test applies in determining whether an increase
in a pay status benefit is a benefit improvement.)
(C) The multiplier for computing the amount of the estimated
guaranteed benefit is taken from the third row of Table I of this
section (because the last new benefit had been in effect for three full
years as of the proposed termination date) and column (c) (because
there was a benefit improvement within the one-year period preceding
the proposed termination date). This multiplier is 0.55. Therefore, the
amount of the participant's estimated guaranteed benefit is $412.50
(0.55 x $750) per month.
(2) Example 2--(i) Facts. A participant who is not a majority owner
terminated employment on December 31, 2010. On January 1, 2012, she
reached age 65 and began receiving a benefit of $250 per month. She had
completed three years of service at her termination of employment and
was fully vested in her accrued benefit. The plan's vesting schedule
had been amended on July 1, 2008. Under the schedule in effect before
the amendment, a participant with five years of service was 100 percent
vested. There have been no other pertinent amendments. The proposed
termination date is December 31, 2012.
(ii) Estimated guaranteed benefit. No reduction is required under
Sec. 4022.61(b) or (c) because the participant's benefit does not
exceed either her accrued benefit at normal retirement age or the
maximum guaranteeable benefit. The plan's change of vesting schedule
created a new benefit for the participant. Because the amendment was in
effect for four full years before the proposed termination date, the
second row of Table I of this section is used to determine the
applicable multiplier for estimating the amount of the participant's
guaranteed benefit. Because the participant did not receive any benefit
improvement during the 12-month period ending on the proposed
termination date, column (b) of the table is used. Therefore, the
multiplier is 0.80, and the amount of the participant's estimated
guaranteed benefit is $200 (0.80 x $250) per month.
(3) Example 3--(i) Facts. A participant who is a majority owner
retired before the proposed termination date of April 30, 2012. The
plan was in effect for seven full years as of the proposed termination
date. On the proposed termination date he was entitled to receive a
benefit of $2,000 per month. No reduction of this benefit is required
under Sec. 4022.61(b) or (c).
(ii) Estimated guaranteed benefit. Paragraph (d) of this section is
used to compute the amount of the estimated guaranteed benefit of
majority owners. Consequently, the amount of this participant's
estimated guaranteed benefit is $1,400 ($2,000 x \7/10\) per month.
(4) Example 4--(i) Facts. A participant who is a majority owner
retired before the proposed termination
[[Page 49805]]
date of April 30, 2012. The plan was in effect for 12 full years as of
the proposed termination date. On the proposed termination date he was
entitled to receive a benefit of $2,000 per month. No reduction of this
benefit is required under Sec. 4022.61(b) or (c).
(ii) Estimated guaranteed benefit. Paragraph (d) of this section is
used to compute the amount of the estimated guaranteed benefit of
majority owners. Since the plan was in effect for more than 10 years as
of the proposed termination date, the amount of this participant's
estimated guaranteed benefit is $2,000 per month.
0
9. In Sec. 4022.63:
0
a. Revise the section heading;
0
b. Amend paragraph (a) by removing the two instances of the word
``substantial'' and adding in their place the word ``majority'' and by
removing the three instances of the words ``estimated title IV
benefit'' and adding in their place the words ``estimated asset-funded
benefit'';
0
c. Amend paragraph (b) introductory text by removing the two instances
of the word ``substantial'' and adding in their place the word
``majority'' and by removing the words ``estimated title IV benefits''
and adding in their place the words ``estimated asset-funded
benefits'';
0
d. Amend paragraph (c)(1) by removing the two instances of the word
``substantial'' and adding in their place the word ``majority'' and by
removing the two instances of the words ``estimated title IV benefit''
and adding in the place of each the words ``estimated asset-funded
benefit'';
0
e. Amend paragraph (d) introductory text by removing the two instances
of the word ``substantial'' and adding in their place the word
``majority'' and by removing the two instances of the words ``estimated
title IV benefit'' and adding in the place of each the words
``estimated asset-funded benefit'';
0
f. Amend paragraph (d)(1) and by removing the two instances of the word
``substantial'' and adding in their place the word ``majority''; and
0
g. Revise paragraph (e).
The revisions read as follows:
Sec. 4022.63 Estimated asset-funded benefit.
* * * * *
(e) Examples. This section is illustrated by the following
examples:
(1) Example 1--(i) Facts. (A) A participant who is not a majority
owner was eligible to retire 3.5 years before the proposed termination
date. The participant retired two years before the proposed termination
date with 20 years of service. Her final five years' average salary was
$45,000, and she was entitled to an unreduced early retirement benefit
of $1,500 per month payable as a single life annuity. This retirement
benefit does not exceed the limitation in Sec. 4022.61(b) or (c).
