Owner-Participant Changes to Guaranteed Benefits and Asset Allocation, 9716-9723 [2018-04609]

Agencies

• Pension Benefit Guaranty Corporation

[Federal Register Volume 83, Number 45 (Wednesday, March 7, 2018)]
[Proposed Rules]
[Pages 9716-9723]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-04609]


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PENSION BENEFIT GUARANTY CORPORATION

29 CFR Parts 4001, 4022, 4041, 4043, and 4044

RIN 1212-AB24


Owner-Participant Changes to Guaranteed Benefits and Asset 
Allocation

AGENCY: Pension Benefit Guaranty Corporation.

ACTION: Proposed rule.

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SUMMARY: The Pension Benefit Guaranty Corporation (PBGC) proposes to 
amend its regulations on guaranteed benefits and asset allocation. 
These amendments would incorporate statutory changes to the rules for 
participants with certain ownership interests in a plan sponsor. PBGC 
seeks public comment on its proposal.

DATES: 
    Deadline for comments: Comments must be submitted on or before May 
7, 2018.
    Applicability: Like the provisions of the Pension Protection Act of 
2006 (PPA 2006) that this rule would incorporate, the amendments in 
this proposed rule would be applicable to plan terminations--
    (A) under section 4041(c) of the Employee Retirement Income 
Security Act of 1974 (ERISA) with respect to which notices of intent to 
terminate are provided under section 4041(a)(2) of ERISA after December 
31, 2005, and
    (B) under section 4042 of ERISA with respect to which notices of 
determination are provided under that section after December 31, 2005.

ADDRESSES: Comments, identified by Regulation Identifier Number (RIN) 
1212-AB24, may be submitted by any of the following methods:
     Federal eRulemaking Portal: https://www.regulations.gov. 
(Follow the online instructions for submitting comments.)
     Email: [email protected].
     Mail or Hand Delivery: Regulatory Affairs Division, Office 
of the General Counsel, Pension Benefit Guaranty Corporation, 1200 K 
Street NW, Washington, DC 20005-4026.

    All submissions must include the RIN for this rulemaking (RIN 1212-
AB24). Comments received will be posted to www.pbgc.gov. Copies of 
comments may also be obtained by writing to Disclosure Division, Office 
of 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 users may call the Federal relay service 
toll-free at 800-877-8339 and ask to be connected to 202-326-4040.)

FOR FURTHER INFORMATION CONTACT: Samantha M. Lowen 
([email protected]), Attorney, Regulatory Affairs Division, 
Office of the General Counsel, Pension Benefit Guaranty Corporation, 
1200 K Street NW, Washington, DC 20005-4026; 202-326-4400, extension 
3786. (TTY and TDD users may call the Federal relay service toll-free 
at 800-877-8339 and ask to be connected to 202-326-4400, extension 
3786.)

SUPPLEMENTARY INFORMATION: 

Executive Summary

Purpose of the Regulatory Action

    This proposed rule is necessary to conform the regulations of PBGC 
to current law and practice. PBGC proposes to incorporate statutory 
changes affecting guaranteed benefits and asset allocation when a plan 
has one or more participants with certain ownership interests in the 
plan sponsor. PBGC's legal authority for this action comes from 
sections 4002(b)(3), 4022, and 4044 of ERISA. Section 4002(b)(3) 
authorizes PBGC to issue regulations to carry out the purposes of title 
IV of ERISA. Sections 4022 and 4044 authorize PBGC to prescribe 
regulations regarding the determination of guaranteed benefits and the 
allocation of assets within priority categories, respectively.

Major Provisions

    This proposed rule would amend PBGC's benefit payment regulation by 
replacing the guarantee limitations applicable to substantial owners 
with a new limitation applicable to majority owners.\1\ Additionally, 
this proposed rule would amend PBGC's asset allocation regulation by 
prioritizing funding of all other benefits in priority category 4 ahead 
of those benefits that would be guaranteed but for the new, owner-
participant limitation. The proposed rule also clarifies that plan 
administrators may continue to use the simplified calculation in the 
existing rule to estimate benefits funded by plan assets. Finally, it 
provides new examples to aid in implementation.
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    \1\ In this preamble, substantial owners and majority owners are 
referred to interchangeably as ``owner-participants.''
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Background

    PBGC administers the pension insurance program under title IV of 
ERISA. ERISA sections 4022 and 4044 cover PBGC's guarantee of plan 
benefits and allocation of plan assets, respectively, under terminated 
single-employer plans. Special provisions within these sections apply 
to ``owner-participants,'' who have certain ownership interests in 
their plan sponsors. PPA 2006 made changes to these provisions. PBGC 
has been operating in accordance with the amended provisions since they 
became effective, but has not yet updated its regulations nor issued 
guidance on implementation. With this rulemaking, PBGC intends to 
increase transparency into its operations and to clarify for plan 
administrators the impact of the statutory changes.
    Before PPA 2006, the owner-participant provisions applied to any 
participant who was a ``substantial owner'' at any time within the 60 
months preceding the date on which the determination was made. ERISA 
defines a substantial owner as an individual who owns the entire 
interest in an unincorporated trade or business, or a partner or 
shareholder who owns more than 10 percent of the partnership or 
corporation. PPA 2006 revised the owner-participant provisions, in 
large part, by making them applicable to ``majority owners'' instead of 
substantial owners. ERISA defines a majority owner as an individual who 
owns the entire interest in an unincorporated trade or business, or a 
partner or shareholder who owns 50 percent or more of the entity.

