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RegSensePension Benefits Guaranty Corporation (PBGC)Employee Retirement Income Security Act (ERISA)Associate Benefits & CompensationPension Protection Act (PPA)Retirement BenefitsAgency PublicationCompliance DocsRetirement BenefitsFocus AreaHuman Resources
Use of Corporate Bond Rate for Certain PBGC Purposes
August 30, 2006 (revised January 25, 2007)
This Technical Update explains how the provisions of the Pension Protection Act of 2006 ("PPA") relating to PBGC's required interest rate for determining variable-rate premiums (the "VRP interest rate"1) apply to certain PBGC requirements (in particular, reporting and disclosure requirements).
1 The VRP interest rate is also called the required interest rate.
The Pension Funding and Equity Act of 2004 ("PFEA") set PBGC's VRP interest rate for plan years beginning in 2004 or 2005 as the applicable percentage of the annual rate of interest determined by the Secretary of the Treasury on amounts invested conservatively in long?term investment grade corporate bonds (the "PFEA Corporate Rate") for the month preceding the month in which the plan year begins. PPA extended the applicability of the PFEA Corporate Rate (currently 85% of the Corporate Bond Rate) to plan years beginning in 2006 and 2007.2 Several of PBGC's requirements call for the use of the VRP interest rate for various purposes.
2 The VRP interest rate is made up of two components: (1) the annual yield and (2) the applicable percentage. PFEA (as extended by PPA) sets the annual yield for plan years beginning after December 31, 2003, and before January 1, 2008, as the annual rate of interest determined by the Secretary of the Treasury on amounts invested conservatively in long?term investment grade corporate bonds (the "Corporate Bond Rate"). Prior to PPA, section 4006(a)(3)(E)(iii)(V) of ERISA provided that the annual yield for "plan years beginning after December 31, 2003, and before January 1, 2006," is equal to the Corporate Bond Rate. PPA replaced "2006" with "2008". The applicable percentage is currently 85% but will change to 100% for the first year to which new mortality tables prescribed by the Secretary of the Treasury for purposes of determining current liability apply. Treasury has proposed to issue such tables effective for plan years beginning on or after January 1, 2007 (see 70 FR 72260, December 2, 2005 ).
II. Revised Variable-Rate Premium Interest Rates
Each month PBGC publishes a notice in the Federal Register informing the public of the interest rates and assumptions to be used under certain PBGC regulations. These rates and assumptions are published elsewhere (or can be derived from rates published elsewhere), but are collected and published for the convenience of the public. Interest rates are also published on PBGC's Web site (www.pbgc.gov).
Before the enactment of PPA, PBGC had published, in monthly Federal Register notices, the VRP interest rates for premium payment years beginning in January 2006 through August 2006. These rates were based on the 30-year yield on Treasury securities (as required under the law then in effect). PPA changed the VRP interest rate starting with premium payment years beginning in January 2006. Therefore, in order to reflect the PPA amendment, PBGC published a notice, at 71 FR 50477 (August 25, 2006), revising the 2006 VRP interest rates that were published prior to enactment of PPA. In addition, PBGC has posted on its Web site the revised VRP interest rates at www.pbgc.gov/practitioners/interest-rates/content/hr1127.html.
III. PBGC Reporting and Disclosure Requirements
A. Employer Annual Reporting Under ERISA Section 4010
ERISA section 4010 generally requires controlled groups to report to PBGC if the aggregate unfunded vested benefits in plans maintained by the controlled group exceed $50 million disregarding plans with no unfunded vested benefits (the "4010 Gateway Test"). Vested benefits are calculated on a plan?by?plan basis as of the last day of the plan year that ends within the Information Year3 (the "4010 Gateway Testing Date").
