Bankruptcy Filing Date Treated as Plan Termination Date for Certain Purposes; Guaranteed Benefits; Allocation of Plan Assets; Pension Protection Act of 2006, 34590-34606 [2011-14241]

Agencies

• Pension Benefit Guaranty Corporation

[Federal Register Volume 76, Number 114 (Tuesday, June 14, 2011)]
[Rules and Regulations]
[Pages 34590-34606]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-14241]


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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: Final rule.

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SUMMARY: This final rule implements 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 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. In most cases, this reduces 
the amount of guaranteed benefits and the amount of benefits in 
priority category 3.

DATES: Effective July 14, 2011. See Applicability in SUPPLEMENTARY 
INFORMATION.

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, for which premiums are paid 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's 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

[[Page 34591]]

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 final 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 was 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 final 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.
    On July 1, 2008 (at 73 FR 37390), PBGC published in the Federal 
Register a proposed rule to implement section 404 of PPA 2006. PBGC 
received comments on the proposed rule from four commenters--three 
labor organizations and one individual. The individual commenter 
opposed the proposed rule changes in their entirety on the ground that 
PBGC ``should not shore up its finances on the backs of workers.'' 
Rather, the commenter stated, Congress has a responsibility to address 
the solvency of the PBGC insurance program either by raising taxes or 
increasing PBGC premiums, or by forcing employers to fully fund their 
pensions. This comment should be addressed to Congress; PBGC has no 
authority to disregard the statutory changes made by PPA 2006. The 
other comments are discussed below with the topics to which they 
relate.

Overview of Final Rule Changes

    The final regulation implements the statutory changes, described 
above, made by section 404 of PPA 2006.
    The final regulation amends PBGC's regulations on Terminology, 29 
CFR part 4001; Benefits Payable in Terminated Single-Employer Plans, 29 
CFR part 4022; and Allocation of Assets in Single-Employer Plans, 29 
CFR part 4044. The amendments 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 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 in effect throughout the 
period beginning five years before the bankruptcy filing date and 
ending on the termination 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

[[Page 34592]]

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 final regulation is nearly the same as the proposed regulation, 
with only a few minor differences. Those differences are discussed 
below with the topics to which they relate. And, like the proposed 
regulation, the final regulation makes some minor changes unrelated to 
PPA 2006.
    A detailed discussion of the final regulation follows.

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 the greater of (i) 20% of the monthly increase or (ii) 
$20 per month (but the guarantee is never more than the amount of the 
increase). For example, PBGC would guarantee $50 of a $125 monthly 
benefit increase that was in effect more than two years but less than 
three years before the termination date (40% of $125 = $50, which is 
greater than $40). A benefit increase is considered to be in effect 
beginning on the later of its adoption date or its effective date.
    There is a third limitation on PBGC's guarantee that the agency 
adopted when it issued its initial guaranteed-benefits regulation. (40 
Fed. Reg. 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. The effect of this provision, often referred to 
as the ``accrued-at-normal'' limit, is 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 is 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.
    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 are not guaranteed. Thus, under the change, a 
participant's guaranteed benefit is 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 are 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 has 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 is not 
guaranteed.
    One commenter suggested that PBGC should not apply the rule 
described in

[[Page 34593]]

