Pension Protection Act of 2006: Summary of the PBGC Guarantee and Related Provisions

Pension Protection Act of 2006: Summary of
the PBGC Guarantee and Related Provisions
Jennifer Staman and Erika Lunder
Legislative Attorneys
American Law Division
Summary
Title IV of the Pension Protection Act of 2006 (P.L. 109-280; August 17, 2006)
contains several provisions concerning premiums and benefit guarantees under the
Pension Benefit Guaranty Corporation’s (PBGC’s) insurance program. The Title also
contains special funding rules for commercial airlines and airline catering companies.
Other provisions address issues such as rules for substantial owners, the appointment
of the PBGC director, and missing participants. This report summarizes the Title’s
provisions. For additional information on the Pension Protection Act, see CRS Report
RL33703, Summary of the Pension Protection Act of 2006, by Patrick Purcell.
The Pension Benefit Guaranty Corporation (PBGC), established in 1974 by the
Employee Retirement Income Security Act of 1974 (ERISA) (P.L. 93-406) provides
insurance protection for participants and beneficiaries of private sector defined benefit
plans. The PBGC guarantees certain benefits, up to a maximum limit, should a plan
terminate with a lack of sufficient assets to pay promised benefits. Currently, the PBGC
pays monthly retirement benefits to about 683,000 retirees in 3,595 terminated pension
plans.¹ This report summarizes Title IV of the Pension Protection Act of 2006 (the Act),
which contains provisions affecting the PBGC.
Variable Rate and Termination Premiums. Defined benefit plans are required
to pay annual premiums to the PBGC. The PBGC is solely funded by these premiums and
investment returns on the assets held in its trust fund. It receives no appropriations from
Congress.
Single-employer plans must pay a flat-rate premium. In 2007, this premium is
$31.00 per participant. Future flat-rate premiums will be adjusted each year for inflation,

¹ See, “How PBGC Operates,” available at [http://www.pbgc.gov/about/operation.html].

based on changes in the national average wage index.² Underfunded single-employer
plans (i.e., plans that contain “unfunded vested benefits,” in which the amount of the
plan’s benefit liabilities exceeds the plan’s assets) must also pay a variable rate premium.
This variable rate premium rate is $9.00 per $1,000 of unfunded vested benefits.
Section 401 of the Act sets out a new way in which to determine the amount of
unfunded vested benefits for purposes of calculating the variable rate premium.³ Under
this rule, which only applies to single-employer plans, the determination of “unfunded
vested benefits” conforms to the new plan funding rules set out in other sections of the
Act. This section defines “unfunded vested benefits” to mean the excess (if any) of (1)
the funding target of the plan as determined under ERISA § 303(d), by only taking into
account vested benefits and using an interest rate specified in section 401, over (2) the
market value of plan assets for the plan year that are held by the plan on the valuation
date.⁴ Section 401(a) is effective beginning in 2008.
Section 401(b) makes permanent a termination premium created by the Deficit
Reduction Act of 2005. This rule imposes a fee of $1,250 per participant on bankrupt
employers that terminate their pension plans and turn their pensions over to the Pension
Benefit Guaranty Corporation. This fee applies for three years after plan termination.
The Pension Protection Act of 2006 also changes the variable rate premium for small
employers (i.e., employers with 25 or fewer employees). Under section 405 of the Act,
variable rate premiums for small employers cannot exceed $5 multiplied by the number
of participants in the plan at the close of the preceding plan year.⁵ The section also
contains a method by which it can be determined whether an employer has 25 or fewer
employees. Section 405 is effective for plan years beginning on January 1, 2007.
Special Funding Rules for Plans Maintained by Commercial Airlines.
Single-employer defined benefit plans are typically subject to minimum funding
requirements set out in ERISA and the Internal Revenue Code. Under section 402 of the
Act, a defined benefit plan maintained by a commercial airline or an airline catering
service is exempt from these funding rules.⁶ Plan sponsors may elect to amortize
unfunded liabilities over a period of 10 years (as opposed to 7 years under the normal
funding requirements) or may instead follow special rules that permit these plan sponsors
to amortize unfunded liabilities over 17 years.
Section 402 also contains several requirements for plan sponsors who select the 17-
year amortization period, referred to by the Act as an “alternative funding schedule.”
Under section 402(b), plan sponsors who elect an alternative funding schedule must
comply with certain benefit accrual requirements, which include freezing some of the
benefits offered under the plan and eliminating others. Additional requirements include

