Bankruptcy Filing Date Treated as Plan Termination Date for Certain Purposes; Guaranteed Benefits; Allocation of Plan Assets; Pension Protection Act of 2006, 37390-37402 [E8-14813]

Agencies

• Pension Benefit Guaranty Corporation

[Federal Register Volume 73, Number 127 (Tuesday, July 1, 2008)]
[Proposed Rules]
[Pages 37390-37402]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-14813]


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PENSION BENEFIT GUARANTY CORPORATION

29 CFR Parts 4001, 4022, and 4044

RIN 1212-AA98


Bankruptcy Filing Date Treated as Plan Termination Date for 
Certain Purposes; Guaranteed Benefits; Allocation of Plan Assets; 
Pension Protection Act of 2006

AGENCY: Pension Benefit Guaranty Corporation.

ACTION: Proposed rule.

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SUMMARY: This is a proposed rule to implement section 404 of the 
Pension Protection Act of 2006. Section 404 amended Title IV of ERISA 
to provide that when an underfunded, PBGC-covered, single-employer 
pension plan terminates while its contributing sponsor is in 
bankruptcy, sections 4022 and 4044(a)(3) of ERISA are to be applied by 
treating the date the sponsor's bankruptcy petition was filed as the 
termination date of the plan. Section 4022 determines which benefits 
are guaranteed by PBGC, and section 4044(a)(3) determines which 
benefits are entitled to priority in ``priority category 3'' in the 
statutory hierarchy for allocating the assets of a terminated plan. 
Thus, under the 2006 amendments, when a plan terminates while the 
sponsor is in bankruptcy, the amount of benefits guaranteed by PBGC and 
the amount of benefits in priority category 3 are fixed at the date of 
the bankruptcy filing rather than at the plan termination date. This 
will, in most cases, reduce the amount of guaranteed benefits and the 
amount of benefits in priority category 3.

DATES: Comments must be submitted on or before September 2, 2008.

ADDRESSES: Comments may be submitted by any of the following methods:
    Federal eRulemaking Portal: https://www.regulations.gov. Follow the 
Web site instructions for submitting comments.
    E-mail: reg.comments@pbgc.gov.
    Fax: 202-326-4224.
    Mail or Hand Delivery: Legislative and Regulatory Department, 
Pension Benefit Guaranty Corporation, 1200 K Street, NW., Washington, 
DC 20005-4026.
    All submissions must include the Regulation Identifier Number for 
this rulemaking (RIN 1212-AA98). Comments received, including personal 
information provided, will be posted to https://www.pbgc.gov. Copies of 
comments may also be obtained by writing to Disclosure Division, Office 
of

[[Page 37391]]

the General Counsel, Pension Benefit Guaranty Corporation, 1200 K 
Street, NW., Washington, DC 20005-4026, or calling 202-326-4040 during 
normal business hours. (TTY and TDD users may call the Federal relay 
service toll-free at 1-800-877-8339 and ask to be connected to 202-326-
4040.)

FOR FURTHER INFORMATION CONTACT: John H. Hanley, Director, or Gail 
Sevin, Manager, Legislative and Regulatory Department; or James J. 
Armbruster, Assistant Chief Counsel, Office of Chief Counsel; 1200 K 
Street, NW., Washington, DC 20005-4026. Mr. Hanley and Ms. Sevin may be 
reached at 202-326-4024; Mr. Armbruster at 202-326-4020, extension 
3068. (TTY/TDD users may call the Federal relay service toll-free at 1-
800-877-8339 and ask to be connected to 202-326-4024 or 202-326-4020.)

SUPPLEMENTARY INFORMATION: 

Background

    The Pension Benefit Guaranty Corporation (``PBGC'') administers the 
single-employer pension plan termination insurance program under Title 
IV of the Employee Retirement Income Security Act of 1974 (``ERISA''). 
The program covers private-sector, single-employer defined benefit 
plans, which pay premiums to PBGC each year. Covered plans that are 
underfunded may terminate either in a distress termination under 
section 4041(c) of ERISA or in an involuntary termination (one 
initiated by PBGC) under section 4042 of ERISA. When such a plan 
terminates, PBGC typically is appointed statutory trustee of the plan, 
and becomes responsible for paying benefits in accordance with the 
provisions of Title IV.
    The amount of benefits paid by PBGC under a terminated, trusteed 
plan is determined by several factors. The starting point is the plan 
itself: PBGC pays only those benefits that were provided under the plan 
and that have been earned by the participant under the plan terms.
    But PBGC does not guarantee all benefits earned under a terminated 
plan. There are statutory and regulatory limits on PBGC's guarantee, 
which are discussed below. On the other hand, a participant may 
sometimes receive from PBGC more than his guaranteed benefits, if 
either the allocation under section 4044 of ERISA of the plan's assets 
or the allocation under section 4022(c) of PBGC's recoveries, or both, 
results in additional benefits being payable.
    When a plan terminates, a termination date must be established in 
accordance with section 4048 of ERISA. If the plan is underfunded and 
terminates in a distress or involuntary termination, the termination 
date is the date agreed upon by the plan administrator and PBGC or, if 
they do not agree, the date set by a United States district court.
    The termination date is a critical date for many purposes under 
Title IV of ERISA. For example, it is the date as of which a plan 
sponsor's liability to the PBGC for a terminated plan's unfunded 
benefit liabilities is determined under section 4062(b) of ERISA. Most 
relevant to this proposed regulation, the termination date--under prior 
law--was the date that governed the amount of benefits participants in 
the terminated plan would receive. The amount of benefits guaranteed by 
PBGC under section 4022 of ERISA and the amount of any additional 
benefits payable from the plan's assets under section 4044 or from 
PBGC's recoveries under section 4022(c) were all determined as of the 
termination date.
    Many single-employer pension plans that terminate in a distress or 
involuntary termination do so while the plan sponsor is in bankruptcy. 
Indeed, two of the criteria for a distress termination are based on the 
sponsor's liquidating or reorganizing in bankruptcy. See ERISA section 
4041(c)(2)(B)(i), (ii).
    A persistent problem for the PBGC insurance program has been that 
the funded status of plans often deteriorates significantly while the 
plan sponsor is in bankruptcy. Many sponsors have failed to make 
minimum funding contributions to their plans during the bankruptcy, 
while the plan continues to pay retiree benefits as usual and employees 
continue to earn additional benefits. Because the termination date 
often comes after the sponsor has been in bankruptcy for some time, the 
result has been that PBGC's losses often increase substantially during 
the course of a bankruptcy proceeding.
    Congress sought to address this problem in the Pension Protection 
Act of 2006 (``PPA 2006''), which the President signed into law on 
August 17, 2006. Section 404 of PPA 2006 provides generally that, if a 
PBGC-insured plan terminates while its contributing sponsor is in 
bankruptcy, PBGC's guarantees and the amount of benefits entitled to 
priority in ``priority category 3'' in the ERISA section 4044 
allocation of the plan's assets are determined as of the date that the 
sponsor's bankruptcy petition was filed (the ``bankruptcy filing 
date'') rather than as of the termination date. This means, for 
example, that benefits earned by participants after the bankruptcy 
filing date are not guaranteed. The changes generally reduce the amount 
of benefits guaranteed by PBGC and the amount of benefits receiving 
priority treatment in the section 4044 asset allocation. By protecting 
PBGC from growth in its liabilities during bankruptcy proceedings, 
these changes reduce claims on PBGC's funds and thereby strengthen the 
PBGC insurance program. The changes are described more fully below.
    PPA 2006 provided that the changes made by section 404 of PPA 2006 
are effective for plan terminations that occur during the bankruptcy of 
the plan sponsor, if the bankruptcy filing date was on or after 
September 16, 2006 (the date that is 30 days after PPA's enactment). 
The terminations to which the changes apply are referred to in this 
preamble and in the proposed regulation as PPA 2006 bankruptcy 
terminations. Of course, if a plan's termination date is the same as 
the bankruptcy filing date, then the plan is unaffected by the changes 
made by section 404.

