pbgc standard terminations and coverage 12.pbgc.pdf•develop a “schedule” for termination...

PBGC Standard Terminations

and Coverage

Bela Palli, Pension Benefit Guaranty Corporation (PBGC)

Rhonda G Migdail, Keightley & Ashner LLP

Kurt F Piper, Piper Pension & Profit Sharing

To Be or Not to Be:

Planning for a Standard

Termination

Why is termination

necessary/appropriate?

• Business considerations

• Financial considerations

• Other options

– Plan freeze

Is plan projected to have sufficient

assets to pay all benefit liabilities?• Consider sufficiency commitment from employer

– PBGC regulations allow an insufficiently funded plan to proceed with a standard termination if the plan sponsor and/or controlled group member makes a commitment to contribute the additional sums necessary to make the plan sufficient for all benefit liabilities

– Commitment must be in writing and signed by the plan sponsor and/or controlled group member

– If the plan sponsor and/or the controlled group member is in bankruptcy, the commitment must either be approved by the bankruptcy court or unconditionally guaranteed by a person not in bankruptcy

– Contribution subject to IRS section 404 deduction rules


assets to pay all benefit liabilities?

• Consider majority owner “alternative treatment” (consent to be at the “end of the line”)– A majority owner can agree to forego receipt

of all or a portion of his or her benefit to extent needed to satisfy benefit liabilities for non-majority owners

– A majority owner is a person who owns 50% or more of a company

Majority Owner Consent

• To be valid:

– The agreement must be in writing

– The agreement must not be inconsistent with a QDRO

– If the benefit is greater than $3,500 (or $5,000 as applicable), the spouse, if any, must consent in writing

• NOTE: IRS does not recognize waivers for purposes of minimum funding requirements


assets to pay all benefit liabilities?

• Consider “freeze and wait” approach

– Stop future benefit accruals

– “Freezing” a defined benefit pension

plan may not eliminate the need for

contributions if they are required by

minimum funding standards

– IRC § 436 considerations

Planning is key!

• Develop a “schedule” for termination– Earliest/latest NOIT dates (and latest potential

204(h) notice date)

– Proposed termination date

– Notice of Plan Benefits and election

– IRS determination letter request (Form 5310) and related notice

– Form 500 Filing with PBGC

– Annuity bids

– Earliest/latest distribution dates

Planning is key!• Assign tasks (with deadlines) among actuary, attorney, plan

administrator, annuity placement advisor, etc.– Determine who has “settlor” authority for decision, then document

(e.g., board resolution)

– Determine who has authority to act as plan administrator to implement termination

• Determine any potential obstacles– Any collective bargaining agreements bar to termination

– Evaluate availability and reliability of data and time needed to determine all “benefit liabilities” and information needed for NOPB

• Develop participant communication strategy– Check/update addresses for all participants/beneficiaries

– Identify any potential “missing” or “lost” participants• Plan sponsor must undertake “diligent search” to take advantage of PBGC

missing participant program

Planning is key!• Determine which costs may/should be paid from plan

assets– “Settlor” vs. “plan” expenses

• Determine “end game” investment strategy– Potential use of derisking strategies

• Are there any illiquid assets and how will they be addressed?

• Research options for selection of annuity provider

• Consider whether there may be and how to deal with potential reversion?– Qualified replacement plan?

– Pro rata increases in accrued benefit?

Plan documentation issues• What plan amendments are needed?

– Retain qualified status—Critical!

– Add termination lump sum provision (with immediate annuity)?

– Eliminate ancillary benefits or other non- 411(d)(6) protected benefits

– Freeze benefits (if not already frozen) as a “fail safe” measure in case termination not completed

– Address formula for allocating any residual assets among participants?

– For cash balance plans, fix variable indices (interest crediting and conversion to annuity)

– Be aware of PBGC’s rules on “post-termination amendments” including residual asset allocation formula and other non-411(d)(6) protected benefits

Standard Termination

Procedures: Doing it Right

Notice of Intent to Terminate

• Count 60–90 day period carefully from proposed termination date back to NOIT issuance date– Exclude proposed termination date (“day

zero”)

– Include NOIT issuance date

– If 60/90-day date falls within weekend/holiday period, may issue NOIT on day before/after weekend/holiday period

– Remember to test for earliest and latest NOIT!