3 Information Year is generally the calendar year. See 29 CFR § 4010.5.
This determination tracks the determination of unfunded vested benefits for variable-rate premium purposes for the plan year that begins on the day after the 4010 Gateway Testing Date, e.g., the 2006 calendar plan year where the 4010 Gateway Testing Date is December 31, 2005. The 4010 Gateway Testing Date generally serves as the premium snapshot date for that next plan year. See Footnote 2 to Technical Update 04-3, which is on PBGC's Web site at www.pbgc.gov/practitioners/law-regulations-informal-guidance/content/tu12782.html.
Because of uncertainty as to whether the PFEA Corporate Rate would be extended, PBGC provided reporting relief under Technical Updates 06-1 and 06-2, which can be found on PBGC's Web site at www.pbgc.gov/practitioners/law-regulations-informal-guidance/content/index.html. Under these technical updates, PBGC waived reporting for 4010 filings for Information Years ending on or after December 31, 2005, and on or before December 30, 2006, provided no filing would be required if, for purposes of the 4010 Gateway Test, the PFEA Corporate Rate is used for valuing vested benefits for plan years ending on or after December 31, 2005.4
4 Technical Update 06-1 provided relief for Information Years beginning on or after December 31, 2005, and on or before June 30, 2006. Technical Update 06-2 provided relief for Information Years beginning on or after July 1, 2006, and on or before December 30, 2006.
Effect of PPA
As a result of PPA, the PFEA Corporate Rate applies to 4010 Gateway Testing Dates between December 31, 2005, and December 30, 2007. (Note that the PPA amendment to the VRP interest rate simply provides by statute what those technical updates provided by waiver.) PBGC will provide guidance at a later time on what interest rate to use for 4010 Gateway Testing Dates between December 31, 2007, and December 30, 2008 ( i.e, for information years beginning in 2007). In addition, PBGC will provide guidance at a later time on changes made to ERISA section 4010 by section 505 of PPA, which "apply with respect to years beginning after 2007."
B. Post-Event Reporting under ERISA Section 4043(a)
ERISA section 4043(a) and PBGC's regulations (29 CFR §§ 4043.1-.35) require plan administrators and contributing sponsors to notify PBGC within 30 days after they know or have reason to know that a reportable event has occurred (post-event reporting). PBGC's reportable events regulation contains a variety of reporting waivers that are tied to the VRP status of a plan for the plan year in which the reportable event occurs (the "Event Year"), and a variety of reporting extensions that are tied to the VRP status of a plan for the plan year preceding the Event Year. For purposes of determining whether one of these waivers applies, vested benefits are calculated as of the premium snapshot date for the Event Year, using the VRP interest rate for the Event Year. For purposes of determining whether one of these extensions applies, vested benefits are calculated as of the premium snapshot date for the plan year preceding the Event Year, using the VRP interest rate for that preceding plan year.
In addition to the reporting waivers and extensions contained in PBGC's reportable events regulation, PBGC, in Technical Update 97-6, waived post-event reporting for certain small employers that fail to make quarterly contributions. Technical Update 97-6 applies to all plans that satisfy one of the following two conditions: (1) The employer had 100 or fewer participants in its defined benefit plans; or (2) The employer had 500 or fewer participants in its defined benefit plans and a Participant Notice for the plan under section 4011 of ERISA (a) was not required for the plan year for which the quarterly contribution is owed or (b) was not required for the prior plan year. The Participant Notice element of that waiver requires the determination of whether a variable-rate premium is required for the plan year for which the quarterly contribution is owed or for the prior plan year.
Effect of PPA
For any reportable event that occurs in a plan year beginning between January 1, 2006, and December 31, 2007, the PFEA Corporate Rate is used to value vested benefits for purposes of determining whether a waiver (other than a waiver pursuant to Technical Update 97-6 or a waiver based on "no unfunded vested benefits") of post-event reporting applies.
For determining whether a reporting extension (other than an extension based on "no unfunded vested benefits") applies, the PFEA Corporate Rate is used to value vested benefits if the plan year preceding the event year begins between January 1, 2006, and December 31, 2007.