Overview of Proposed Regulatory Changes

    The proposed regulation implements the statutory changes, described 
above, made by section 404 of PPA 2006. It would amend PBGC's 
regulations on Benefits Payable in Terminated Single-Employer Plans, 29 
CFR part 4022; Termination of Single-Employer Plans, 29 CFR part 4041; 
and Allocation of Assets in Single-Employer Plans, 29 CFR part 4044. 
The amendments would establish rules for PPA 2006 bankruptcy 
terminations, the most important of which are:
     A participant's guaranteed benefit is based on the amount 
of his service and the amount of his compensation (if applicable) as of 
the bankruptcy filing date.
     The Title IV guarantee limits--the maximum guaranteeable 
benefit, the phase-in limit, and the accrued-at-normal limit--are all 
determined as of the bankruptcy filing date.
     Only benefits that are nonforfeitable as of the bankruptcy 
filing date are guaranteed. Thus, for example, early retirement 
subsidies and disability benefits to which a participant became 
entitled after the bankruptcy filing date are not guaranteed.
     Participants who retired under a subsidized early 
retirement benefit (or a disability or other benefit) to which they 
became entitled between the bankruptcy filing date and the termination 
date will continue in pay status, or may go into pay status if they are 
not already receiving a benefit, but the amount of

[[Page 37392]]

the benefit is reduced to reflect that the subsidy (or other benefit) 
is not guaranteed.
     The benefits in priority category 3 under section 4044(a) 
of ERISA are benefits in pay status, or that could have been in pay 
status, three years before the bankruptcy filing date, generally taking 
into account only benefit increases that were effective throughout the 
five-year period ending on the bankruptcy filing date.
     Benefits under section 4022(c) of ERISA are based on 
(among other things) the value of a plan's unfunded nonguaranteed 
benefits. Because section 404 of PPA 2006 has changed guaranteed 
benefits and benefits in priority category 3, the unfunded 
nonguaranteed benefits are changed and therefore the section 4022(c) 
benefits are also changed.
     Where a plan has more than one contributing sponsor and 
all contributing sponsors did not file for bankruptcy on the same date, 
PBGC determines the date to treat as the bankruptcy filing date, based 
on the facts and circumstances.
    Although the bankruptcy filing date thus displaces a plan's 
termination date as the controlling date for certain purposes, the 
termination date continues to be important for other purposes. For 
example, although the monthly amount of benefits guaranteed and the 
monthly amount of benefits in priority category 3 will be determined by 
reference to the bankruptcy filing date, the value of those benefits is 
determined--as before PPA 2006--as of the plan's termination date. The 
value of a terminated plan's assets, too, is determined as of the 
termination date. Also, determinations under sections 4062(a) and (b) 
of ERISA of the parties liable for a plan's unfunded benefit 
liabilities and the amount of those liabilities are made as of the 
termination date.
    The proposed regulation also makes some minor changes unrelated to 
PPA 2006. The discussion below describes in detail the proposed 
regulatory changes, as well as areas in which no change to the 
regulations is needed.

Guaranteed Benefits

Prior Law

    PBGC's guarantee is limited, under section 4022(a) of ERISA, to 
nonforfeitable benefits under a terminated plan. Before PPA 2006, the 
crucial date for determining guaranteed benefits was the plan's 
termination date, established under section 4048 of ERISA. PBGC had to 
determine the amount of benefits participants had earned under the 
plan, and whether those benefits were nonforfeitable, as of the 
termination date.
    In addition, PBGC's guarantee is subject to two important 
limitations under section 4022(b) of ERISA: the maximum guaranteeable 
benefit (sometimes referred to as the maximum guarantee limit or the 
maximum insurance limit) under section 4022(b)(3), and the phase-in 
limit under sections 4022(b)(1) and 4022(b)(7). The maximum 
guaranteeable benefit essentially places a ceiling, or cap, on the 
amount of a participant's guaranteed benefit. The maximum monthly 
guaranteeable benefit under section 4022(b)(3)(B) was $750 per month 
for a 65-year-old participant receiving a straight-life annuity in a 
plan that terminated in 1974. (The maximum guaranteeable benefit may be 
lower, under section 4022(b)(3)(A), depending on the participant's 
average monthly gross income, but this limitation rarely applies, and 
the discussion and examples in this regulation assume that it does not 
apply.) The $750 monthly figure is adjusted each year based on the 
contribution and wage base under the Social Security Act; for example, 
for a plan whose termination date was in 2005 the maximum monthly 
amount at age 65 payable as a straight-life annuity was $3,801.14. The 
maximum guaranteeable benefit for an individual participant depends on 
his age at the later of the plan's termination date or the date he 
begins receiving his benefit from PBGC, and on the form in which the 
benefit is paid. For example, the maximum guaranteeable benefit is 
lower if the participant begins receiving benefits from PBGC before age 
65, or if the benefit form will provide a survivor benefit after the 
participant dies.
    The phase-in limit under sections 4022(b)(1) and 4022(b)(7) of 
ERISA provides that PBGC's guarantee of a benefit increase resulting 
from amendment of an existing plan or adoption of a new plan is phased 
in over a five-year period. PBGC's guarantee is equal to the number of 
full years before the termination date that the increase was in effect, 
multiplied by 20% (or $20 per month, if greater). For example, a 
benefit increase that was in effect more than two years before the 
termination date but less than three years is 40% guaranteed (or $40 
per month, if greater, but not more than the amount of the increase). A 
benefit increase is considered to be in effect from the later of the 
date the benefit increase was adopted or the date it became effective.
    There is a third limitation on PBGC's guarantee that the agency 
adopted when it issued its initial guaranteed benefits regulation. (40 
FR 43509, Sept. 22, 1975.) Under Sec.  4022.21 of PBGC's regulation, 
PBGC's guarantee is generally limited to the amount of the 
participant's benefit payable as a straight-life annuity commencing at 
normal retirement age. This limit, often referred to as the ``accrued-
at-normal'' limit, means that PBGC generally does not guarantee 
temporary supplemental benefits payable to a participant who retires 
before normal retirement age. Consider, for example, a participant who 
was entitled under his plan to receive $1,000 per month as a straight-
life annuity starting at his normal retirement date but who could 
retire early under certain conditions with an unreduced benefit of 
$1,000 plus a supplement of $400 per month payable until age 62. If the 
participant retires early, PBGC generally will not guarantee more than 
$1,000 per month.
    Before PPA 2006, the maximum guaranteeable benefit, the phase-in 
limit, and the accrued-at-normal limit were all calculated as of the 
termination date of a plan. Accordingly, before PPA 2006, a 
participant's guaranteed benefit would be the amount of the 
nonforfeitable plan benefit to which the participant was entitled as of 
the termination date, subject to the guarantee limits applicable as of 
that date.