[[Page 9717]]

Guaranteed Benefits Before and After PPA 2006

    ERISA section 4022 imposes several limitations on PBGC's guarantee 
of plan benefits, including the ``phase-in limitation.'' As the name of 
this limitation suggests, PBGC's guarantee of a plan's benefits is 
phased in over a specified time period. Before PPA 2006, this time 
period was drastically different for owner-participants and for all 
other participants; the benefits of owner-participants were phased in 
over 30 years, whereas the benefits of non-owner-participants were 
phased in over five years. In addition, the extent to which an owner-
participant's benefit was phased in was unique to each owner-
participant and based on the number of years he or she was an active 
participant in the plan; whereas the extent to which all other 
participants' benefits were phased in was based on the number of years 
a plan provision--specifically, one that increased benefits--was in 
effect before the plan terminated.
    PPA 2006 greatly simplified the method for determining PBGC's 
guarantee of owner-participants' benefits by eliminating the 30-year 
phase-in and making the five-year phase-in of benefit increases 
applicable to owner-participants and non-owner-participants alike. PPA 
2006 then applies a separate, additional limitation--the ``owner-
participant limitation''--to an owner-participant's otherwise 
guaranteed benefit. This owner-participant limitation is similar to the 
five-year phase-in limitation on benefit increases, as it is calculated 
based on a plan's age; however, it is based on the length of time the 
original plan was in existence, regardless of whether the plan 
increased benefits, and the phase-in period is 10 years. The owner-
participant limitation bears little resemblance to the 30-year phase-in 
limitation, and the calculations are much simpler. This proposed rule 
would incorporate these changes to PBGC's benefit payment regulation.

Phase-In Limitation

    Sections 4022.25 and 4022.26 of PBGC's benefit payment regulation 
provide the procedures for calculating the five-year phase-in of 
benefit increases for non-owner-participants and the 30-year phase-in 
of all benefits for owner-participants, respectively. Section 4022.25 
provides, generally, that benefit increases (as defined in Sec.  
4022.2) of non-owner-participants are phased in by the greater of $20 
or 20 percent of the increase for each full year the increase was 
effective. Section 4022.26 provides the much more complicated 
procedures for calculating the guaranteed benefits of owner-
participants--based on a 30-year phase-in--before PPA 2006; different 
procedures apply depending on whether or not there have been any 
benefit increases. As explained above, PPA 2006 eliminated the 30-year 
phase-in limitation and made the five-year phase-in of benefit 
increases applicable to all participants, including owner-participants. 
Accordingly, PBGC proposes to amend the benefit payment regulation by 
removing the distinction between owner-participants and all other 
participants under Sec.  4022.25, and PBGC proposes to amend Sec.  
4022.26 by replacing the 30-year phase-in limitation with a new 
``owner-participant limitation,'' as discussed next.

Owner-Participant Limitation

    PPA 2006 provided a new formula for determining PBGC's guarantee of 
an owner-participant's benefit. Under this owner-participant 
limitation, an owner-participant's guaranteed benefit is limited to the 
product of the owner-participant's otherwise-guaranteed benefit and a 
fraction, not to exceed one. The numerator of this fraction equals the 
number of years that the plan was in existence (from the later of its 
effective date or adoption date), and the denominator equals 10.
    Compared to the 30-year phase-in under the old statute--implemented 
at Sec.  4022.26 of the benefit payment regulation--the owner-
participant limitation is much simpler to calculate and generally 
provides a much more generous guarantee. Before PPA 2006, PBGC needed 
to make individualized determinations about the length of time each 
substantial owner was an active participant in a plan over a 30-year 
period. Additionally, a substantial owner needed to have been an active 
participant for at least 30 years in order for his or her benefit to be 
fully guaranteed (to the extent that other limitations on PBGC's 
guarantee did not apply). Under PPA 2006, PBGC needs only to calculate 
a single fraction, based on the age of the plan, and then to multiply 
the benefit of each majority owner under the plan by that same 
fraction. In addition, all majority owners' benefits are now fully 
guaranteed (to the extent that other limitations on PBGC's guarantee do 
not apply) once a plan has been in existence for 10 years.
    Consistent with these statutory changes, PBGC proposes to amend the 
benefit payment regulation by replacing references to ``substantial 
owner'' with ``majority owner'' and by revising Sec.  4022.26 to 
provide the formula for calculating the owner-participant limitation, 
in the place of the 30-year phase-in limitation.