² See ERISA § 4006(a)(3)(F); 29 U.S.C. §1306(a)(3)(F).
³ ERISA § 4006(a); 29 U.S.C.§ 1306(a).
⁴ ERISA § 4006(a)(3)(E)(iii); 29 U.S.C.§ 1306(a)(3)(E)(iii).
⁵ Id.
⁶ 26 U.S.C. § 430 nt.

election procedures for the alternative funding schedule,⁷ minimum contribution
requirements, and participant notice. Special rules for plan spinoffs and plan terminations
may also apply. The provisions of section 402 are effective for plan years ending after the
date of the enactment of the Act (August 17, 2006).
Limitation on Reduction in PBGC Guarantee for Shutdown and Other
Benefits. A defined benefit plan may include benefits that are payable based only on the
occurrence of a unpredictable event, such as a facility shutdown or a workforce reduction.
The PBGC guarantees these “unpredictable contingent event benefits” subject to certain
limitations. Under section 403 of the Act, PBGC guarantees for contingent event benefits
are to be calculated using the same method as benefits associated with plan amendments
that are made within five years of the date of termination.⁸ The formula to be used is the
greater of (a) 20% of the guaranteed benefit or (b) $20 per month, multiplied by the
number of years since the date the unpredictable contingent event occurred (not to exceed⁹
five years). Section 403 applies to unpredictable contingent event benefits that become
payable as a result of an event that occurred after July 26, 2005.
Guaranteed Benefits and Employer Bankruptcy. When an employer
terminates an underfunded plan, the PBGC will guarantee a certain amount of benefits as
of the date of termination. Under section 404 of the Act, the amount of PBGC guaranteed
benefits is frozen when an employer enters bankruptcy or a similar proceeding.¹⁰ If a plan
terminates during the employer’s bankruptcy, the amount of guaranteed benefits will
depend on the benefits available on the date the employer entered bankruptcy.¹¹ Section
404 applies with respect to bankruptcy proceedings or other similar proceedings initiated
on or after September 16, 2006.
Interest on Premium Overpayments to the PBGC. As discussed above,
defined benefit plans sponsored by employers in the private sector are required to make
premium payments to the PBGC. If any premium payment is considered late, the PBGC
is to impose interest charges on the unpaid amount. Under section 406 of the Act, the
PBGC is now authorized to pay interest on the amount of any premium overpayment¹²
refunds. This authority can be regulated by the PBGC. Also, interest paid by the PBGC
on overpayments must be calculated in the same rate and manner as the interest calculated
on premium underpayments. Section 406 applies to interest accruing for periods
beginning on or after the date of enactment of the Act (August 17, 2006).

⁷ See Internal Revenue Service Announcement 2006-70 (Sept. 14, 2006) for additional guidance
on the election of the alternative funding schedule.
⁸ ERISA § 4022(b); 29 U.S.C. § 1322(b).
⁹ ERISA § 4022(b)(7); 29 U.S.C. § 1322(b)(7).
¹⁰ J^OI^NTC^OM^M.^ONT^AXATI^O^N,109^THC^ONG,2^DS^ESS.T^ECHNI^CALE^XP^LANATI^{ON OF}H.R.4,T^HE
‘P^ENSI^ONP^ROTECTI^ONA^{CT OF}2006,’^ASP^{ASSED I}^N^THEH^{OUSE ON}J^ULY28,2006^{AND AS}
C^ONSI^D^{ERED BY}^THES^{ENATE ON}A^UGUST3,2006, JCX-38-06, 79 (Comm. Print 2006). See also
ERISA § 4022(g); 29 U.S.C. § 1322(g).
¹¹ Id.
¹² ERISA § 4007(b)(2); 29 U.S.C. § 1307(b)(2).