PPA 2006 Changes

    Section 404 of PPA 2006 changed the way in which the amount of 
guaranteed benefits will be determined in PPA 2006 bankruptcy 
terminations. Section 404(a) of PPA 2006 added a new subsection (g) to 
section 4022 of ERISA. New section 4022(g) provides as follows:

    Bankruptcy Filing Substituted for Termination Date.--If a 
contributing sponsor of a plan has filed or has had filed against 
such person a petition seeking liquidation or reorganization in a 
case under title 11, United States Code, or under any similar 
Federal law or law of a state or political subdivision, and the case 
has not been dismissed as of the termination date of the plan, then 
this section shall be applied by treating the date such petition was 
filed as the termination date of the plan.

The ``section'' referred to is section 4022 of ERISA, which as 
explained above determines the amount of a participant's guaranteed 
benefit. Thus, for a plan that terminates while its contributing 
sponsor is in bankruptcy, section 4022(g) requires that a participant's 
guaranteed benefit be determined by treating the date the sponsor's 
bankruptcy petition was filed (the ``bankruptcy filing date'') as if it 
were the termination date of the plan.

[[Page 37393]]

    This change has a number of important consequences. First, it means 
that a participant's guaranteed benefit can be no greater than the 
amount of his plan benefit as of the bankruptcy filing date. Even 
though the plan in many cases will have continued after the bankruptcy 
filing date and (in the absence of a plan freeze) participants will 
have continued to accrue benefits after that date, those post-
bankruptcy accruals will not be guaranteed. Thus, under the change, a 
participant's guaranteed benefit will be calculated by reference to the 
amount of his service and the amount of his compensation (or the amount 
of the plan's benefit ``multiplier,'' depending on how the plan 
calculates benefits) as of the bankruptcy filing date.
    Second, only benefits that were nonforfeitable as of the bankruptcy 
filing date will be guaranteed. For example, in a plan that has five-
year ``cliff'' vesting, a participant with less than five years of 
service as of the bankruptcy filing date will have no guaranteed 
benefit, even if his benefit becomes vested by the section 4048 
termination date. Similarly, if a participant becomes entitled to a 
disability retirement benefit or an early retirement subsidy after the 
bankruptcy filing date but before the termination date, that disability 
benefit or subsidy will not be guaranteed.
    Third, the PBGC guarantee limits--the maximum guaranteeable 
benefit, the phase-in limit, and the accrued-at-normal limit--will all 
be determined as of the bankruptcy filing date. For example, if the 
sponsor's bankruptcy filing date is in 2008 and the plan's termination 
date is in 2010, the maximum guaranteeable benefit for all plan 
participants will be based on the 2008 limit. Also, an individual 
participant's maximum guaranteeable benefit will be based on his age 
and form of benefit as of the later of the bankruptcy filing date or 
the date he begins to receive his benefit. Similarly, the phase-in rule 
will be applied by counting the number of full years before the 
bankruptcy filing date that a benefit increase has been in effect. The 
accrued-at-normal limit, too, will be determined based on the facts as 
of the bankruptcy filing date.
    The proposed rule would modify PBGC's regulations to reflect the 
changes described above for PPA 2006 bankruptcy terminations. In most 
cases, the proposed regulation simply provides that in a PPA 2006 
bankruptcy termination, ``bankruptcy filing date'' is substituted for 
``termination date'' each place that ``termination date'' appears in a 
specified section or paragraph of the regulation. The proposed 
regulation provides a number of examples to clarify what this means in 
various situations. The regulations are unchanged for plans to which 
the changes do not apply (non-PPA 2006 bankruptcy terminations).

Aggregate Limit on Benefits Guaranteed

    Title IV of ERISA includes an additional limitation on PBGC's 
guarantee that applies only when a participant receives benefits under 
two or more trusteed plans. Section 4022B of ERISA provides that, in 
such a situation, the sum of the guaranteed benefits payable from PBGC 
funds with respect to all such plans may not exceed the maximum 
guaranteeable benefit payable ``as of the date of the last plan 
termination.''
    PPA 2006 made no change to this provision. PBGC therefore proposes 
to make no change to part 4022B of its regulations, and proposes to 
calculate the aggregate limit, as previously, by reference to a 
participant's maximum guaranteeable benefit as of the section 4048 
termination date of the latest-terminating plan.

Benefits Payable Under the Section 4044 Allocation

Prior Law

    PPA 2006 also made an important change to the allocation of a 
terminated plan's assets under section 4044 of ERISA. To understand 
this change, it is important to understand how the section 4044 
allocation worked before the PPA 2006 amendment.
    As noted above, a participant may receive more than his guaranteed 
benefit from PBGC, depending on the amount of the plan's assets and 
whether his benefits are entitled to priority under ERISA's allocation 
scheme. Section 4044 of ERISA specifies how a plan's assets are to be 
allocated among various classes of guaranteed and nonguaranteed 
benefits of participants. Part 4044 of PBGC's existing regulations 
provides detail about how assets and benefits are valued, and how the 
assets are allocated to the benefits. (Section 4022(c) of ERISA may 
provide additional benefits, as discussed below.)
    The first step in the section 4044 allocation is to assign each 
participant's plan benefits to one or more of six ``priority 
categories'' that are described in paragraphs (1) through (6) of 
subsection 4044(a) of ERISA. Before PPA 2006, the benefits in each 
priority category were as follows:
    Priority category 1: The portion of a participant's accrued benefit 
derived from the participant's voluntary contributions.
    Priority category 2: The portion of a participant's accrued benefit 
derived from the participant's mandatory contributions.
    Priority category 3: The portion of a participant's benefit that 
was in pay status as of the beginning of the three-year period ending 
on the termination date of the plan, or that would have been in pay 
status at the beginning of such three-year period if the participant 
had retired before the beginning of the three-year period. In either 
case, however, the benefits in this category are limited to the lowest 
annuity benefit payable under the plan provisions at any time during 
the five-year period ending on the termination date (e.g., disregarding 
benefit increases in the five-year period).
    Priority category 4: All other guaranteed benefits, and benefits 
that would be guaranteed but for the aggregate limit of section 4022B 
of ERISA and the stricter phase-in limit that applies to business 
owners.
    Priority category 5: All other nonforfeitable benefits under the 
plan.
    Priority category 6: All other benefits under the plan.
    PBGC's regulations make a distinction between a participant's 
``gross'' benefit in a priority category and his ``net'' benefit in 
that category (although the regulations do not use these terms). The 
gross benefit is the total amount of the participant's benefit that 
would be in a priority category, if benefits in higher priority (i.e., 
lower numbered) categories were not subtracted. The net benefit is the 
amount in the priority category after subtracting amounts in higher 
priority categories. For example, a participant's net benefit in 
priority category 4 generally excludes any portion of his guaranteed 
benefit that was allocated to priority categories 2 or 3. See 29 CFR 
4044.10(c). Descriptions of benefits in a priority category usually 
refer to the net benefits in that category, and the discussion below 
generally follows that usage, unless otherwise indicated.
    Once the benefits of each participant have been assigned to the 
applicable priority category or categories, the benefits of all 
participants are valued, using the rules in PBGC's valuation 
regulation, 29 CFR part 4044, subpart B. The terminated plan's assets 
are also valued (at fair market value). The valuation of both the plan 
benefits and the plan assets is done as of the termination date.
    After the plan benefits and assets are valued, the assets are 
``poured through'' the priority categories, beginning with priority 
category 1. If the assets are sufficient to pay all benefits in 
priority