the previous paragraph to participants who become disabled after the 
bankruptcy filing date but before the termination date. The commenter 
noted that the effects could be especially harsh in the case of 
disability, and that a different rule ought to apply because becoming 
disabled is not a choice over which a participant has control and is 
subject to verification. PBGC has not adopted this suggestion. Under 
ERISA and PBGC's rules, disability retirement benefits are treated the 
same as other benefits in determining nonforfeitability: They are 
nonforfeitable (and thus guaranteed) only if the condition for 
entitlement, such as the disabling event, occurred on or before the 
termination date. PPA 2006 changed the date for determining entitlement 
to a guaranteed benefit from the termination date to the bankruptcy 
filing date, but did not otherwise change the guarantee rules. Thus, 
PBGC believes it would not be appropriate to make the suggested change.
    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 (subject to the 
refinement described below). 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 final rule modifies PBGC's regulations to reflect the changes 
described above for PPA 2006 bankruptcy terminations. In most cases, 
the final regulation (like 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 final regulation provides a number of examples to clarify what this 
means in various situations. In response to a comment, the final 
regulation provides a second example (in addition to the one in the 
proposed rule) to illustrate the workings of the accrued-at-normal 
limit. Except for a few minor items discussed below, the regulations 
are unchanged for plans to which the PPA 2006 amendments do not apply 
(``non-PPA 2006 bankruptcy termination''; the final rule adds this term 
to the definitions in Sec.  4001.2).
    The final regulation contains one refinement that was not addressed 
in the proposed regulation. The proposed regulation provided that PBGC 
would determine the guarantee limits based on the age of the 
participant and the form of benefit that was being paid at the later of 
the bankruptcy filing date and the date the participant begins to 
receive his benefit from PBGC. The final regulation adopts this rule, 
but with a slight modification that applies primarily in cases in which 
there has been a death before termination that affects the form of 
benefit being paid at termination. PBGC has decided that the guarantee 
limits should be applied based on the form of benefit that was being 
paid (or was payable) and the person who was receiving or was entitled 
to receive a benefit from PBGC as of the termination date, not the 
bankruptcy filing date. For example, if as of the bankruptcy filing 
date a participant was receiving a benefit in the form of a joint-and-
survivor annuity, but by the termination date the participant has died 
and his spouse is receiving a survivor annuity, PBGC will determine the 
maximum guaranteeable benefit for the surviving spouse based on the 
spouse's age as of the bankruptcy filing date but based on the 
straight-life benefit form being paid to the spouse at the termination 
date rather than on the joint-and-survivor benefit form that was being 
paid as of the bankruptcy filing date. Similarly, if the benefit in pay 
status as of the bankruptcy filing date was a ``pop up'' annuity (a 
joint-and-survivor annuity under which the benefit amount ``pops up'' 
to the straight-life amount if the beneficiary dies before the 
participant) and the beneficiary dies before the termination date, PBGC 
will determine the maximum guaranteeable benefit based on the 
participant's age as of the bankruptcy filing date but based on the 
straight-life benefit form being paid to the participant at the 
termination date rather than on the joint-and-survivor ``pop up'' form 
that was being paid as of the bankruptcy filing date.
    The final rule adopts this refinement, which will generally 
increase guaranteed benefits for the affected individuals, to reduce 
the complexity and difficulty of computing benefits. When a plan 
terminates, the plan records often do not reflect the full history of a 
specific benefit. For example, the records may show only that an 
individual is receiving so many dollars per month at termination and 
that no survivor benefit is payable; they may not show whether the 
person receiving that benefit is the original plan participant or a 
beneficiary. An additional example has been added to Sec.  4022.23(g) 
to illustrate this principle.

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 is making 
no change to part 4022B of its regulations, and will continue to 
calculate the aggregate limit 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 
section 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

[[Page 34594]]

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 and had 
commenced receiving benefits (in the normal form of annuity under the 
plan) as of the beginning of such 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 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, 
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:

    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 
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. In the proposed rule, PBGC stated that 
it interpreted 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. The 
proposed rule stated that 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 proposed rule 
also stated that the exception in Sec.  4044.13(b)(5) for certain 
``automatic'' benefit increases would apply to applicable benefit 
increases in the fourth and fifth years preceding the bankruptcy filing 
date.)
    The final rule adopts these proposals, but with a slight 
modification that will apply only in limited circumstances. The three-
year period, as under the proposed rule, is the three-year period 
before the bankruptcy filing date. But for the five-year period, PBGC 
realized that it would not be appropriate to simply substitute the 
bankruptcy filing date for the termination date. Although that 
formulation would present no problems in the case of a benefit that 
increased during the years before a bankruptcy filing, it could have 
anomalous results in the case of a benefit that decreased between the 
bankruptcy filing date and the termination date. (A benefit might 
decrease, for example, due to the expiration of a temporary supplement 
or a plan amendment eliminating an ancillary benefit that is not 
protected by section 411(d)(6) of the Internal Revenue Code.) Not 
taking account of such a decrease could mean that a participant's 
priority category 3 benefit would be larger than the participant's 
total benefit as of the termination date. It makes no sense to provide 
priority treatment for an amount larger than the amount of the 
participant's entire benefit as of termination.
    To address that anomaly, the final rule creates a new term in Sec.  
4044.13(c)(1)--the ``applicable pre-termination period''--to describe 
the period that includes the five years before the bankruptcy filing 
date plus the additional time between the bankruptcy filing date and 
the termination date. The final rule provides that the benefit in 
priority category 3 is limited to the lowest annuity benefit payable 
under the plan provisions at any time during the applicable pre-
termination period.
    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