(B) On the participant's benefit commencement date, the plan
provided for a normal retirement benefit of 2 percent of the final five
years' salary times the number of years of service. Five years before
the proposed termination date, the percentage was 1.5 percent. The
amendments improving benefits were put into effect 3.5 years before the
proposed termination date. There were no other amendments during the
five-year period.
(C) The participant's estimated guaranteed benefit computed under
Sec. 4022.62(c) is $1,500 per month times 0.90 (the factor from column
(b) of Table I in Sec. 4022.62(c)(2)), or $1,350 per month. It is
assumed that the plan meets the conditions set forth in paragraph (b)
of this section, and the plan administrator is therefore required to
estimate the asset-funded benefit.
(ii) Estimated asset-funded benefit. (A) For a participant who is
not a majority owner, the amount of the estimated asset-funded benefit
is the estimated priority category 3 benefit computed under paragraph
(c) of this section. This amount is computed by multiplying the
participant's benefit under the plan as of the later of the proposed
termination date or the benefit commencement date by the ratio of the
normal retirement benefit under the provisions of the plan in effect
five years before the proposed termination date and the normal
retirement benefit under the plan provisions in effect on the proposed
termination date.
(B) Thus, the numerator of the ratio is the benefit that would be
payable to the participant under the normal retirement provisions of
the plan five years before the proposed termination date, based on her
age, service, and compensation on her benefit commencement date. The
denominator of the ratio is the benefit that would be payable to the
participant under the normal retirement provisions of the plan in
effect on the proposed termination date, based on her age, service, and
compensation as of the earlier of her benefit commencement date or the
proposed termination date. Since the only different factor in the
numerator and denominator is the salary percentage, the amount of the
estimated asset-funded benefit is $1,125 (0.015/0.020 x $1,500) per
month. This amount is less than the estimated guaranteed benefit of
$1,350 per month. Therefore, in accordance with Sec. 4022.61(d), the
benefit payable to the participant is $1,350 per month.
(iii) PPA 2006 bankruptcy termination. In a PPA 2006 bankruptcy
termination, the methodology would be the same, but ``bankruptcy filing
date'' would be substituted for ``proposed termination date'' each
place that ``proposed termination date'' appears in the example, and
the numbers would change accordingly.
(2) Example 2--(i) Facts. (A) A participant who is a majority owner
retired on the proposed termination date of October 31, 2012. The
original plan had been in effect for seven full years as of the
proposed termination date. Under the provisions of the plan in effect
five years before the proposed termination date, the participant is
entitled to a single life annuity of $500 per month. The plan was
amended to increase benefits three full years before the proposed
termination date. Under these plan amendments, the participant is
entitled to a single life annuity of $1,000 per month.
(B) The participant's estimated guaranteed benefit computed under
Sec. 4022.62(d) is $455 per month ($1,000 x 0.65 x \7/10\).
(C) It is assumed that all of the conditions in paragraph (b) of
this section have been met. Plan assets equal $2 million. The present
value of all benefits in pay status is $1.5 million based on applicable
PBGC interest rates. There are no employee contributions and the
present value of all vested benefits that are not in pay status is
$0.75 million based on applicable PBGC interest rates.
(ii) Estimated asset-funded benefit. (A) Paragraph (d) of this
section provides that the amount of the estimated asset-funded benefit
payable with respect to a participant who is a majority owner is the
higher of the estimated priority category 3 benefit computed under
paragraph (c) of this section or the estimated priority category 4
benefit computed under paragraph (d) of this section.
(B) Under paragraph (c) of this section, the participant's
estimated priority category 3 benefit is $500 ($1,000 x $500/$1,000)
per month.
(C) Under paragraph (d) of this section, the participant's
estimated priority category 4 benefit is the estimated guaranteed
benefit computed under Sec. 4022.62(c) (i.e., as if the participant
were not a majority owner) multiplied by the priority category 4
funding ratio. Since the plan has priority category 3 benefits, the
ratio is determined under paragraph (d)(2)(i) of this section. The
numerator of the ratio is plan assets minus the present value of
benefits in pay status. The denominator of the ratio is the present
[[Page 49806]]
value of all vested benefits that are not in pay status. The
participant's estimated guaranteed benefit under Sec. 4022.62(c) is
$1,000 per month times 0.65 (the factor from column (b) of Table I in
Sec. 4022.62(c)(2)), or $650 per month. Multiplying $650 by the
category 4 funding ratio of \2/3\ (($2 million-$1.5 million)/$0.75
million) produces an estimated category 4 benefit of $433.33 per month.