[[Page 37394]]

category 1, then they pour into priority category 2, and so on until 
either all benefits in all categories have been covered or until the 
assets are insufficient to pay all benefits within a category. Where 
assets are insufficient to pay all benefits within a category, they are 
allocated among the benefits in that category according to the rules in 
part 4044 of PBGC's regulations.
    It is important to note that benefits in priority category 3--which 
may or may not be guaranteed--come ahead of guaranteed benefits in 
priority category 4 in the section 4044 asset allocation. Thus, for 
example, if a terminated plan's assets are sufficient to cover all 
benefits in priority category 3, those benefits will be paid by PBGC, 
regardless of whether they are guaranteed.

PPA 2006 Changes

    Section 404 of PPA 2006 made an important change to priority 
category 3 in the asset allocation, similar to the change to guaranteed 
benefits. Section 404(b) added a new subsection (e) to section 4044, 
which provides as follows:

    Allocation of Assets Among Priority Groups in Bankruptcy 
Proceedings.--If a contributing sponsor of a plan has filed or has 
had filed against such person a petition seeking liquidation or 
reorganization in a case under title 11, United States Code, or 
under any similar Federal law or law of a State or political 
subdivision, and the case has not been dismissed as of the 
termination date of the plan, then subsection (a)(3) shall be 
applied by treating the date such petition was filed as the 
termination date of the plan.

Subsection (a)(3) of section 4044 describes the benefits assigned to 
priority category 3. As explained above, before PPA 2006 the benefits 
in priority category 3 were the benefits that were in pay status as of 
the beginning of the three-year period ending on the termination date, 
or that would have been in pay status as of that date if the 
participant had retired--but based on the plan provisions during the 
five years before the termination date under which the benefit would be 
the least. See 29 CFR 4044.13. PBGC interprets new section 4044(e) to 
mean that these three-year and five-year periods are the three-year and 
five-year periods before the bankruptcy filing date rather than before 
the termination date. In other words, the benefits in priority category 
3 will be benefits in pay status, or that could have been in pay 
status, three years before the bankruptcy filing date, but generally 
taking into account only benefit increases that were effective 
throughout the five-year period ending on the bankruptcy filing date. 
(The exception in Sec.  4044.13(b)(5) for certain ``automatic'' benefit 
increases will apply to applicable benefit increases in the fourth and 
fifth years preceding the bankruptcy filing date.)
    In addition, the changes made by PPA 2006 section 404(a) to the way 
guaranteed benefits are determined necessarily affect the gross 
benefits that are assigned to priority category 4. As explained above, 
the gross benefits assigned to priority category 4 are guaranteed 
benefits (and benefits that would be guaranteed but for the aggregate 
limit of section 4022B and the stricter phase-in limit that applies to 
business owners). Because section 404(a) of PPA 2006 has modified 
PBGC's guarantee, the gross benefits assigned to priority category 4 in 
a PPA 2006 bankruptcy termination are those benefits guaranteed under 
new section 4022(g), not the benefits that would be guaranteed absent 
that provision. In other words, the guaranteed benefits in priority 
category 4 will be the plan benefits that were both accrued and 
nonforfeitable as of the bankruptcy filing date, based on the guarantee 
limits as of that date. In addition, the PPA 2006 changes to benefits 
in priority category 3 necessarily affect the net benefits in priority 
category 4 as well; some guaranteed benefits that previously would have 
been in priority category 3 will now fall into priority category 4. The 
proposed rule reflects this treatment.
    PPA 2006 did not amend the other priority categories of section 
4044. Therefore, the gross amount of a participant's benefit in those 
categories will be unaffected by the changes discussed above. For 
example, the gross amount of a participant's benefit in priority 
category 5 is all of the participant's benefit that is nonforfeitable 
as of the plan's termination date. See ERISA section 4044(a)(5); 29 CFR 
4044.15. Thus, a benefit that is not guaranteed because it was 
forfeitable as of the bankruptcy filing date will be treated as 
nonforfeitable for purposes of priority category 5 if the participant 
satisfied the conditions of entitlement to the benefit between the 
bankruptcy filing date and the plan's termination date.
    The net amount of a participant's benefit in priority category 5, 
however, is necessarily affected by the changes to the benefits in 
priority categories 3 and 4. For example, benefits that are not 
guaranteed because they became nonforfeitable between the sponsor's 
bankruptcy filing date and the plan's termination date will not be in 
priority category 4 but will be in priority category 5. Thus, a 
participant in that situation will have a smaller guaranteed benefit in 
priority category 4 and therefore a larger net benefit in priority 
category 5. (Benefits in priority category 5 are divided into 
subcategories, based on whether they would have been payable based on 
the plan provisions in effect five years before the plan's termination 
date, or became payable due to subsequent plan amendments. See ERISA 
section 4044(b)(4) (before PPA 2006, section 4044(b)(3)); 29 CFR 
4044.10(e). Because PPA 2006 did not amend this provision, PBGC 
interprets the five-year period in section 4044(b)(4) of ERISA--and in 
Sec.  4044.10(e) of PBGC's regulation--as still being the five-year 
period before the termination date. No change in the regulation is 
needed to embody this interpretation.)
    Like the change to the guarantee provisions, the PPA 2006 changes 
to the ERISA section 4044 asset allocation apply to PPA 2006 bankruptcy 
terminations--plan terminations occurring during a bankruptcy 
proceeding initiated on or after September 16, 2006.
    The PPA 2006 changes, as explained above, require PBGC to determine 
the amount of a participant's monthly benefit in priority category 3 
and priority category 4 by reference to the bankruptcy filing date 
rather than the termination date. Valuing benefits in the priority 
categories is a different matter. PBGC has always valued benefits and 
plan assets as of the plan's termination date, and section 4044(e) does 
not dictate a change to that approach for priority category 3. Although 
section 4044(e) might be read to suggest that a valuation should be 
done as of the bankruptcy filing date for purposes of priority category 
3, PBGC believes that the better interpretation is that the valuation 
should still be done as of the termination date. Subsection (a)(3) of 
section 4044, which is to be ``applied'' by treating the bankruptcy 
filing date as the termination date, describes only the kind of 
benefits that fall into priority category 3, not the time or manner of 
valuing those benefits or plan assets.
    Moreover, because the statutory change applies only to priority 
category 3, benefits and plan assets will still be valued as of the 
termination date for all other categories. Using a different valuation 
date for priority category 3 than for all the other priority categories 
would be complex to administer, difficult to explain to participants, 
and anomalous in its results. In the absence of a clear statutory 
mandate of that intricate approach, PBGC proposes to take the simpler 
and more coherent approach of valuing benefits and assets as of the 
termination date for all priority categories.