Notice of Intent to Terminate (Cont.)

• Need to anticipate who will be an “affected party” as of future “proposed termination date”– Err on side of over-inclusion (e.g., new

participants)

– But if you miss someone, PBGC’s “after-discovered affected parties” rules can save you

• Be careful regarding NOIT “freeze” information– PBGC less likely to nullify for defect if benefits

were frozen irrespective of plan termination

– Make clear if freeze is independent of termination

Notice of Intent to Terminate (Cont.)

• No required format, but best to use PBGC’s “model” language in Form 500 package– Possible foreign language requirement

• Additional information permitted– Must not be “misleading”

– Helps to include cover letter to set expectations (e.g., reason for termination, process/timing, replacement plan, etc.)

• Once first NOIT issued, plan cannot pay lump sums or purchase irrevocable commitments until PBGC 60-day review period ends (subject to “ordinary course” exception)

Notice of Plan Benefits

• Must issue NOPBs before filing Form 500 with PBGC

• Provides participant-specific data and allows participant opportunity to make corrections– Dates of birth / hire / termination, credited service,

compensation history (if applicable)

• Consider including election material with NOPBs– May depend on expected timing of distributions and

expected receipt of IRS determination letter

– Note PPA 180-day notice/consent period provides potentially more time for required notice period

Notice of Plan Benefits (Cont.)

• Determination of category (pay status, valid election or de minimis benefits, others not in pay status) may be unclear– Example: de minimis hinges on interest rate

not yet known

– May want to provide NOPB information for multiple categories

• If NOPB error discovered later, correct by election notice deadline to preserve possible “correction of errors” relief

IRS Determination Letter Request

• Not required, but usually advisable– May not be feasible if goal is to distribute shortly after

PBGC review period

– But no disqualification “protection” without determination letter and greater likelihood of IRS audit

– Note: PBGC will not treat determination letter as determinative of whether all benefit liabilities have been properly paid for Title I and Title IV purposes

• Must provide Notice to Interested Parties at least 10 days, but not more than 24 days, prior to the date Form 5310 is filed– Might coordinate with NOIT or NOPB

IRS Determination Letter Request (Cont.)

• File determination letter request before filing Form 500 with PBGC (allows later distribution deadline)

• Determination letter timing leads to potential loss of control over distribution timing (risk of new stability period and annuity purchase price volatility)

• May need substantial updating given IRS’s determination letter “cycle” system (suddenly all amendments needed!)

• Remember that IRS and PBGC post-termination amendment rules differ!

IRS Determination Letter Request (Cont.)

• Data needed for Form 5310 and Form 6088– 25 participants including 5% owners and highest

paid (in descending order of current three-year average 415 compensation)

– Include years of participation and years of credited service

– Need to estimate the present value of benefits at the plan termination date

• Use lump sum value if provided for under plan terms

• Estimate annuity purchase assumptions for other distributions

Form 500 Filing

• Watch out for deadline

– No later than 180th day after proposed termination date

– No earlier than completion of NOPB issuance

• May need documentation of sufficiency measures to certify to projected sufficiency on the Schedule EA-S (Enrolled Actuary’s certification)

– “Sufficiency commitment”

– Majority owner “alternative treatment”

Form 500 Filing (Cont.)

• If more time is needed (e.g., to

complete NOPB issuance or to

address sufficiency):

– Move the proposed termination date

(subject to 90-day limit regarding earliest

NOIT)

– Request an extension

– Start over (“61-day expedited” process)

PBGC Review

• PBGC likely to respond to Form 500 filing within 2–3 weeks– Acknowledgment letter (good news!)

– Notice of incomplete filing (can still correct)

– Notice of noncompliance (bad news!)

