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The PBGC has issued transitional guidance on the determination of unfunded vested benefits for purposes of its regulations on annual employer reporting (under ERISA §4010) and reportable events (under ERISA §4043). The guidance, issued in the form of a Technical Update, reflects changes made by the Pension Protection Act of 2006 (PPA; P.L. 109-280).
The PPA modified the way the variable-rate premium (VRP) is determined. The modifications, which apply to plan years beginning after 2007, affect the valuation of vested benefits and assets and the determination of unfunded vested benefits (UVBs). The PBGC expects to amend both the annual employer reporting regulation and the reportable events regulation to conform to and implement the premium-related changes under the PPA. The Technical Update is intended to provide guidance for the period before those amendments apply.
In general, the Technical Update provides that, for purposes of the annual employer reporting and reportable events regulations, a plan’s UVBs and vested benefits amounts (for the transition plan years covered by this Technical Update) are determined as of the relevant year-end “testing date” using the rules for determining the VRP under the law in effect before the PPA. The guidance generally applies (1) under the annual employer reporting regulation, to information years that begin before 2008 and (2) under the reportable events regulation, to event years that begin in 2008.
Under the “$50 million gateway test” in ERISA §4010 , a controlled group is generally required to report to the PBGC if the aggregate UVBs in plans maintained by the controlled group, as determined for VRP purposes, exceed $50 million, disregarding plans with no UVBs. UVBs are calculated on a plan-by-plan basis as of the last day of the plan year that ends within the information year (the testing date).
The PPA replaced the $50 million gateway test with a new test, effective for “years beginning after 2007.” The PBGC interprets the PPA change as applying to information years beginning after 2007. Therefore, for information years beginning before 2008, the $50 million gateway test will still be used.
For purposes of the $50 million gateway test for an information year that begins before 2008, UVBs for any plan year ending within the information year are to be determined as of the testing date using the premium rules in effect before 2008 (ignoring the PPA premium changes that take effect for plan years beginning after 2007).
ERISA §4043(a) and the regulations require plan administrators and contributing sponsors to notify the PBGC within 30 days after they know or have reason to know that a reportable event has occurred. The regulation provides certain waivers based on the level of UVBs or vested benefits amounts, calculated as of the testing date (generally the last day of the plan year preceding the event year) using the VRP interest rate for the event year. Certain non-public companies are required to notify the PBGC at least 30 days before the effective date of certain reportable events. Generally, a company is subject to advance reporting if a “threshold test” is met: (1) in the aggregate, the UVBs of plans maintained by the controlled group exceed $50 million (disregarding plans with no UVBs) and (2) the aggregate funded vested benefit percentage (the ratio of assets to vested benefits) for those plans that are underfunded is less than 90 percent. UVBs and vested benefits are calculated as of the testing date (generally the last day of the plan year preceding the event year) using the VRP interest rate for the event year.
Under the Technical Update, vested benefits amounts and UVBs for an event year beginning in 2008 are to be determined for the rules above as of the testing date using the premium rules in effect before 2008 (ignoring the PPA changes that take effect for plan years beginning after 2007).
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