[[Page 37395]]

    Accordingly, the proposed rule makes no change to PBGC's existing 
rules in this regard. Under Sec.  4044.10(c), benefits in a trusteed 
plan will still be valued as of the termination date. The tables in 
Appendix D to part 4044 used to determine a participant's expected 
retirement age are also unchanged, and continue to be based on the year 
in which the plan's termination date occurs and on the facts as of the 
termination date. A terminated plan's assets, too, will still be valued 
as of the termination date under Sec.  4044.3(b).

Benefits Payable Under Section 4022(c) of ERISA

Prior Law

    Under section 4022(c) of ERISA, PBGC pays additional benefits to 
participants and beneficiaries, beyond guaranteed benefits and benefits 
provided by the plan's assets. The amount of section 4022(c) benefits 
depends on PBGC's recoveries of unfunded benefit liabilities under 
section 4062 (or, in some circumstances, under sections 4063 or 4064). 
Sections 4062(a) and (b) of ERISA provide that, when a plan terminates 
in a distress termination or an involuntary termination, the 
contributing sponsor of the plan and all members of the contributing 
sponsor's controlled group are liable to PBGC for the ``total amount of 
the unfunded benefit liabilities (as of the termination date) to all 
participants and beneficiaries under the plan.'' The amount of unfunded 
benefit liabilities, defined in section 4001(a)(18) of ERISA, is the 
excess of the value of the plan's benefit liabilities over the value of 
the plan's assets--i.e., the amount of the shortfall in the plan's 
assets.
    PBGC seeks to recover from contributing sponsors and members of 
their controlled groups as much as it can of terminated plans' unfunded 
benefit liabilities. A portion of those recoveries is paid to 
participants and beneficiaries of a terminated plan in accordance with 
the provisions of section 4022(c) of ERISA. Section 4022(c) provides 
for determination of a ``recovery ratio,'' which is then multiplied by 
the total value of the plan's unfunded nonguaranteed benefits to 
determine the total amount allocable to participants in the plan who 
have unfunded nonguaranteed benefits. It is allocated to those unfunded 
nonguaranteed benefits beginning in the section 4044 priority category 
where the plan's assets ran out, but none of it is allocated to 
guaranteed benefits--i.e., this section 4022(c) allocation ``skips 
over'' guaranteed benefits in the priority categories.
    The recovery ratio is described in section 4022(c)(3) of ERISA. For 
a large plan, it equals the value of PBGC's recovery of unfunded 
liabilities for that plan divided by the amount of that plan's unfunded 
benefit liabilities ``as of the termination date.'' For a small plan, 
the ratio is based on an average of PBGC's recoveries over a five-year 
period. For this purpose, a small plan is any plan in which the value 
of unfunded nonguaranteed benefits is equal to or less than $20 
million. (Section 408 of PPA 2006 changed the five-year period over 
which the recovery ratio is determined for small plans; that change 
generally applies to plans in which termination was initiated on or 
after September 16, 2006.)
    A plan's unfunded nonguaranteed benefits, as the term suggests, are 
those benefits that are neither funded by the plan's assets under the 
section 4044 allocation nor guaranteed by PBGC. (PBGC generally uses 
the term ``unfunded nonguaranteed benefits,'' because that term is more 
descriptive than ``outstanding amount of benefit liabilities,'' the 
term used in section 4001(a)(19) of ERISA.) Stated differently, the 
unfunded nonguaranteed benefits are the benefits lost by participants 
on account of their plan's termination, a portion of which is made up 
by the section 4022(c) allocation.

PPA 2006 Changes

    New section 4022(g) instructs PBGC to apply section 4022 by 
treating the bankruptcy filing date as the plan's termination date. 
Section 4022(c), of course, is part of section 4022. PBGC interprets 
this statutory language, for section 4022(c) benefits, to mean that in 
determining a plan's unfunded nonguaranteed benefits, PBGC must take 
into account the changes to guaranteed benefits under new section 
4022(g) and the changes to the asset allocation under new section 
4044(e). For example, a benefit that became nonforfeitable between the 
bankruptcy filing date and the termination date is not guaranteed and 
thus (if not funded) is included in the unfunded nonguaranteed 
benefits.
    The regulation also provides that, as in a non-PPA 2006 bankruptcy 
termination, PBGC will value the unfunded nonguaranteed benefits as of 
the termination date. For reasons similar to those explained above 
regarding priority category 3 benefits, PBGC believes that the 
statutory provision should not be interpreted to require a different 
valuation date for this purpose.
    The proposed regulation similarly provides that the other elements 
that go into calculation of section 4022(c) benefits are unaffected by 
the PPA 2006 changes. The recovery ratio described in section 
4022(c)(3)(A), as explained above, is based on PBGC's recoveries of 
unfunded benefit liabilities. Because that section provides that the 
denominator of the recovery ratio is the amount of the plan's unfunded 
benefit liabilities as of the termination date, one might conclude that 
in a PPA 2006 bankruptcy termination the unfunded benefit liabilities 
should be determined for this purpose as of the bankruptcy filing date. 
The proposed regulation does not adopt that approach. The numerator of 
the recovery ratio--PBGC's recoveries--is based on PBGC's statutory 
claim for unfunded benefit liabilities, which, under section 4062(b) of 
ERISA, must be determined as of the termination date. Because section 
4062(b) was not amended by PPA 2006, PBGC's recoveries will still be 
based on that termination date-computed claim. PBGC believes that the 
general language of section 4022(g) should not be interpreted to 
require a separate determination of unfunded benefit liabilities to be 
made as of the bankruptcy filing date, when PBGC recoveries will be 
based on a determination of unfunded benefit liabilities as of the 
termination date. Thus, the amount of a plan's unfunded benefit 
liabilities, as in a non-PPA 2006 bankruptcy termination, will be 
determined based on the value of the plan's assets and benefit 
liabilities as of the termination date. See ERISA sections 4001(a)(18), 
4062(b).
    The proposed rule would add a new Sec.  4022.51 to PBGC's 
regulations to incorporate the above interpretations. It provides, for 
example, that in computing section 4022(c) benefits in a PPA 2006 
bankruptcy termination, the benefits included in a plan's unfunded 
nonguaranteed benefits take into account the provisions of sections 
4022(g) and 4044(e) of ERISA, and the corresponding provisions of 
PBGC's regulations. The value of unfunded nonguaranteed benefits would 
be multiplied by the recovery ratio, as in a non-PPA 2006 bankruptcy 
termination, to determine the total dollar amount to be allocated for 
the plan. That dollar amount would be allocated to the unfunded 
nonguaranteed benefits of participants in the same manner as before PPA 
2006, but the result of the allocation would be different because of 
the changes made by section 404 of PPA 2006 to guaranteed benefits and 
the benefits in priority category 3. For example, a benefit that would 
have been guaranteed under prior law but is not guaranteed under PPA 
2006 and is not

[[Page 37396]]

funded under the section 4044 allocation is an unfunded nonguaranteed 
benefit that might be paid under the section 4022(c) allocation.

