PBGC issues final regs on unpredictable contingent event benefit phase-in rules

The Pension Benefit Guaranty Corporation (PBGC) has issued final regulations providing guidance on the phase-in period for the guarantee of “unpredictable contingent event benefits.” The regulations implement provisions of the Pension Protection Act of 2006 (PPA; P.L. 109-280). The regulations are effective June 5, 2014.

Unpredictable contingent event benefits (UCEBs)

Under ERISA Sec. 4022(b)(7), the PBGC’s guarantee of pension benefits under a new plan or of a new benefit or benefit increase under an amendment to an existing plan is phased in based on the number of full years the benefit increase is in the plan. The time period that a benefit increase has been provided under a plan is measured from the later of the adoption date of the provision creating the benefit increase or the effective date of the benefit increase. Generally, 20% of a benefit increase is guaranteed after one year, 40% after two years, etc., with full phase-in of the guarantee after five years.

Unpredictable contingent event benefits (UCEBs) are benefits or benefit increases that become payable solely by reason of the occurrence of an unpredictable contingent event (UCE), such as a plant shutdown. UCEBs typically provide a full pension, without any reduction for age, starting well before an unreduced pension would otherwise be payable.

PPA treatment of UCEBs

The PPA made two significant changes to the rules for UCEBs.

First, the PPA added ERISA §206(g) and parallel Code Sec. 436(b) that restrict payment of UCEBs with respect to a UCE if the plan is less than 60% funded for the plan year in which the UCE occurs (or would be less than 60% funded taking the UCEB into account).

Second, the PPA added ERISA Sec. 4022(b)(8), which changes the start of the phase-in period for plant shutdowns and other UCEBs.

Under ERISA Sec. 4022(b)(8), phase-in of the PBGC guarantee does not start until the UCE actually occurs. The provision applies to UCEs that occur after July 26, 2005. Thus, for purposes of the phase-in limitation, the date a UCE occurs is treated as the adoption date of the plan provision that provides for the related UCEB. This statutory change provides the PBGC insurance program a greater measure of protection than prior law from losses due to unfunded UCEBs–most notably, benefits that become payable by reason of a plant shutdown or similar event such as a permanent layoff.

The IRS provided guidance on UCEBs in final regulations issued in 2009. Proposed PBGC regulations were issued in March 2011.

Final regs reflect PPA and 2009 regs

The final regulations are nearly the same as the proposed regulations. The final regulations incorporate the definition of UCEB under ERISA Sec. 206(g)(1)(C) and the 2009 IRS final regulations. The final rules also provide that the guarantee of a UCEB would be phased in from the latest of the date the benefit provision is adopted, the date the benefit is effective, or the date the UCE that makes the benefit payable occurs. The regulations include eight examples that show how the UCEB phase-in rules would apply in certain specified fact situations.

Under the final regulations, the PBGC determines the date a UCE occurs based on the plan provisions and other facts and circumstances, including the nature and level of activity at a facility that is closing and the permanence of the event. Statements or determinations by the employer, the plan administrator, a union, an arbitrator under a collective bargaining agreement, or a court about the date of the event may be relevant but are not controlling. Where a plan provides that a UCEB is payable only upon the occurrence of more than one UCE, the regulations provide that the guarantee is phased in from the latest date when all such UCEs have occurred.

Source: 79 FR 25667, May 6, 2014.

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