• If no word from PBGC within month or so, call to make sure filing was received

• Termination distributions prohibited until 61 days after date PBGC received Form 500 filing

Notice of Annuity Information

• Often included with NOIT or NOPB, but required at least 45 days before distribution

• Must identify insurers from whom (or from among whom) you intend to purchase irrevocable commitments– OK to include list of insurers from whom you

reasonably expect to solicit bids

– But new 45-day notice is required if new insurer is to be used

Notice of Annuity Information (Cont.)

• Remember to give notice to all participants and beneficiaries except de minimis cashouts

– This includes participants expected to elect, or who have elected, consensual lump sum

– One purpose of notice is to help participants decide whether to elect lump sum

– Even a participant who has elected a lump sum can change election (subject to limitations)

Standard Termination

Distribution: Doing it Right

Distribution

• Must complete distribution by later of:– 180th day after end of PBGC review period for

Form 500, or

– 120th day after receipt of favorable determination letter (if valid request submitted by time Form 500 filed)

• May need extension (e.g., because of illiquid assets, benefit dispute, election or data issues)– File request at least 15 days before deadline

– PBGC will focus on length of delay and exercise of ordinary business care and prudence

Distribution (Cont.)

• Note deductibility issues regarding

contribution to “top up” for standard

termination distribution

– Can deduct in year of termination amount

necessary to be sufficient for all benefit

liabilities

– PPA ‘06 rules generally allow larger

deductions (so may be no need to wait

until year of termination)


• Distribution must meet ERISA/IRC requirements (e.g., QJSA notice and consent, consequence of failure to defer, special tax notice, etc.)

• Concerns regarding difficulty/cost to purchase irrevocable commitment for small benefits (e.g., $6K benefit)

• If participant neglects or refuses to return election forms (or cannot get spousal consent), must annuitize

• PPA “prohibited payment” restrictions do not apply to payments to carry out standard termination in accordance with applicable law


• Watch out for timing of lump sum distributions– Key issue: “annuity starting date” vis-à-vis stability

period (and resulting “lookback” month) changes

– PBGC regulations presume distribution date is ASD in “absence of evidence establishing” another ASD

– But presumption may be overcome by use of “immediate” ASD pursuant to Treas. Reg.§ 1.417(e)-1(b)(1)

– Note that delays in payment beyond reasonable administrative delay may result in new/later ASD

– Retroactive annuity starting dates: special concerns

Post-Distribution Certification• Form 501 due within 30 days after distribution is

completed

• PBGC provides penalty relief until 90 days after distribution deadline

• Mark that 90th day on your calendar as soon as you know distribution deadline!

• But may want to file Form 501 sooner, not later– Likelihood of audit essentially same whenever you file

PDC

– Earlier filing puts you in earlier audit pool, so that any audit takes place before memories/records harder to reconstruct

Provision of Annuity Contract

• Where participant will receive distribution through irrevocable commitment:

– Plan administrator or insurer must provide participant annuity contract or certificate within 30 days after it is available

– If contract/certificate unavailable by 90th day after distribution deadline, plan administrator must issue notice providing:

• Identifying information relating to insurer

• Statement re future receipt of contract or certificate

Standard Termination Filings

and Audits

Standard Termination Filing

Errors

• Distributing plan assets in satisfaction of plan liabilities– before filing Form 500 with PBGC

– within PBGC’s 60-day review period for the filing

– without filing the Form 500 with PBGC

• Filing is sent to the Premiums P.O. BoxProper mailing address: Pension Benefit Guaranty Corporation

Standard Termination Compliance DivisionProcessing and Technical Assistance Branch1200 K Street, NWWashington, DC 20005-4026

• Filing is faxed or emailedForm 500 and 501 require original signatures


Errors• Incorrect EIN and/or PN• Not reporting a different EIN or PN if one was

used in a previous Premium Filing with PBGC• Notice of Intent to Terminate issued less than

60 or more than 90 days prior to the proposed termination date

• Notices of Plan Benefits issued after filing the Standard Termination Notice with PBGC

• Standard Termination Notice not filed on or before the 180th day after the proposed termination date

• Filing a Standard Termination for a plan not covered by PBGC


Errors• Filing the Schedule MP and sending the MP funds

to the MP lockbox without conducting a diligent search for the missing participants