Other Issues

Reduction of Benefits to Title IV Levels

    In a distress termination, the plan administrator is required, 
beginning on the proposed termination date, to reduce benefits in pay 
status to the estimated levels payable under Title IV. See ERISA 
section 4041(c)(3)(D)(ii); 29 CFR 4041.42(c), 4022.61-4022.63. The 
proposed regulation provides that for any PPA 2006 bankruptcy 
termination, those estimated benefits are based on the rules described 
above relating to the bankruptcy filing date.
    PPA 2006 did not change the provision in section 4041 of ERISA 
about when these benefit reductions are to be made. Accordingly, the 
proposed regulation does not change the rule in Sec.  4041.42(c) of the 
regulations that the reductions are made beginning on the proposed 
termination date.

Recoupment of Overpayments

    PBGC's current regulations provide that the agency recoups benefit 
overpayments if it determines that net benefits paid exceed the amount 
to which a participant is entitled under Title IV of ERISA. See 29 CFR 
4022.81. For example, if a retiree is paid an estimated Title IV 
benefit of $3,050 per month while PBGC is processing the termination of 
the plan, and PBGC later determines that the participant is entitled to 
a Title IV benefit of only $3,000 per month, the agency generally 
recoups the net overpayment (the $50 difference times the number of 
months the benefit was overpaid) from future benefit payments. The 
amount recouped is determined by multiplying future benefit payments by 
a fraction the numerator of which is the net overpayment and the 
denominator of which is the present value of the benefit to which the 
participant is entitled under Title IV. The proposed regulation amends 
Sec.  4022.82(a) to provide that the denominator is determined taking 
into account the changes to participants' benefits made by section 404 
of PPA 2006.
    In computing the net overpayment, the current regulations provide 
that PBGC takes into account only overpayments made on or after the 
latest of the proposed termination date, the termination date, or, if 
no notice of intent to terminate was issued, the date on which 
proceedings to terminate the plan are instituted pursuant to section 
4042 of ERISA. See 29 CFR Sec.  4022.81(c)(1). Thus, for example, in a 
case where a plan is terminated under section 4042 and the termination 
date is before the date on which PBGC initiated termination 
proceedings, PBGC does not recoup overpayments made before initiation 
of the termination proceedings even though those overpayments were made 
after (what later became) the termination date.
    PBGC proposes not to make any change to this rule. Accordingly, as 
under prior law, in determining the amount to be recouped (or otherwise 
recovered, if there are no future benefits from which to recoup), PBGC 
will include only overpayments made on or after the latest of the 
proposed termination date, the termination date, or, if no notice of 
intent to terminate was issued, the date on which proceedings to 
terminate the plan are instituted pursuant to section 4042 of ERISA.

Entry Into Pay Status

    As explained above, under new section 4022(g) of ERISA, PBGC will 
not guarantee a benefit that was forfeitable as of the bankruptcy 
filing date even it became nonforfeitable by the termination date. This 
includes, for example, a subsidized early retirement benefit to which a 
participant became entitled between the two dates.
    Because the plan normally will have been ongoing as of the 
bankruptcy filing date, participants who became entitled to subsidized 
early retirement benefits or other benefits after the bankruptcy filing 
date but before the termination date may have retired and been put into 
pay status by the plan administrator. It would impose a hardship on 
such participants to take them out of pay status, likely depriving them 
of all or most of their retirement income.
    To address this situation, the regulation proposes that 
participants who became entitled under their plan to subsidized early 
retirement benefits or other benefits between the bankruptcy filing 
date and the termination date will be continued in pay status or, if 
they are not already receiving a benefit, will be allowed to go into 
pay status. The amount of such a benefit, however, would be reduced to 
reflect that the subsidy is not guaranteed.

Sufficiency for Guaranteed Benefits

    In a distress termination, the plan's enrolled actuary must 
certify, among other things, whether the plan is sufficient for 
guaranteed benefits as of the proposed termination date and as of the 
proposed distribution date. ERISA section 4041(c)(2)(A). In making 
those determinations, the actuary must take into account nonguaranteed 
benefits to which the plan's assets must be allocated under section 
4044--notably, nonguaranteed benefits in priority category 3. PBGC must 
determine whether it agrees that the plan is sufficient for guaranteed 
benefits. ERISA section 4041(c)(3)(A). If PBGC agrees that the plan is 
sufficient for guaranteed benefits, it so notifies the plan 
administrator and the administrator then proceeds to distribute the 
plan's assets and carry out the termination of the plan. ERISA section 
4041(c)(3)(B)(ii). One purpose of the determinations under section 4041 
of the plan's sufficiency for guaranteed benefits is to avoid PBGC 
trusteeship of a plan that has enough assets to pay all the benefits 
that PBGC would pay if it took over the plan. (Any additional benefits 
that may be payable under section 4022(c) of ERISA are not considered 
for purposes of whether a plan is sufficient for guaranteed benefits.)
    The proposed regulation provides that in a PPA 2006 bankruptcy 
termination, the determination of sufficiency for guaranteed benefits 
is made taking into account the amendments made by section 404 of PPA 
2006. That is, the plan actuary and PBGC should determine sufficiency 
for guaranteed benefits based on whether, as of the termination date 
and the distribution date, the plan has sufficient assets to pay the 
benefits that are guaranteed as of the bankruptcy filing date and the 
benefits that are in priority category 3 as of three years before the 
bankruptcy filing date (based generally on the plan provisions as of 
five years before the bankruptcy filing date). It would make little 
sense to treat as insufficient for guaranteed benefits--and thus 
require PBGC to trustee--a plan that has enough assets to provide all 
the benefits that PBGC would pay if it became statutory trustee of the 
plan.

Amendment of Definition of Basic-Type Benefit

    PBGC's regulations define the term ``basic-type benefit'' in Sec.  
4001.2 to mean any benefit that is guaranteed under part 4022 or that 
would be guaranteed if the guarantee limits in Sec. Sec.  4022.22 
through 4022.27 (primarily the maximum guaranteeable benefit and the 
phase-in limit) did not apply. A ``nonbasic-type benefit'' is any 
benefit provided by a plan other than a basic-type benefit. The effect 
of this distinction is to treat temporary supplements, which as 
explained above are generally not guaranteed due to the accrued-at-
normal limitation in Sec.  4022.21, as nonbasic-type

[[Page 37397]]

benefits. Nonbasic-type benefits are treated differently from basic-
type benefits in the section 4044 allocation. See, e.g., Sec. Sec.  
4044.10(c) and 4044.12.
    If no change were made to the definition of basic-type benefit in a 
PPA 2006 bankruptcy termination, benefits that accrued, or to which a 
participant otherwise became entitled, between the sponsor's bankruptcy 
filing date and the plan's termination date would become nonbasic-type 
benefits (because they would not be guaranteed but not due to the 
limitations in Sec. Sec.  4022.22 through 4022.27) and thus subject to 
the different treatment currently accorded temporary supplements. Such 
benefits would, absent this regulatory change, receive less favorable 
treatment in priority category 5, a technical result that PBGC believes 
was not intended by the statutory change. Not amending the regulation 
would also require PBGC to follow the more complex allocation 
procedures in part 4044 for nonbasic-type benefits even where a plan 
has no temporary supplements. Accordingly, the proposed regulation 
would modify the definition of ``basic-type benefits'' to provide that 
benefits not guaranteed solely because they accrued or became 
nonforfeitable, or the participant became entitled to them, after the 
bankruptcy filing date will be considered basic-type benefits. This 
change to the regulatory definition of basic-type benefits requires a 
conforming change to Sec.  4044.14 of the regulations, to ensure that 
these nonguaranteed benefits are not placed in priority category 4, 
which (with limited exceptions for benefits of business owners and of 
participants in more than one terminated plan) is reserved for 
guaranteed benefits.