Substantial Owner Benefits. Special rules apply to plan participants who are
“substantial owners” — individuals who own an entire interest in an unincorporated trade
or business, more than 10% of the capital or profits interest in a partnership, or more than
10% of the voting stock or 100% of all the stock of a corporation. Section 407 changes
two of these rules. First, under one of these rules as it existed prior to the Act, the
maximum benefit guaranteed by the PBGC for substantial owners was phased in over a
30-year period. Specifically, the maximum benefit was determined by dividing the
number of years the owner participated in the plan by 30. This number or one, whichever
was lesser, was then multiplied by the monthly guaranteed benefit determined without the
special rule. If the plan had been amended to increase benefits, each amendment was
treated as a new plan and subject to the calculation.
Section 407 of the Act amends this rule in two ways.¹³ First, it makes the rule apply
to majority owners rather than substantial owners. A majority owner is an individual who
owns the entire interest in an unincorporated trade or business, at least 50% of the capital
or profits interest in a partnership, or at least 50% of the voting stock or 100% of all the
stock of a corporation. A substantial owner who is not a majority owner is no longer
subject to the special rule regarding maximum guaranteed benefits. Second, the section
changes the formula for determining the maximum guaranteed benefit. Under the new
formula, the majority owner’s maximum guaranteed benefit is phased in over a 10-year
period. Specifically, it is determined by dividing the number of years between the plan’s
effective or adoption date (whichever is later) and the plan’s termination date by 10. This
number or one, whichever is lesser, is multiplied by the amount of benefits that would
have been guaranteed had the participant not been a majority owner.
Another special pre-Act rule that applied to substantial owners related to the
allocation of plan assets at termination. ERISA creates six categories of benefits to
prioritize how plan assets will be distributed when the plan terminates. The fourth
category includes all guaranteed benefits not allocated to higher categories and, prior to
the Act, the benefits of substantial owners that exceeded the maximum guaranteed benefit
as determined under the special rule discussed above. Under section 407 of the Act, this
rule applies to majority owners rather than substantial owners.¹⁴ The Act also provides
that, for purposes of the fourth category, assets are first allocated to the guaranteed
benefits and then to the majority owners’ benefits.¹⁵
Section 407 generally applies to distress and involuntary terminations for which
notices of intent to terminate or determination are provided after December 31, 2005.
Benefits Attributable to Recoveries from Employers. The sponsor of a
terminating plan and the members of its controlled group are liable for amounts including
unfunded benefit liabilities and unpaid employer contributions. The PBGC is to attempt
to recover these amounts and pay a portion of them to plan participants as additional
benefits (i.e., benefits in addition to the amounts guaranteed by the PBGC). The PBGC
would keep the rest to reduce its losses.

¹³ ERISA § 4022(b)(5); 29 U.S.C. § 1322(b)(5).
¹⁴ ERISA § 4044(a)(4); 29 U.S.C. § 1344(a)(4).
¹⁵ ERISA § 4044(b); 29 U.S.C. § 1344(b).

With respect to unfunded benefit liabilities, the plan participants’ share is the amount
of the non-guaranteed and non-allocated benefit liabilities multiplied by a recovery ratio.
For large plans whose outstanding benefit liabilities exceed $20 million, the recovery ratio
is the amount recovered from the plan over the plan’s unfunded benefit liabilities on the
termination date. For all other plans, the recovery ratio is not based on the amount
actually recovered from the plan, but rather on the PBGC’s recoveries from all plan
terminations that occurred during a specified period. Specifically, the recovery ratio is
the amount recovered from plans terminating during the specified period over the total
amount of those plan’s unfunded benefit liabilities on their termination dates. Under the
law prior to the Act, the specified period was the five-federal fiscal year period that ended
with the year immediately prior to the year in which the appropriate termination notice
was given for the plan for which the recovery ratio was being determined. Under section
408 of the Act, the specified period is changed to the five-federal fiscal year period ending
with the third year preceding the year in which that notice is given.¹⁶
With respect to unpaid employer contributions, the amount that went to the plan
participants prior to the Act was based on the amount recovered from that plan. Section
408 of the Act creates a new formula that is similar to that used for unfunded benefit
liabilities. Under the section, the plan participants’ share is determined by multiplying
the amount of the liability by a recovery ratio.¹⁷ For large plans, the recovery ratio is the
actual recovery from the plan over the total liability. For other plans, the recovery ratio
is the amount recovered for these unpaid contributions from plans that terminated during
the specified period over those plans’ total such liability at their termination dates. The
specified period is the five-federal fiscal year period that ended with the third year
immediately prior to the year in which the appropriate termination notice was given for
the plan for which the recovery ratio is being determined. The determinations made by
the PBGC for these rules are binding unless shown by clear and convincing evidence to
be unreasonable.
Section 408 applies to terminations for which notices of intent to terminate or of
determination are provided on or after the date which is 30 days after August 17, 2006.
Cessation or Change in Membership of a Controlled Group. A plan
administrator may terminate its single-employer plan if the plan’s assets exceed its benefit
liabilities. The PBGC may terminate a single-employer plan if the PBGC’s possible
long-run loss may be expected to unreasonably increase if the plan continues. In both
situations, the plan’s benefit liabilities are determined by calculating the present value of
the benefits owed under the plan using the PBGC’s interest and mortality assumptions.
Section 409 of the Act provides that, in certain situations, the interest rate used to
calculate the plan’s benefit liabilities can not be less than the interest rate used to¹⁸
determine whether the plan is fully funded. The rule applies if there is a transaction (or
series of transactions) that results in a person no longer being a member of a controlled
group and that person immediately before the transaction maintained a fully funded