Asset Allocation in Priority Category 4 Before and After PPA 2006

    ERISA section 4044 prescribes the method for allocating a 
terminated single-employer plan's assets to its benefit liabilities. 
Under section 4044, plan assets must be allocated to six priority 
categories (PC1 through PC6, with PC1 being the highest) into which all 
plan benefits are sorted. Benefits affected by the owner-participant 
limitation are assigned to priority category 4 (PC4). PPA 2006 changed 
the method for allocating assets within PC4 when there are benefits 
affected by the owner-participant limitation.
    PC4 includes three kinds of benefits: (1) Guaranteed benefits, 
other than employee contributions and benefits that could have been in 
pay status three or more years before a plan's termination (or before 
the plan sponsor's bankruptcy filing date, for plans subject to ERISA 
section 4022(g)); (2) benefits that would be guaranteed but for the 
aggregate limit of ERISA section 4022B; and (3) benefits that would be 
guaranteed but for the owner-participant limitation (based on 
substantial ownership before PPA 2006 and majority ownership after PPA 
2006).\2\ If a plan's assets are sufficient to cover all PC4 benefits 
or are insufficient to cover any PC4 benefits, the PPA 2006 changes for 
owner-participants have no bearing on the allocation; however, if 
assets are sufficient to cover some, but not all, PC4 benefits (i.e., 
if assets are ``exhausted in PC4''), the allocation rules differ before 
and after PPA 2006.
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    \2\ Strictly speaking, this description applies to benefits in 
``net PC4,'' given that ``PC4'' (or, more accurately, ``gross PC4'') 
technically includes the three kinds of benefits listed, as well as 
all benefits in higher priority categories. Without using the terms 
``gross'' or ``net,'' PBGC's asset allocation regulation makes this 
distinction at paragraph (c) of Sec.  4044.10 (``[t]he value of each 
participant's basic-type benefit or benefits in a priority category 
shall be reduced by the value of the participant's benefit of the 
same type that is assigned to a higher priority category''). 
Nevertheless, PBGC recognizes that colloquial descriptions of 
benefits in a given priority category usually refer to the net 
benefits in that category, and this preamble follows that common 
usage, unless otherwise indicated.
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    Before PPA 2006, if assets were exhausted in PC4, then assets were 
to be allocated pro rata among all three kinds of PC4 benefits. Under 
PPA 2006, if assets are exhausted in PC4, then assets must first be 
allocated to the first two PC4 groups; only if assets cover all 
benefits in these two groups will any assets be allocated to benefits 
that

[[Page 9718]]

would be guaranteed but for the majority-owner limitation. In 
accordance with these statutory changes, PBGC proposes to amend the 
asset allocation regulation by prioritizing assets in PC4 to other 
benefits ahead of benefits affected by the majority-owner limitation.

Calculation of Estimated Benefits

    In a distress termination, Sec.  4022.61 of the benefit payment 
regulation--implementing section 4041(c)(3)(D) of ERISA--requires plan 
administrators to limit benefit payments to estimates of the amounts 
that PBGC is expected to pay, in order to minimize potential 
overpayments and exhaustion of plan assets before PBGC becomes trustee 
and is able to assume benefit payments. As trustee, PBGC pays each 
participant the greater of his or her guaranteed benefit or asset-
funded benefit.\3\ Accordingly, Sec.  4022.61 requires plan 
administrators to limit benefits in pay status to the greater of each 
participant's estimated guaranteed benefit or estimated asset-funded 
benefit, beginning on the proposed termination date.\4\
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    \3\ A participant's asset-funded benefit is essentially the 
portion of the participant's plan benefit that plan assets are 
sufficient to fund when assets are allocated according to the 
distribution rules of ERISA section 4044.
    \4\ PBGC's benefit payment regulation does not currently include 
the term ``estimated asset-funded benefit''; the term ``estimated 
title IV benefit'' is used instead. As discussed later in this 
preamble, PBGC proposes to replace the term ``estimated title IV 
benefit'' with ``estimated asset-funded benefit.'' Consistent with 
the proposed terminology change, this preamble refers to estimated 
asset-funded benefits and not to estimated title IV benefits, except 
where otherwise indicated.
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Estimated Guaranteed Benefits

    A participant's estimated guaranteed benefit is determined as of 
the proposed termination date and is the portion of the participant's 
plan benefit (viz., the benefit to which the participant would be 
entitled under the terms of the plan if the plan did not terminate) 
that does not exceed the estimated legal limits of PBGC's guarantee. 
Section 4022.62 of the benefit payment regulation prescribes the method 
for estimating PBGC's guarantee limitations and for calculating a 
participant's estimated guaranteed benefit.
    As discussed above, the changes under PPA 2006 greatly affected the 
calculation of guaranteed benefits of owner-participants. Therefore, in 
order to ensure that administrators of plans with owner-participants 
understand how to accurately estimate these benefits in distress 
terminations, PBGC must update the calculation procedures.
    Section 4022.62 provides two methods for calculating estimated 
guaranteed benefits. One method--given at paragraph 4022.62(c)--applies 
to non-owner-participants, while the other--given at paragraph 
4022.62(d)--applies to owner-participants. Both methods' calculations 
use the amount calculated under paragraph 4022.62(b) as a starting 
point. Paragraph 4022.62(b) estimates a participant's benefit that 
would be guaranteed before application of any phase-in limitation. 
Paragraph 4022.62(c) estimates the effect of the five-year phase-in 
limitation on the 4022.62(b) amount. Paragraph 4022.62(d) estimates the 
effect of the 30-year phase-in limitation applicable to owner-
participants before PPA 2006 on the 4022.62(b) amount.
    In order to reflect the changes to PBGC's guarantee limitations for 
owner-participants under PPA 2006, PBGC proposes to revise paragraph 
4022.62(d) in its entirety. As revised, paragraph 4022.62(d) would no 
longer estimate the effect of the 30-year phase-in limitation on the 
4022.62(b) amount; rather, paragraph 4022.62(d) would estimate the 
effect of the owner-participant limitation (using the n/10 
ratio that PPA 2006 introduced) on the 4022.62(c) amount. The revised 
paragraph 4022.62(d) would use the 4022.62(c) amount instead of the 
4022.62(b) amount because the five-year phase-in limitation is now 
applicable to all participants (including majority owners).