Determination of the Bankruptcy Filing Date

    Section 404 of PPA 2006 requires treating the date that a 
contributing sponsor of a plan has filed or has had filed against it 
``a petition seeking liquidation or reorganization in a case under 
title 11, United States Code, or under any similar Federal law or law 
of a state or political subdivision'' as the termination date of the 
plan, for the purposes discussed above. The proposed regulation uses 
the term ``bankruptcy filing date'' to describe the date when a 
bankruptcy petition has been filed, and PBGC does not anticipate 
difficulty determining what that date is in most cases.
    However, three situations may arise in which there could be 
ambiguity about the bankruptcy filing date. The first involves 
conversion of a bankruptcy case--for example, where a bankruptcy case 
began with the filing of a petition for reorganization under Chapter 11 
of the Bankruptcy Code but was later converted to a liquidation case 
under Chapter 7. The proposed regulation clarifies that, in such a 
situation, the date of the original bankruptcy petition is the 
bankruptcy filing date. This is consistent with section 348 of the 
Bankruptcy Code, which provides that conversion of a case from one 
chapter to another under the Bankruptcy Code does not change the date 
of the filing of the petition.
    The second situation involves plans that have more than one 
contributing sponsor. Section 404 of PPA 2006 applies where a plan 
terminates during the bankruptcy proceeding of ``a'' contributing 
sponsor of a plan. Although most terminating single-employer plans have 
only a single contributing sponsor, some plans have more than one 
contributing sponsor. If a plan with multiple contributing sponsors 
terminates during the sponsors' bankruptcy proceedings and if the 
various sponsors all filed for bankruptcy on the same date, the 
proposed regulation provides that that date is the bankruptcy filing 
date.
    However, if the various contributing sponsors filed for bankruptcy 
on different dates, or if not all of them have filed for bankruptcy, it 
is not obvious what date should be treated as the bankruptcy filing 
date. PBGC believes that it would be impracticable to use more than one 
bankruptcy filing date in determining benefits under a single plan. But 
PBGC also believes that it would be unwise to attempt to establish a 
mechanical rule on what date to use that would apply in all cases. The 
proposed regulation therefore provides that, where a plan has more than 
one contributing sponsor and not all sponsors filed for bankruptcy on 
the same date, PBGC will determine the date to treat as the bankruptcy 
filing date for determining guaranteed benefits and benefits in 
priority category 3. PBGC's determination will be based on all the 
relevant facts and circumstances, which may include such things as the 
size of the various contributing sponsors, the relative amounts of 
their minimum required contributions to the plan, the amount of time 
between bankruptcy filing dates, and the expectations of participants 
regarding continuation of the plan.
    The third situation involves liquidation or reorganization cases 
that are filed, not under the U.S. Bankruptcy Code, but under a 
``similar * * * law of a state or political subdivision.'' Some states 
have insolvency statutes similar to the U.S. Bankruptcy Code and 
include provisions similar to 11 U.S.C. 301(a), 302(a), and 303(b) 
under which a case is commenced by the filing of a petition in court. 
The date on which such a petition is filed would be treated as the 
bankruptcy filing date under the proposed rule. Other, perhaps more 
informal, proceedings, such as assignments for the benefit of 
creditors, may have different procedures for commencing cases, which 
may vary from state to state. For such proceedings, PBGC would make 
case-by-case determinations on what date is most analogous to the date 
of the filing of a bankruptcy petition and would treat that date as the 
bankruptcy filing date.

Changes Unrelated to PPA 2006

    A few minor changes unrelated to the PPA 2006 amendments are 
proposed. For example, in Sec. Sec.  4022.4(a)(1), 4044.2, and 4044.13, 
the proposed regulation would change the words ``date of termination'' 
or ``date of plan termination'' to ``termination date'' to conform to 
the current phrasing in section 4048(a) of ERISA. The proposed 
regulation would amend Sec.  4022.4 to codify PBGC's practice of 
allowing a participant who has elected an optional annuity form of 
benefit (not a lump sum) at any time up until the date that PBGC is 
appointed statutory trustee of the plan to receive his benefit in that 
form, even if it is not one of the PBGC optional forms under Sec.  
4022.8(c) of the regulations. The proposed regulation would also 
correct the reference in Sec.  4022.22 to the provision of the Internal 
Revenue Code defining ``earned income''; the definition has been moved 
from section 911(b) to section 911(d)(2) of the Code since PBGC's 
original regulation was adopted.
    A new Sec.  4022.62(b)(5) has been added to clarify that the rules 
in Sec.  4022.62(b), which generally apply to the calculation of 
estimated benefits pending PBGC's determination of final benefits, do 
not override the requirements of subparts A or B of part 4022 with 
respect to the requirements for a benefit to be guaranteed by PBGC.

Coordination With Other PPA 2006 Amendments

    Section 404 was only one of a number of provisions of PPA 2006 that 
affect the determination of benefits under Title IV. PBGC's regulations 
therefore must coordinate the various provisions, where necessary. 
Below is a description of certain PPA 2006 amendments that interrelate 
with the changes made by section 404.

[[Page 37398]]

Shutdown Benefits and Other Unpredictable Contingent Event Benefits

    One situation requiring coordination involves section 403 of PPA 
2006, which added new section 4022(b)(8) to the guarantee provisions of 
Title IV. Section 4022(b)(8) provides a special phase-in rule for 
shutdown benefits and other ``unpredictable contingent event 
benefits.'' In cases to which that provision applies, PBGC is to apply 
the phase-in rules of section 4022 as if a plan amendment had been 
adopted on the date that the unpredictable contingent event occurred. 
For example, in a case in which new section 4022(g) does not apply, if 
an unpredictable contingent event occurred more than two years but less 
than three years before the termination date, this would mean that the 
guarantee of a benefit increase arising from the unpredictable 
contingent event would be 40% phased in.
    But if section 4022(g) also applies to such a case, PBGC believes 
that, as with other benefit increases, the five-year phase-in period 
must be measured by reference to the bankruptcy filing date, not the 
termination date. Thus, continuing the above example, if the sponsor's 
bankruptcy filing date were one year before the plan's termination 
date, then the guarantee of the unpredictable contingent event benefit 
would be only 20% rather than 40% phased in, because the unpredictable 
contingent event would have occurred more than one year but less than 
two years before the bankruptcy filing date. Section 4022(b)(8) applies 
to benefits that become payable as a result of an unpredictable 
contingent event that occurs after July 26, 2005.
    PBGC intends to issue a separate proposed rule to implement section 
4022(b)(8).