For purposes of determining whether a waiver under Technical Update 97-6 applies to a reportable event, the PFEA Corporate Rate is used for determining whether a variable-rate premium is due for plan years to be tested beginning between January 1, 2006, and December 31, 2007.
As more fully discussed in section III.D below, PPA repeals ERISA section 4011 (Notice to Participants) for plan years beginning after December 31, 2006. For purposes of determining whether a waiver under Technical Update 97-6 applies to missed quarterly contributions for the 2007 plan year, the PBGC will consider a plan to meet the requirement that "a Participant Notice for the plan under section 4011 of ERISA was not required for the plan year for which the quarterly contribution is owed," only if, for that 2007 plan year, a Participant Notice would not be required under part 4011 of the PBGC's regulations in effect as of December 31, 2006 (i.e., without regard to PPA's repeal of section 4011 of ERISA for plan years beginning after December 31, 2006). The PBGC will issue further guidance on how Technical Update 97-6 applies to plan years beginning after December 31, 2007.
This Technical Update 06-4 updates the guidance provided in the instructions to Form 10 (see the note on p. 13 of those instructions under Part IV - Funding Based Waivers and Extensions).
C. Advance Reporting under ERISA Section 4043(b)
ERISA section 4043(b) and PBGC's regulations (29 CFR §§ 4043.1-.8 and §§ 4043.61-.68) require certain non-public companies to give PBGC notice at least 30 days before the effective date of certain reportable events ("advance reporting"). Generally, a company is subject to advance reporting if: (1) the aggregate unfunded vested benefits of plans maintained by the controlled group exceed $50 million (disregarding plans with no unfunded vested benefits) and (2) the aggregate funded vested benefit percentage for those plans that are underfunded is less than 90%. Vested benefits for both the $50 million and the 90% gateway tests are computed as of the premium snapshot date for the plan year that includes the effective date of the reportable event, using the VRP interest rate for that plan year.
Effect of PPA
For advance reporting of a reportable event with an effective date in a plan year beginning between January 1, 2006, and December 31, 2007, the PFEA Corporate Rate is used to value vested benefits for purposes of determining whether a company is subject to advance reporting.
This Technical Update 06-4 updates the guidance provided in the instructions to Form 10-Advance (see the note on p. 2 of those instructions under Contributing Sponsors Subject to Advance Reporting).
D. Participant Notices under ERISA Section 4011
Plan administrators of certain underfunded PBGC-insured plans are required to issue a Participant Notice under section 4011 of ERISA and PBGC's regulations (29 CFR part 4011) disclosing the plan's funded current liability percentage and describing the limitations on PBGC's guarantee should the plan terminate while underfunded. In general, a plan administrator must issue a Participant Notice for a plan year if a VRP is payable for the plan for that plan year, unless the plan meets a funding-related test (tied to the "deficit reduction contribution" rules) for that plan year or the prior plan year.
Under PPA, ERISA section 4011 is repealed for plan years beginning after December 31, 2006, and replaced by new disclosure requirements under ERISA section 101(f). Plan administrators are required to comply with ERISA section 4011 for the 2006 plan year. In Technical Update 06-3 available on the Web site at http://www.pbgc.gov/practitioners/law-regulations-informal-guidance/content/tu15820.html, PBGC provided guidance on the 2006 Participant Notice requirement, including a model 2006 Participant Notice.
Effect of PPA
For plan years beginning in 2006, the PFEA Corporate Rate is used to determine whether a VRP is payable. See section II above.55 PPA also extended certain other PFEA interest rates used in connection with the funding-related test used for determining whether a Participant Notice is required. See Technical Update 06-3.
IV. PBGCContact Points.
For questions about this Technical Update 06-4, contact James L. Beller, Jr. of the Legislative and Regulatory Department at (202) 326-4223, ext. 3865, or firstname.lastname@example.org.
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['Pension Benefits Guaranty Corporation (PBGC)', 'Pension Protection Act (PPA)', 'Retirement Benefits', 'Employee Retirement Income Security Act (ERISA)']
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