Estimated Asset-Funded Benefits

    A participant's estimated asset-funded benefit is the portion of 
the participant's plan benefit that plan assets are expected to be 
sufficient to fund through PC4, based on estimated plan assets and 
benefits in each priority category. Section 4022.63 of the benefit 
payment regulation prescribes two methods for calculating estimated 
asset-funded benefits; one applies to non-owner-participants and the 
other applies to owner-participants. Essentially, Sec.  4022.63 
provides that a non-owner-participant's estimated asset-funded benefit 
equals his or her estimated PC3 benefit and that an owner-participant's 
estimated asset-funded benefit equals the greater of his or her 
estimated PC3 benefit or estimated PC4 benefit. The PPA 2006 changes 
for owner-participants have no bearing on estimated PC3 benefits; 
however, the PPA 2006 change to asset allocation has the potential to 
affect the calculation of estimated PC4 benefits, which are payable 
only to owner-participants.
    An owner-participant's estimated PC4 benefit equals the product of 
what would be his or her estimated guaranteed benefit if the 
participant were not an owner-participant and the ``PC4 funding 
ratio.'' The PC4 funding ratio is calculated one of two ways, depending 
on whether a plan has any benefits in PC3 (viz., whether a plan has 
benefits that were or could have been in pay status three years before 
the proposed termination date). If a plan has no PC3 benefits, the PC4 
funding ratio essentially equals the estimated amount of plan assets 
divided by the estimated amount of vested benefits under the plan.\5\ 
If a plan has PC3 benefits, the PC4 funding ratio essentially equals 
the estimated amount of plan assets minus the present value of all 
benefits in pay status, all divided by the estimated amount of vested 
benefits not in pay status.\6\
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    \5\ The PC4 funding ratio excludes assets and benefits that are 
attributable to employee contributions. See 29 CFR 4022.63(d)(2).
    \6\ See note 5.
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    By calculating and then using a plan's PC4 funding ratio, an 
administrator is able to estimate the amount of assets available to 
fund all benefits in PC4. This ratio does not distinguish between 
owner-participants' benefits and all other benefits in PC4, as this 
distinction was not necessary before PPA 2006, when assets were to be 
allocated equally among the three kinds of PC4 benefits. As a result, 
while the PC4 funding ratio is a useful tool for estimating assets 
available to fund all benefits in PC4 (including those of substantial 
owners before PPA 2006), it does not account for the requirement under 
PPA 2006 to fund the benefits of majority owners only if assets remain 
after funding all other benefits in PC4.
    Under PPA 2006, continued use of the PC4 funding ratio is more 
likely to result in an inflated estimate of assets available to fund a 
majority owner's benefit. While this potential overestimation increases 
the likelihood that a majority owner's estimated benefit will exceed 
his or her actual benefit entitlement, it has no bearing on--in 
particular, it does not reduce--the estimated benefits of other 
participants. This is because the PC4 ratio is used only when 
calculating the estimated asset-funded benefit of an owner-participant. 
As stated above, the estimated asset-funded benefits of non-owner-
participants equal the participants' estimated PC3 benefits. Because 
PC3 benefits receive higher allocation priority than PC4 benefits, the 
estimated asset-funded benefit of any non-owner-participant would not 
be affected by the allocation of assets in PC4.

[[Page 9719]]

    Even without any potential harm to other participants, the concern 
remains for potentially overpaying majority owners who receive 
estimated benefits. Weighed against this concern is consideration of 
the potential burden on plan administrators that more robust estimation 
procedures would impose. Modifying the PC4 funding ratio to account for 
the funding prioritization of other PC4 benefits ahead of those of 
majority owners would require additional calculations that would seem 
to undermine the requirement of administrators to ``estimate'' asset-
funded benefits, as opposed to performing more precise calculations 
outright. Moreover, far fewer participants are likely to be majority 
owners, compared to the number likely to have been substantial owners 
before PPA 2006. This is because majority owners must have an ownership 
interest of at least 50 percent and because the majority-owner 
limitation does not apply to any plan that existed for at least 10 
years before terminating.
    Having weighed the concerns and chiefly recognizing the limited 
number of cases where a plan will have one or more majority owners as 
well as assets sufficient to fund some, but not all, benefits in PC4, 
PBGC proposes to leave its estimated asset-funded benefit provisions at 
Sec.  4022.63 substantively unchanged, with the sole exception of 
revising Example 2 under paragraph (e). Example 2 illustrates how to 
calculate the estimated asset-funded benefit of an owner-participant 
and describes the related calculation of the owner-participant's 
estimated guaranteed benefit under Sec.  4022.62. The proposed 
revisions to Example 2 would reflect the proposed changes to Sec.  
4022.62 discussed above.

Related Regulatory Amendments

    PBGC proposes to make conforming amendments to its regulations on 
Terminology, Termination of Single-employer Plans, and Reportable 
Events and Certain Other Notification Requirements.
    PBGC also proposes to correct paragraph (e) of Sec.  4022.62, which 
currently provides that in a PPA 2006 bankruptcy termination, 
``bankruptcy filing date'' is substituted for ``proposed termination 
date'' in paragraph (c) of Sec.  4022.62, by making the substitution 
applicable to both paragraph (c) (applicable to non-owner-participants) 
and paragraph (d) (applicable to owner-participants) of Sec.  4022.62. 
It is clear from the preamble to the final rule that added paragraph 
(e) that PBGC intended, consistent with PPA 2006, to have the 
applicable ``bankruptcy filing date'' substituted when calculating the 
estimated benefits of all participants, regardless of ownership 
status.\7\
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    \7\ See 76 FR 34590, 34596 (June 14, 2011) (``[t]he final 
regulation provides that for any PPA 2006 bankruptcy termination, 
those estimated benefits [calculated under 29 CFR 4022.62-4022.63] 
are based on the rules described above relating to the bankruptcy 
filing date'').
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Amendments Unrelated to PPA 2006