Commercial Airlines

    Another provision that raises coordination issues is PPA 2006 
section 402(g)(2)(A), which added new section 4022(h) to Title IV. 
Section 4022(h) modifies the guarantee and asset allocation rules 
primarily for plans of commercial airlines that make an election under 
section 402(a)(1) of PPA 2006 (relating to special minimum funding 
rules) and that terminate within 10 years of such election. Section 
4022(h) provides that when those conditions are met, section 4022 is to 
be applied by treating the first day of the first applicable plan year 
(for the special airline funding rules) as the termination date of the 
plan. It also provides generally that the plan's assets are to be 
allocated first to the benefits that would have been guaranteed but for 
this provision (i.e., ahead of benefits in all other priority 
categories under section 4044). Section 4022(h) applies to plan years 
ending after August 17, 2006.
    The proposed regulation does not address implementation of section 
4022(h) or how it interrelates with the amendments made by section 404 
of PPA 2006. PBGC intends to do so in a future rulemaking.

Substantial Owner Benefits

    Section 407 of PPA 2006 amended section 4022(b)(5) of ERISA, which 
previously provided a special phase-in rule for PBGC's guarantee of the 
benefits of ``substantial owners,'' who were generally defined as those 
owning more than 10% of the business. Under the amendment, a special 
phase-in rule applies only to benefits of ``majority owners,'' 
generally defined as those owning 50% or more of the business. The 
amendment also completely revamped the way in which the special phase-
in rule works. Previously, the substantial owner phase-in rule was used 
in lieu of the usual phase-in rule for benefits of substantial owners. 
The new majority owner phase-in rule, by contrast, applies in addition 
to the usual phase-in rule, but the additional limitation looks back 
only 10 years rather than 30 years. Finally, section 407 of PPA 2006 
amended section 4044 of ERISA to change the treatment in priority 
category 4 of benefits subject to the majority owner phase-in. These 
section 407 amendments are effective for distress terminations in which 
notices of intent to terminate are provided on or after January 1, 
2006, and for involuntary terminations in which notices of 
determination are provided on or after January 1, 2006.
    The proposed regulation does not address implementation of these 
changes or how they interrelate with the amendments made by section 404 
of PPA 2006. PBGC intends to do so in a future rulemaking.

Applicability

    Section 404(c) of PPA 2006 provided that the changes made by 
section 404 apply to any plan whose termination date occurs while 
bankruptcy proceedings are pending with respect to the contributing 
sponsor of the plan, if the bankruptcy proceedings were initiated on or 
after September 16, 2006. Bankruptcy proceedings are pending, for this 
purpose, if the contributing sponsor has filed or has had filed against 
it a petition seeking liquidation or reorganization in a case under 
title 11, United States Code, or under any similar Federal law or law 
of a State or political subdivision, and the case has not been 
dismissed as of the termination date of the plan. Accordingly, the 
proposed regulation, which implements the statutory changes, likewise 
applies to terminations occurring during a bankruptcy proceeding of the 
contributing sponsor that was initiated on or after September 16, 2006.

Compliance With Rulemaking Guidelines

E.O. 12866

    PBGC has determined, in consultation with the Office of Management 
and Budget, that this rule is a ``significant regulatory action'' under 
Executive Order 12866. The Office of Management and Budget has 
therefore reviewed this notice under E.O. 12866. Pursuant to section 
1(b)(1) of E.O. 12866 (as amended by E.O. 13422), PBGC identifies the 
following specific problems that warrant this agency action: Section 
404 of the Pension Protection Act of 2006 made significant changes to 
provisions of Title IV of ERISA relating to the guarantee of benefits 
under section 4022 and the allocation of a terminated plan's assets 
under section 4044. The proposed rule implements those statutory 
changes and, as described in this preamble, clarifies the implications 
of those changes in areas where there might be ambiguity in the absence 
of a regulation. The proposed rule provides guidance to participants 
and beneficiaries of terminated plans about their benefits paid by 
PBGC; it will also assist PBGC staff in making benefit determinations. 
Except for a few minor housekeeping items described above under 
``Changes Unrelated to PPA 2006,'' the proposed rule is limited to 
implementing and clarifying the changes made by section 404.

Regulatory Flexibility Act

    PBGC certifies under section 605(b) of the Regulatory Flexibility 
Act (5 U.S.C. 601 et seq.) that the amendments in this proposed 
regulation would not have a significant economic impact on a 
substantial number of small entities. The amendments implement and in 
some cases clarify statutory changes made in PPA 2006; they do not 
impose new burdens on entities of any size. Virtually all of the 
statutory changes affect only PBGC and persons who receive benefits 
from PBGC. Accordingly, as provided in section 605 of the Regulatory 
Flexibility Act, sections 603 and 604 do not apply.

[[Page 37399]]

List of Subjects

29 CFR Part 4001

    Pensions.

29 CFR Part 4022

    Pension insurance, Pensions, Reporting and recordkeeping 
requirements.

29 CFR Part 4044

    Pension insurance, Pensions.

    For the reasons given above, PBGC proposes to amend 29 CFR parts 
4001, 4022, and 4044 as follows.

PART 4001--TERMINOLOGY

    1. The authority citation for part 4001 continues to read as 
follows:

    Authority: 29 U.S.C. 1301, 1302(b)(3).

    2. In Sec.  4001.2:
    a. Amend the definition of ``basic-type benefit'' by adding at the 
end: ``In a PPA 2006 bankruptcy termination, it also includes a benefit 
accrued by a participant, or to which a participant otherwise became 
entitled, on or before the plan's termination date but that is not 
guaranteed solely because of the provisions of Sec. Sec.  4022.3(b) or 
4022.4(c).''
    b. Amend the definition of ``sufficient for guaranteed benefits'' 
by adding at the end: ``In a PPA 2006 bankruptcy termination, the 
determination whether a plan is sufficient for guaranteed benefits is 
made taking into account the limitations in sections 4022(g) and 
4044(e) of ERISA (and corresponding provisions of these regulations). 
The determinations of which benefits are guaranteed and which benefits 
are in priority category 3 under section 4044(a)(3) of ERISA are made 
by reference to the bankruptcy filing date, but the present values of 
those benefits are determined as of the proposed termination date and 
the date of distribution.''
    c. Add two new definitions in alphabetical order to read as 
follows:


Sec.  4001.2  Definitions.

* * * * *
    ``Bankruptcy filing date means the date on which a petition 
commencing a case under the United States Bankruptcy Code is filed, or 
the date on which any similar filing is made commencing a case under 
any similar Federal law or law of a state or political subdivision, 
with respect to the contributing sponsor of a plan, if such case has 
not been dismissed as of the termination date of the plan. If a 
bankruptcy petition is filed under one chapter of the United States 
Bankruptcy Code, or under one chapter or provision of any such similar 
law, and the case is converted to a case under a different chapter or 
provision of such Code or similar law (for example, a Chapter 11 
reorganization case is converted to a Chapter 7 liquidation case), the 
date of the original petition is the bankruptcy