[[Page 34595]]

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 
final 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 for 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 changes 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 section 4044(e) 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 is taking the simpler and more 
coherent approach of valuing benefits and assets as of the termination 
date for all priority categories.
    Accordingly, PBGC is making 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. (PBGC's determination of a 
participant's expected retirement age may be affected by the new PPA 
2006 rules, however, because, as explained above, those rules may 
change the amount of a participant's guaranteed benefit, and a change 
in the guaranteed benefit in some cases affects the expected retirement 
age.) 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

[[Page 34596]]

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 final 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 final 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 final 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 final rule adds 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 will 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 will be allocated to the unfunded 
nonguaranteed benefits of participants in the same manner as before PPA 
2006, but the result of the allocation will 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 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 Sec. Sec.  4041.42(c), 4022.61-
4022.63. The final 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 
final 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 termination 
benefit of $3,100 per month while PBGC is processing the termination of 
the plan, and PBGC later determines that the participant is entitled to 
a termination benefit of only $3,000 per month, the agency generally 
recoups the net overpayment (the $100 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 final rule (like the 
proposed rule) 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 regulation provides 
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 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

[[Page 34597]]

recoup overpayments made before initiation of the termination 
proceedings even though those overpayments were made after (what later 
became) the termination date.
    In the preamble to the proposed rule, PBGC proposed not to make any 
change to this rule. As under prior law, the preamble stated, in 
determining the amount to be recouped (or otherwise recovered, if there 
are no future benefits from which to recoup), PBGC would 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. Several commenters 
applauded this aspect of the proposed rule. They stated that this was a 
fair proposal that would moderate the hardship that would otherwise 
result if PBGC were to treat as overpayments subject to recoupment 
benefit payments made after the bankruptcy filing date that exceeded 
the Title IV limitations. These commenters asked only that PBGC make 
this treatment explicit in the regulation itself. To avoid any doubt 
about this matter, PBGC has accepted this suggestion. PBGC has thus 
included a new Sec.  4022.81(c)(3) in the regulation explicitly stating 
that the rules regarding the overpayments and underpayments that will 
be taken into account in determining any amount to be recouped or 
reimbursed by PBGC apply regardless of whether the termination is a PPA 
2006 bankruptcy termination.

Continuation of Payments; 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 if it became nonforfeitable by the termination date. 
This includes, for example, a subsidized early retirement benefit or 
disability 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 proposed regulation proposed 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 would be continued in pay status or, if 
they were not already receiving a benefit, would be allowed to go into 
pay status. The amount of such a benefit, however, would be reduced to 
reflect that the subsidy or other benefit is not guaranteed.
    PBGC received several comments on this proposal. One commenter 
suggested that PBGC should give a choice to participants who became 
entitled to a subsidized early retirement or other benefit between the 
bankruptcy filing date and the termination date and went into pay 
status with that benefit. The choice would be either to remain in pay 
status but with the benefit reduced to reflect that the subsidy or 
other benefit is not guaranteed, or to come out of pay status with the 
ability to resume benefit payments at a later date.
    The final rule does not adopt this suggestion. In the situations in 
question, the participant was entitled under the plan to the subsidized 
or other benefit at the time he was put into pay status and the benefit 
was nonforfeitable as of the termination date. Even though the benefit 
is not guaranteed because of section 4022(g), some or all of it may be 
paid by PBGC in priority category 5, depending on the level of the 
plan's assets and PBGC's recoveries on its claims for unfunded benefit 
liabilities under section 4062(b) of ERISA. Moreover, the Title IV 
limits on PBGC's guarantee have often resulted in substantial 
reductions to retirees' benefits, but PBGC historically has not offered 
a choice to such retirees to come out of pay status and resume benefits 
later.\1\ If PBGC were to allow such a choice in the situations 
addressed in this regulation, it might seem unfair not to allow a 
similar choice to any retiree whose benefit is reduced because of Title 
IV limits. But allowing a potentially large number of participants to 
come out of pay status and resume benefits later would create 
complications, including how to account for the benefits previously 
received and possible disputes about entitlement if, for example, the 
participant in the interim has divorced and remarried or a spouse has 
died. For these reasons, PBGC does not believe it would be appropriate 
to offer a choice to come out of pay status in these situations.
---------------------------------------------------------------------------