    PBGC proposes to make minor, non-substantive changes to the 
examples not involving owner-participants at Sec. Sec.  4022.62 and 
4022.63 of the benefit payment regulation, in order to improve 
readability. Additionally, PBGC proposes to correct two clerical errors 
that were made when PBGC previously amended the regulation; the first 
duplicated paragraph (f) of Sec.  4022.62, and the second duplicated 
the designation of paragraph (c)(1) of Sec.  4022.63. Lastly, PBGC 
proposes to replace the term ``estimated title IV benefit'' with 
``estimated asset-funded benefit'' at Sec.  4022.63.
    The use of the term ``estimated title IV benefit'' at Sec.  4022.63 
of the benefit payment regulation is confusing, in light of the 
definition of ``title IV benefit'' at Sec.  4001.2 of the terminology 
regulation. Section 4001.2 provides, generally, that a participant's 
title IV benefit equals the greater of his or her guaranteed benefit or 
asset-funded benefit. Given this definition, one might assume that the 
estimated title IV benefit equals the greater of the estimate of a 
participant's guaranteed benefit or the estimate of a participant's 
asset-funded benefit; however, Sec.  4022.63 provides that the 
estimated title IV benefit is essentially an estimate of a 
participant's asset-funded benefit (through PC4) only. Accordingly, 
PBGC proposes to rename the ``estimated title IV benefit'' referred to 
in Sec.  4022.63 as the ``estimated asset-funded benefit.'' This term 
only appears in Sec.  4022.63; the proposed change would not require 
any conforming amendments elsewhere in PBGC's regulations.

Compliance With Rulemaking Guidelines

Executive Orders 12866, 13563, and 13771

    PBGC has determined that this rulemaking is not a ``significant 
regulatory action'' under Executive Order 12866 and, accordingly, that 
the provisions of Executive Order 13771 do not apply. Because this 
rulemaking is not a significant regulatory action, OMB has not reviewed 
this proposed rule. Executive Orders 12866 and 13563 direct agencies to 
assess all costs and benefits of available regulatory alternatives and, 
if regulation is necessary, to select regulatory approaches that 
maximize net benefits (including potential economic, environmental, 
public health and safety effects, distributive impacts, and equity). 
Executive Order 13563 emphasizes the importance of quantifying both 
costs and benefits, of reducing costs, of harmonizing rules, and of 
promoting flexibility. If a regulatory action is significant under 
Executive Order 12866, Executive Order 13771 imposes additional 
requirements on the agency.
    Although this is not a significant regulatory action under 
Executive Order 12866, PBGC has examined the economic implications of 
this proposed rule. PBGC has concluded that because the key aspects of 
this proposed rule would merely incorporate statutory changes that have 
been effective since 2006, neither the public nor PBGC would assume any 
additional costs due to this regulatory action. Moreover, because PBGC 
has been following the statute as amended in 2006, and not the 
inconsistent provisions in its regulations, this proposal would improve 
the transparency of PBGC operations to the public and would provide 
helpful guidance to plan administrators. By leaving unchanged the 
estimated asset-funded benefit calculation procedures under Sec.  
4022.63, PBGC would enable plan administrators to continue to rely 
confidently on these relatively simple procedures, rather than creating 
more complex procedures that could be contemplated in light of the 
statutory changes. Finally, the proposed revisions to the examples at 
Sec. Sec.  4022.62 and 4022.63 would assist plan administrators in 
complying with the law. Accordingly, this proposed rule would result in 
a net benefit to the public.

Regulatory Flexibility Act

    Under the Regulatory Flexibility Act (5 U.S.C. 601 et seq.), 
federal agencies must comply with additional requirements when engaging 
in certain rulemaking activities that are subject to notice and public 
comment. An agency must satisfy these requirements if a proposed rule 
is likely to have a significant economic impact on a substantial number 
of small entities. Unless an agency determines that a proposed rule is 
not likely to have a significant economic impact on a substantial 
number of small entities, section 603 of the Regulatory Flexibility Act 
requires that the agency present an initial regulatory flexibility 
analysis at the time of the publication of the

[[Page 9720]]

proposed rule. The agency's analysis must describe the impact of the 
rule on small entities, and the agency must seek public comment on the 
impact. Small entities include small businesses, organizations, and 
governmental jurisdictions.
    For purposes of the Regulatory Flexibility Act, with respect to 
this proposed rule, PBGC considers a small entity to be a plan with 
fewer than 100 participants. This criterion is consistent with certain 
requirements in title I of ERISA \8\ and the Internal Revenue Code,\9\ 
as well as the definition of a small entity that the Department of 
Labor (DOL) has used for purposes of the Regulatory Flexibility 
Act.\10\ While some large employers maintain both small and large 
plans, most small plans are maintained by small employers. In light of 
this, PBGC believes that assessing the impact of the proposed rule on 
small plans is an appropriate substitute for evaluating the effect on 
small entities. Notably, the definition of small entity considered 
appropriate for this purpose differs from the definition of small 
business--based on size standards--at 13 CFR 0121.201, which the Small 
Business Administration promulgated pursuant to the Small Business Act. 
Therefore, PBGC requests public comment on its proposed definition of 
small entity, as applied to this proposed rule.
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    \8\ See, e.g., ERISA section 104(a)(2), which permits the 
Secretary of Labor to prescribe simplified annual reports for 
pension plans that cover fewer than 100 participants.
    \9\ See, e.g., Code section 430(g)(2)(B), which permits single-
employer plans with 100 or fewer participants to use valuation dates 
other than the first day of the plan year.
    \10\ See, e.g., DOL's final rule on Prohibited Transaction 
Exemption Procedures, 76 FR 66637, 66644 (Oct. 27, 2011).
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    PBGC certifies under section 605(b) of the Regulatory Flexibility 
Act that this proposed rule would not have a significant economic 
impact on a substantial number of small entities. This certification is 
based on the fact that this proposed rule is not likely to have a 
significant economic impact on any entity, regardless of size. This is 
because nearly all aspects of this proposed rule would merely 
incorporate statutory changes that have been effective for more than a 
decade, while, as discussed in the context of Executive Order 12866 
above, the remaining few would provide clarity on the accurate 
estimation of benefits required by law, at no additional cost to the 
public.