¹⁶ ERISA § 4022(c)(3)(B)(ii); 29 U.S.C. § 1322(c)(3)(B)(ii).
¹⁷ ERISA § 4044(e); 29 U.S.C. § 1344(e) [it appears this should be changed to ERISA § 4044(f)
and 29 U.S.C. § 1344(f)].
¹⁸ ERISA § 4041(b)(5); 29 U.S.C. § 1341(b)(5).

single-employer defined benefit plan. The employer maintaining the plan before or after
the transaction must meet requirements pertaining to creditworthiness, and the employer
maintaining the plan after the transaction must continue to employ at least 20% of its U.S.
workforce. The special interest rate rule does not apply if the plan is terminated after the
close of the two-year period beginning on the date of the initial transaction. The section
applies to any transaction (or series of transactions) occurring on or after August 17, 2006.
Missing Participants. In general, when a single-employer plan terminates under
a standard termination, the plan administrator must purchase annuity contracts from a
private insurer to provide the benefits owed to the plan participants and then distribute
them to the participants. In the event that the plan administrator is unable to locate a plan
participant after a diligent search, he or she may either purchase an annuity from an
insurer or transfer the missing participant’s benefits to the PBGC. Section 410 of the Act
requires the PBGC to prescribe similar regulations for terminating multiemployer plans.¹⁹
It also allows certain single-employer plans that were not previously covered by the
missing person rule to transfer missing participants’ benefits to the PBGC according to²⁰
regulations promulgated by the PBGC. The section applies to distributions made after
the regulations are finalized.
PBGC Director. Section 411 creates a new director position to administer the
PBGC.²¹ The PBGC director is to be appointed by the President, with the advice and
consent of the Senate.²² The Senate Committee on Finance and Committee on Health,
Education, Labor, and Pensions have jurisdiction over the nomination. If one committee
votes to order the nomination reported, the other must act within 30 calendar days or the
nomination is automatically discharged. The section also establishes the director’s
compensation at Level III of the Executive Schedule.²³ Finally, the section provides
transition rules regarding the interim director.
PBGC Annual Report. The PBGC must issue an annual financial report to the
President and Congress that includes information on its finances and operations and an
actuarial five-year projection of its revolving funds. Section 412 of the Act requires
additional information be included in the annual report, specifically (1) information on
the Pension Insurance Modeling System microsimulation model, (2) a comparison of the
investment return earned by the PBGC for the year with an investment return based on the
average for the S&P 500 and the Lehman Aggregate Bond Index (or similar index), and
(3) a statement on what the PBGC’s deficit or surplus would have been for the year had
it earned the latter rate of return.²⁴

¹⁹ ERISA § 4050(c); 29 U.S.C. § 1350(c).
²⁰ ERISA § 4050(d); 29 U.S.C. § 1350(d).
²¹ ERISA § 4002(a); 29 U.S.C. § 1302(a).
²² P.L. 109-280, § 411(c).
²³ 5 U.S.C. § 5314.
²⁴ ERISA § 4008(b); 29 U.S.C. § 1308(b).