    \1\ PBGC in the past has allowed participants the option to come 
out of pay status (and resume benefits later) in very limited 
circumstances, such as where a participant was mistakenly put into 
pay status by the plan administrator at a time when the participant 
was not entitled to any benefit under the plan. Relatively few 
participants have taken advantage of this option in any event, and 
for the reasons stated in the text PBGC is not inclined to expand 
the group to whom such a choice is offered.
---------------------------------------------------------------------------

    A commenter also suggested that PBGC specify in the regulations how 
it will determine the amount of the reduction in the benefit in these 
situations. The final rule does not adopt this suggestion. There are 
quite a number of different situations that may arise, and different 
rules may be needed for each. For example, in one case a participant 
who is not entitled to a fully subsidized early retirement benefit 
because he had not satisfied the conditions for it by the bankruptcy 
filing date may not be entitled to any other early retirement benefit. 
In that case a full actuarial reduction from the accrued benefit would 
be appropriate. In another case, although a participant might not be 
entitled to the fully subsidized benefit he had been receiving, he 
might be entitled to a different, partially subsidized benefit for 
which he had satisfied the conditions by the bankruptcy filing date. In 
that case, the reduction would not be a full actuarial reduction from 
the accrued benefit but rather would take into account the partially 
subsidized benefit to which the participant was entitled. Also, the 
plan may or may not have actuarial reduction factors for the 
participant's age (since under the plan they may not have been needed). 
PBGC believes that specifying reduction factors in this regulation for 
a wide range of theoretical scenarios would add more complexity than 
clarity.
    Finally, a commenter noted that the proposed rule had described how 
PBGC will treat participants who become entitled to a benefit between 
the bankruptcy filing date and the termination date only in an example 
about subsidized early retirement benefits. Because this treatment 
applies to any benefit to which a participant becomes entitled between 
the bankruptcy filing date and the termination date, the commenter 
suggested that PBGC include it in a separate paragraph rather than 
merely as part of an example. This suggestion is a good one and has 
been adopted in Sec.  4022.3(b)(2).

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. (See section 4041(c)(2)(A) of ERISA.) In 
making those determinations, the actuary must take into account 
nonguaranteed benefits to which the

[[Page 34598]]

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. 
(See section 4041(c)(3)(A) of ERISA.) 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. (See section 
4041(c)(3)(B)(ii) of ERISA.) 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 final 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 must 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 limit in Sec.  4022.21, as nonbasic-type 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 final regulation 
modifies 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 final 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 final 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. The final regulation provides that 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, 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. 
Thus, where a plan has more than one contributing sponsor and not all 
sponsors filed for bankruptcy on the same date, the proposed regulation 
provided that PBGC would determine the date to treat as the bankruptcy 
filing date for determining guaranteed benefits and benefits in 
priority category 3. PBGC's determination would be based on the facts 
and circumstances, which might include such things as the relative 
sizes of the various contributing sponsors, the relative amounts of 
their minimum required contributions to the plan, the timing of the 
different bankruptcies, and the expectations of participants.
    One commenter suggested a change to the proposal described in the 
previous paragraph regarding plans that have more than one contributing 
sponsor that filed for bankruptcy on different dates. Noting the 
importance to participants of the date chosen as the bankruptcy filing 
date, the commenter urged that the final rule provide that PBGC 
either--
     Obtain a court determination of the appropriate bankruptcy 
filing date; or

[[Page 34599]]

     Issue a not