List of Subjects

29 CFR Part 4001

    Business and industry, Employee benefit plans, Pension insurance.

29 CFR Parts 4022, 4041, and 4043

    Employee benefit plans, Pension insurance, Reporting and 
recordkeeping requirements.

29 CFR Part 4044

    Employee benefit plans, Pension insurance.

    In consideration of the foregoing, PBGC proposes to amend 29 CFR 
parts 4001, 4022, 4041, 4043, and 4044 as follows.

PART 4001--TERMINOLOGY

0
1. The authority citation for part 4001 continues to read as follows:

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

0
2. In Sec.  4001.2:
0
a. Add in alphabetical order a definition for ``majority owner''; and
0
b. Remove the definition of ``substantial owner''.
    The addition reads as follows:


Sec.  4001.2  Definitions.

* * * * *
    Majority owner means, with respect to a contributing sponsor of a 
single-employer plan, an individual who owns, directly or indirectly 
(taking into account the constructive ownership rules of section 414(b) 
and (c) of the Code)--
    (1) The entire interest in an unincorporated trade or business;
    (2) 50 percent or more of the capital interest or the profits 
interest in a partnership; or
    (3) 50 percent or more of either the voting stock of a corporation 
or the value of all of the stock of a corporation.
* * * * *

PART 4022--BENEFITS PAYABLE IN TERMINATED SINGLE-EMPLOYER PLANS

0
3. The authority citation for part 4022 continues to read as follows:

    Authority: 29 U.S.C. 1302, 1322, 1322b, 1341(c)(3)(D), and 1344.


Sec.  4022.2  [Amended]

0
4. In Sec.  4022.2 introductory text:
0
a. Remove the words ``guaranteed benefit'' and add in their place the 
words ``guaranteed benefit, majority owner''; and
0
b. Remove the words ``substantial owner,'';
0
5. Amend Sec.  4022.24 by revising paragraphs (a) and (b) to read as 
follows:


Sec.  4022.24   Benefit increases.

    (a) Scope. This section applies to all benefit increases, as 
defined in Sec.  4022.2, that have been in effect for less than five 
years preceding the termination date.
    (b) General rule. Benefit increases described in paragraph (a) of 
this section are guaranteeable only to the extent provided in Sec.  
4022.25.
* * * * *


Sec.  4022.25  [Amended]

0
6. In Sec.  4022.25:
0
a. Amend the section heading by removing the words ``for participants 
other than substantial owners''; and
0
b. Amend paragraph (a) by removing the words ``with respect to 
participants other than substantial owners''.
0
7. Revise Sec.  4022.26 to read as follows:


Sec.  4022.26   Benefit guarantee for participants who are majority 
owners.

    (a) Scope. This section applies to the guarantee of all benefits 
described in subpart A of this part (subject to the limitations in 
Sec.  4022.21) with respect to participants who are majority owners at 
the termination date or who were majority owners at any time within the 
five-year period preceding that date.
    (b) Formula. Benefits provided by a plan are guaranteed to the 
extent provided in the following formula: The amount of the 
participant's benefit that PBGC would otherwise guarantee under section 
4022 of ERISA and this part if the participant were not a majority 
owner, multiplied by a fraction not to exceed one, the numerator of 
which is the number of full years from the later of the effective date 
or the adoption date of the plan to the termination date, and the 
denominator of which is 10.
0
8. In Sec.  4022.62:
0
a. Amend paragraphs (a) and (c) introductory text by removing the four 
instances of the word ``substantial'' and adding in their place the 
word ``majority'';
0
b. Revise paragraph (d);
0
c. Amend paragraph (e) by removing the words ``paragraph (c)'' and 
adding in their place the words ``paragraphs (c) and (d)'';
0
d. Remove the first paragraph (f); and
0
e. Revise remaining paragraph (f).
    The revisions read as follows:


Sec.  4022.62   Estimated guaranteed benefit.

* * * * *
    (d) Estimated guaranteed benefit payable with respect to a majority 
owner. For benefits payable with respect to each participant who is a 
majority owner, the estimated guaranteed benefit is the benefit to 
which he or she would be entitled under paragraph (c) of this section 
but for his or her status as a

[[Page 9721]]

majority owner, multiplied by a fraction, not to exceed one, the 
numerator of which is the number of full years from the later of the 
effective date or the adoption date of the plan to the proposed 
termination date and the denominator of which is 10.
* * * * *
    (f) Examples. This section is illustrated by the following 
examples. (For an example addressing issues specific to a PPA 2006 
bankruptcy termination, see Sec.  4022.25(f).)