(D) Because the estimated category 4 benefit so computed is less
than the estimated category 3 benefit so computed, the estimated
category 3 benefit is the estimated asset-funded benefit. Because the
estimated category 3 benefit so computed is greater than the estimated
guaranteed benefit of $455 per month, in accordance with Sec.
4022.61(d), the benefit payable to the participant is the estimated
priority category 3 benefit of $500 per month.
PART 4043--REPORTABLE EVENTS AND CERTAIN OTHER NOTIFICATION
REQUIREMENTS
0
10. The authority citation for part 4043 continues to read as follows:
Authority: 29 U.S.C. 1083(k), 1302(b)(3), 1343.
0
11. In Sec. 4043.2:
0
a. Amend the introductory text by removing the words ``single-employer
plan, and substantial owner'' and by adding in their place the words
``and single-employer plan''.
0
b. Add in alphabetical order a definition for ``Substantial owner''.
The addition reads as follows:
Sec. 4043.2 Definitions.
* * * * *
Substantial owner means a substantial owner as defined in section
4021(d) of ERISA.
* * * * *
PART 4044--ALLOCATION OF ASSETS IN SINGLE-EMPLOYER PLANS
0
12. The authority citation for part 4044 continues to read as follows:
Authority: 29 U.S.C. 1301(a), 1302(b)(3), 1341, 1344, 1362.
Sec. 4044.2 [Amended]
0
13. In Sec. 4044.2(a):
0
a. Remove the words ``irrevocable commitment'' and add in their place
the words ``irrevocable commitment, majority owner''; and
0
b. Remove the words ``substantial owner,''.
0
14. Amend Sec. 4044.10 by revising paragraph (e) to read as follows:
Sec. 4044.10 Manner of allocation.
* * * * *
(e) Allocating assets within priority categories. Except for
priority categories 4 and 5, if the plan assets available for
allocation to any priority category are insufficient to pay for all
benefits in that priority category, those assets shall be distributed
among the participants according to the ratio that the value of each
participant's benefit or benefits in that priority category bears to
the total value of all benefits in that priority category. If the plan
assets available for allocation to priority category 4 are insufficient
to pay for all benefits in that category, the assets shall be
allocated, first, to the value of all participants' nonforfeitable
benefits that would be assigned to priority category 4 other than those
impacted by the majority-owner limitation under Sec. 4022.26 of this
chapter. If assets available for allocation to priority category 4 are
sufficient to fully satisfy the value of those other benefits, the
remaining assets shall then be allocated to the value of the benefits
that would be guaranteed but for the majority-owner limitation. These
remaining assets shall be distributed among the majority owners
according to the ratio that the value of each majority owner's benefit
that would be guaranteed but for the majority-owner limitation bears to
the total value of all benefits that would be guaranteed but for the
majority-owner limitation. If the plan assets available for allocation
to priority category 5 are insufficient to pay for all benefits in that
category, the assets shall be allocated, first, to the value of each
participant's nonforfeitable benefits that would be assigned to
priority category 5 under Sec. 4044.15 after reduction for the value
of benefits assigned to higher priority categories, based only on the
provisions of the plan in effect at the beginning of the five-year
period immediately preceding the termination date. If assets available
for allocation to priority category 5 are sufficient to fully satisfy
the value of those benefits, assets shall then be allocated to the
value of the benefit increase under the oldest amendment during the
five-year period immediately preceding the termination date, reduced by
the value of benefits assigned to higher priority categories (including
higher subcategories in priority category 5). This allocation procedure
shall be repeated for each succeeding plan amendment within the five-
year period until all plan assets available for allocation have been
exhausted. If an amendment decreased benefits, amounts previously
allocated with respect to each participant in excess of the value of
the reduced benefit shall be reduced accordingly. In the subcategory in
which assets are exhausted, the assets shall be distributed among the
participants according to the ratio that the value of each
participant's benefit or benefits in that subcategory bears to the
total value of all benefits in that subcategory.
* * * * *
Sec. 4044.14 [Amended]
0
15. In Sec. 4044.14, remove the word ``phase-in'' and add the word
``guarantee'' in its place and remove the word ``substantial'' and add
the word ``majority'' in its place.
Issued in Washington, DC.
William Reeder,
Director, Pension Benefit Guaranty Corporation.
[FR Doc. 2018-21551 Filed 10-2-18; 8:45 am]
BILLING CODE 7709-02-P