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
Is plan projected to have sufficient
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
Is plan projected to have sufficient
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 non411(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 “afterdiscovered 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 (Cont.)
• 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
Distribution (Cont.)
• 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. Box
Proper mailing address: Pension Benefit Guaranty Corporation
Standard Termination Compliance Division
Processing and Technical Assistance Branch
1200 K Street, NW
Washington, DC 20005-4026
• Filing is faxed or emailed
Form 500 and 501 require original signatures
Standard Termination Filing
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
Standard Termination Filing
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
Professional Service Employer
• Owned or controlled by
– Professional individuals or
– Executors or administrators of
professional individuals
Professional Service Employer
• Principal business is the
performance of professional
services
Professional Individuals include
•
•
•
•
•
•
Physicians
Dentists
Chiropractors
Osteopaths
Optometrists
Other licensed practitioners of the
healing arts
Professional Individuals include
•
•
•
•
Attorneys
Public Accountants
Public Engineers
Architects
Professional Individuals include
•
•
•
•
•
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
Example – 25 Active Rule
• If the number of active participants
in the plan increases to 28 in a
subsequent year, the plan is
covered starting with that year
Example – 25 Active Rule
• 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,
Criteria for Professional
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.
Criteria for Professional
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
PBGC Opinion Letter 98-1
• Not a professional service
employer
– Owner does not have an advanced
degree
– Not required by state law to hold a
specific license
PBGC Opinion Letter 98-1
– 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.
PBGC Opinion Letter 80-1
• 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.
PBGC Opinion Letter 80-1
• Not a professional service
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.
PBGC Opinion Letter 80-13
• Advertising and Public Relations
services.
PBGC Opinion Letter 80-13
• Not a professional service
employer
– Not on list
– While it requires a great deal of skill
– Does not require a prolonged course
of specialized intellectual instruction.
PBGC Opinion Letter 88-9
• 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.
PBGC Opinion Letter 96-1
• Economic consulting firm
• The first ruling was … No, since
there are no State licensing
requirements for economists.
PBGC Opinion Letter 96-1
• 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.
PBGC Opinion Letter 96-1
• 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
– standard@pbgc.gov
• Fax
– 202-326-4001
Questions