    (1) Example 1. (i) Facts. A participant who is not a majority 
owner retired on December 31, 2011, at age 60 and began receiving a 
benefit of $600 per month. On January 1, 2009, the plan had been 
amended to allow participants to retire with unreduced benefits at 
age 60. Previously, a participant who retired before age 65 was 
subject to a reduction of \1/15\ for each year by which his or her 
actual retirement age preceded age 65. On January 1, 2012, the 
plan's benefit formula was amended to increase benefits for 
participants who retired before January 1, 2012. As a result, the 
participant's benefit was increased to $750 per month. There have 
been no other pertinent amendments. The proposed termination date is 
December 15, 2012.
    (ii) Estimated guaranteed benefit. No reduction is required 
under Sec.  4022.61(b) or (c) because the participant's benefit does 
not exceed either the participant's accrued benefit at normal 
retirement age or the maximum guaranteeable benefit. (Post-
retirement benefit increases are not considered as increasing 
accrued benefits payable at normal retirement age.)
    The amendment as of January 1, 2009, resulted in a ``new 
benefit'' because the reduction in the age at which the participant 
could receive unreduced benefits increased the participant's benefit 
entitlement at actual retirement age by \5/15\, which is more than 
the 20-percent increase threshold under paragraph (c)(2)(i) of this 
section. The amendment of January 1, 2012, which increased the 
participant's benefit to $750 per month, is a ``benefit 
improvement'' because it is an increase in the amount of benefit for 
persons in pay status. (No percentage test applies in determining 
whether an increase in a pay status benefit is a benefit 
improvement.)
    The multiplier for computing the amount of the estimated 
guaranteed benefit is taken from the third row of Table I (because 
the last new benefit had been in effect for three full years as of 
the proposed termination date) and column (c) (because there was a 
benefit improvement within the one-year period preceding the 
proposed termination date). This multiplier is 0.55. Therefore, the 
amount of the participant's estimated guaranteed benefit is $412.50 
(0.55 x $750) per month.
    (2) Example 2. (i) Facts. A participant who is not a majority 
owner terminated employment on December 31, 2010. On January 1, 
2012, she reached age 65 and began receiving a benefit of $250 per 
month. She had completed three years of service at her termination 
of employment and was fully vested in her accrued benefit. The 
plan's vesting schedule had been amended on July 1, 2008. Under the 
schedule in effect before the amendment, a participant with five 
years of service was 100 percent vested. There have been no other 
pertinent amendments. The proposed termination date is December 31, 
2012.
    (ii) Estimated guaranteed benefit. No reduction is required 
under Sec.  4022.61(b) or (c) because the participant's benefit does 
not exceed either her accrued benefit at normal retirement age or 
the maximum guaranteeable benefit. The plan's change of vesting 
schedule created a new benefit for the participant. Because the 
amendment was in effect for four full years before the proposed 
termination date, the second row of Table I is used to determine the 
applicable multiplier for estimating the amount of the participant's 
guaranteed benefit. Because the participant did not receive any 
benefit improvement during the 12-month period ending on the 
proposed termination date, column (b) of the table is used. 
Therefore, the multiplier is 0.80, and the amount of the 
participant's estimated guaranteed benefit is $200 (0.80 x $250) per 
month.
    (3) Example 3. (i) Facts. A participant who is a majority owner 
retired before the proposed termination date of April 30, 2012. The 
plan was in effect for seven full years as of the proposed 
termination date. On the proposed termination date he was entitled 
to receive a benefit of $2,000 per month. No reduction of this 
benefit is required under Sec.  4022.61(b) or (c).
    (ii) Estimated guaranteed benefit. Paragraph (d) of this section 
is used to compute the amount of the estimated guaranteed benefit of 
majority owners. Consequently, the amount of this participant's 
estimated guaranteed benefit is $1,400 ($2,000 x \7/10\) per month.
    (4) Example 4. (i) Facts. A participant who is a majority owner 
retired before the proposed termination date of April 30, 2012. The 
plan was in effect for 12 full years as of the proposed termination 
date. On the proposed termination date he was entitled to receive a 
benefit of $2,000 per month. No reduction of this benefit is 
required under Sec.  4022.61(b) or (c).
    (ii) Estimated guaranteed benefit. Paragraph (d) of this section 
is used to compute the amount of the estimated guaranteed benefit of 
majority owners. Since the plan was in effect for more than 10 years 
as of the proposed termination date, the amount of this 
participant's estimated guaranteed benefit is $2,000 per month.

0
9. In Sec.  4022.63:
0
a. Revise the section heading;
0
b. Amend paragraph (a) by removing the two instances of the word 
``substantial'' and adding in their place the word ``majority'' and by 
removing the three instances of the words ``estimated title IV 
benefit'' and adding in their place the words ``estimated asset-funded 
benefit'';
0
c. Amend paragraph (b) introductory text by removing the two instances 
of the word ``substantial'' and adding in their place the word 
``majority'' and by removing the words ``estimated title IV benefit'' 
and adding in their place the words ``estimated asset-funded benefit'';
0
d. Amend paragraph (c)(1) by removing the two instances of the word 
``substantial'' and adding in their the word ``majority'' and by 
removing the two instances of the words ``estimated title IV benefit'' 
and adding in the place of each the words ``estimated asset-funded 
benefit'';
0
e. Amend paragraphs (d) introductory text by removing the two instances 
of the word ``substantial'' and adding in the place the word 
``majority'' and by removing the two instances of the words ``estimated 
title IV benefit'' and adding in the place of each the words 
``estimated asset-funded benefit'';
0
f. Amend paragraph (d)(1) and by removing the two instances of the word 
``substantial'' and adding in the place the word ``majority''; and
0
g. Revise paragraph (e).
    The revisions read as follows:


Sec.  4022.63  Estimated asset-funded benefit.