• Sending missing participant funds to the MP lockbox without the Payment Voucher

• Sending MP funds to the MP lockbox either way before or way after filing the PDC and the Schedule MP

• Not sending the Schedule MP and the Attachment A and/or Attachment B along with the PDC

• Sending a Schedule MP without the plan administrator or enrolled actuary’s signature

Standard Termination Audits• Audit a statistically significant number of plans terminating in

standard terminations to determine if the termination is in compliance with the plan document, ERISA, PBGC Regulations and the Code; if participants and beneficiaries have received their benefit liabilities; and, if missing participant rules have been followed. PBGC requires corrective action when needed. Currently audit all plans with more than 300 participants and a random sample of smaller plans

• Conduct compliance audits of plan terminations when there is an indication of a problem, e.g., a complaint from a participant or practitioner

• Audit all plans that distribute plan assets in satisfaction of plan liabilities before or without filing a standard termination notice with PBGC

• Focus of PBGC audits is whether or not participants got proper distributions

• In case of problems, PBGC asks plan administrator to correct errors

PBGC Audits (Cont.)

• Timing of plan selection

– PBGC selects from Form 501’s filed in the prior quarter

– To make cutoff, file Form 501 prior to end of quarter

– If Form 501 filed late, any audit will be late!

• Initial audit letter generally issued within 30 days after end of quarter

PBGC Audits (Cont.)

• Initial audit letter requests information in 30 days:– Summary participant data (name, address, and

distribution form, amount, and date)

– Reconciliation (from termination to distribution date) of participant counts and assets

– Plan and trust documents

– Annuity contracts

– Collective Bargaining Agreement(s)

– Last actuarial report

– IRS determination letter

– Other information, including EA worksheet

PBGC Audits (Cont.)

• PBGC sampling– PBGC selects sample participants from distribution

listing

– PBGC requests detailed information on sample participants

– PBGC sends letters to sample participants to confirm data used in benefit calculations and distribution amounts

– PBGC reviews sample (follows up with PA, EA, etc.)

• Initial determination by auditor

• Final decision by higher level at PBGC

• PBGC enforcement of audit findings (will file suit if necessary)

PBGC Audits (Cont.)

• Focus of audit is on benefit determination and distribution

• Most common error: lump sums too low– Wrong determination date for interest rate or for

current age

– Wrong retirement age assumption

– Failure to use plan assumptions that require greater than IRC§ 417(e) minimum lump sums

– Adoption of post-termination amendments regarding lump sum assumptions

– Remedy: employer pays balance due plus reasonable interest

Common Errors

• Accrued benefit calculation errors:– Not fully vesting terminated participants who had not incurred

a five-year break in service and had not received a distribution of the entire benefit as of the date of plan termination

– In the case of a plan amendment or a restated plan, not protecting benefits accrued under prior plan provisions until the later of the effective date or the adoption date of the amendment or restated plan

– Not paying top heavy benefit if greater than the accrued benefit

– Incorrectly taking into account service or compensation in the calculation of the benefit

• Lump sum valuation errors:– Use of incorrect interest rate, mortality table, or participant age– Not protecting plan assumptions if they provide a higher

benefit then 417(e) assumptions

Common Errors

– Use of assumptions for an incorrect stability period and look back month in calculation of 417(e) minimum lump sums

– Use of assumptions stated in post-termination amendments, if they provide a lower benefit

• Others: – Failure to obtain appropriate elections and spousal

consents– Alternative treatment (waiver)of benefits by non-majority

owners– Failure to include all benefits options in annuity contracts– Failure to send the total value of Missing P’s benefits to

PBGC– Deduction of processing fees from participants’ benefits– Rollover of missing participants’ benefits with a lump sum

value between $1,000 and $5,000 into an IRA

Nuances of PBGC Coverage

Exclusion from Coverage

• ERISA 4021(b)(13)

• Professional Service Employer

• No more than 25 active

participants at any time

Professional Service Employer

• Proprietorship

• Partnership

• Corporation

• Or other association


• Owned or controlled by

– Professional individuals or

– Executors or administrators of

professional individuals


• Principal business is the

performance of professional

services

Professional Individuals include

• Physicians

• Dentists

• Chiropractors

• Osteopaths

• Optometrists

• Other licensed practitioners of the healing arts


• Attorneys

• Public Accountants

• Public Engineers

• Architects


• Draftsmen

• Actuaries

• Psychologists

• Social or physical scientists

• Performing artists

Types of Participants

(1) active participants

(2) terminated vested participants

(3) retirees and beneficiaries receiving

payment.

(2013 Premium Payment Instructions)

Example – 25 Active Rule

• A law firm maintains a DBPP

• 20 active participants

• Never had more than 25 active

participants

• Thus the plan is not covered


• If the number of active participants

in the plan increases to 28 in a

subsequent year, the plan is

covered starting with that year


• If the number of active plan

participants then drops to 23, the

plan continues to be covered

because of the “at all times” rule

Other Professionals

• PBGC has been restrictive with its

acceptance of what other

professional individuals are.

• PBGC has set forth a list of

requirements in opinion letters for

who is a professional individual.

Criteria for Professional

Individual

• Provides services that require

knowledge of an advanced type in

a field of science or learning

customarily acquired by a

prolonged course of specialized

intellectual instruction and study,


Individual

• As distinguished from a general

academic education and from an

apprenticeship or from training in

the performance of routine mental,

manual or physical process.


Individual

• The rendering of professional

services generally requires the

consistent exercise of discretion

and judgment in its performance

and would usually be

predominantly intellectual in

character.

Performing Artist

• Since I have many entertainment

industry clients, this is a

fascinating inclusion.

Performing Artist

• PBGC has not interpreted this as

only for “Performance Artists”

such as someone who splashes

paint on themselves and rolls on a

canvas in front of 300 stoned

audience members in Greenwich

Village.

Performing Artist

• While I’ve had someone who was a performance artist as a client, usually they are:

– Actors

– Directors

– Musicians

– Dancers

Performing Artist

• Some who are not generally

performing artists

– Writers

– Producers

– Gofers

PBGC Opinion Letter 98-1

• Management consulting firm

• New business development and

strategic services for Fortune 500

• Owner with 15 years of

experience and a degree from

University of London


• Not a professional service

employer

– Owner does not have an advanced

degree

– Not required by state law to hold a

specific license


– Services do not require knowledge of an advanced type that is customarily acquired through a prolonged course of special intellectual instruction.

– IRC section 448(b) on qualified personal service corporations is irrelevant.


• Wholly owned by opticians licensed

to practice by State of Alaska.

• Engaged primarily in the business of

dispensing eyeglasses and contact

lenses and grinding lenses to

prescription and fitting them.



employer

– While it requires a great deal of skill

– Does not require a prolonged course

of specialized intellectual instruction

– Is not predominately intellectual in

character.


• Advertising and Public Relations

services.



employer

– Not on list

– While it requires a great deal of skill

– Does not require a prolonged course

of specialized intellectual instruction.


• Proposed to divide plan with 150 active participants into two plans

– One with 20 professionals

– The other with all non-professionals

• Since the one with professionals is a continuation of the current plan No.


• Economic consulting firm

• The first ruling was … No, since

there are no State licensing

requirements for economists.


• Request for reconsideration since three owners have Doctor of Philosophy Degrees in economics and the fourth is a CPA.

• All company’s work is economic analysis except for minor other work such as testimony.


• Yes, it is a professional service

employer

– Advanced degrees

– Extensive work and teaching

experience (apparently not Gym)

– Provide intellectual services

– Etc.

Investment Advisors

• I’ve never seen anyone obtain

approval for an investment

advisor.

• They almost always fail the

prolonged course of specialized

intellectual instruction test

Investment Advisors

• And they fail the performance of

services predominantly intellectual

in character test.

How to get a ruling on Coverage

• Mail– PBGC

Standard Termination Compliance Division

Suite 920

Processing and Technical Assistance Branch

1200 K Street, N.W.

Washington, DC 20005-4026

• Email– [email protected]

• Fax– 202-326-4001

mailto:[email protected]

Questions

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