* * * * *
    (e) Examples. This section is illustrated by the following 
examples:

    (1) Example 1. (i) Facts. A participant who is not a majority 
owner was eligible to retire 3.5 years before the proposed 
termination date. The participant retired two years before the 
proposed termination date with 20 years of service. Her final five 
years' average salary was $45,000, and she was entitled to an 
unreduced early retirement benefit of $1,500 per month payable as a 
single life annuity. This retirement benefit does not exceed the 
limitation in Sec.  4022.61(b) or (c).
    On the participant's benefit commencement date, the plan 
provided for a normal retirement benefit of 2 percent of the final 
five years' salary times the number of years of service. Five years 
before the proposed termination date, the percentage was 1.5 
percent. The amendments improving benefits were put into effect 3.5 
years before the proposed termination date. There were no other 
amendments during the five-year period.
    The participant's estimated guaranteed benefit computed under 
Sec.  4022.62(c) is $1,500 per month times 0.90 (the factor from 
column (b) of Table I in Sec.  4022.62(c)(2)), or $1,350 per month. 
It is assumed that the plan meets the conditions set forth in 
paragraph (b) of this section, and the plan administrator is 
therefore required to estimate the title IV benefit.
    (ii) Estimated asset-funded benefit. For a participant who is 
not a majority owner, the amount of the estimated asset-funded 
benefit is the estimated priority category 3 benefit computed under 
paragraph (c) of this section. This amount is computed by 
multiplying the participant's benefit under the plan as of the later 
of the proposed termination date or the benefit commencement date by 
the ratio of

[[Page 9722]]

the normal retirement benefit under the provisions of the plan in 
effect five years before the proposed termination date and the 
normal retirement benefit under the plan provisions in effect on the 
proposed termination date.
    Thus, the numerator of the ratio is the benefit that would be 
payable to the participant under the normal retirement provisions of 
the plan five years before the proposed termination date, based on 
her age, service, and compensation on her benefit commencement date. 
The denominator of the ratio is the benefit that would be payable to 
the participant under the normal retirement provisions of the plan 
in effect on the proposed termination date, based on her age, 
service, and compensation as of the earlier of her benefit 
commencement date or the proposed termination date. Since the only 
different factor in the numerator and denominator is the salary 
percentage, the amount of the estimated asset-funded benefit is 
$1,125 (0.015/0.020 x $1,500) per month. This amount is less than 
the estimated guaranteed benefit of $1,350 per month. Therefore, in 
accordance with Sec.  4022.61(d), the benefit payable to the 
participant is $1,350 per month.
    (iii) PPA 2006 bankruptcy termination. In a PPA 2006 bankruptcy 
termination, the methodology would be the same, but ``bankruptcy 
filing date'' would be substituted for ``proposed termination date'' 
each place that ``proposed termination date'' appears in the 
example, and the numbers would change accordingly.
    (2) Example 2. (i) Facts. A participant who is a majority owner 
retired on the proposed termination date of October 31, 2012. The 
original plan had been in effect for seven full years as of the 
proposed termination date. Under the provisions of the plan in 
effect five years before the proposed termination date, the 
participant is entitled to a single life annuity of $500 per month. 
The plan was amended to increase benefits three full years before 
the proposed termination date. Under these plan amendments, the 
participant is entitled to a single life annuity of $1,000 per 
month.
    The participant's estimated guaranteed benefit computed under 
Sec.  4022.62(d) is $455 per month ($1,000 x 0.65 x \7/10\).
    It is assumed that all of the conditions in paragraph (b) of 
this section have been met. Plan assets equal $2 million. The 
present value of all benefits in pay status is $1.5 million based on 
applicable PBGC interest rates. There are no employee contributions 
and the present value of all vested benefits that are not in pay 
status is $0.75 million based on applicable PBGC interest rates.
    (ii) Estimated asset-funded benefit. Paragraph (d) of this 
section provides that the amount of the estimated asset-funded 
benefit payable with respect to a participant who is a majority 
owner is the higher of the estimated priority category 3 benefit 
computed under paragraph (c) of this section or the estimated 
priority category 4 benefit computed under paragraph (d) of this 
section.
    Under paragraph (c), the participant's estimated priority 
category 3 benefit is $500 ($1,000 x $500/$1,000) per month.
    Under paragraph (d), the participant's estimated priority 
category 4 benefit is the estimated guaranteed benefit computed 
under Sec.  4022.62(c) (i.e., as if the participant were not a 
majority owner) multiplied by the priority category 4 funding ratio. 
Since the plan has priority category 3 benefits, the ratio is 
determined under paragraph (d)(2)(i). The numerator of the ratio is 
plan assets minus the present value of benefits in pay status. The 
denominator of the ratio is the present value of all vested benefits 
that are not in pay status. The participant's estimated guaranteed 
benefit under Sec.  4022.62(c) is $1,000 per month times 0.65 (the 
factor from column (b) of Table I in Sec.  4022.62(c)(2)), or $650 
per month. Multiplying $650 by the category 4 funding ratio of \2/3\ 
(($2 million - $1.5 million)/$0.75 million) produces an estimated 
category 4 benefit of $433.33 per month.
    Because the estimated category 4 benefit so computed is less 
than the estimated category 3 benefit so computed, the estimated 
category 3 benefit is the estimated asset-funded benefit. Because 
the estimated category 3 benefit so computed is greater than the 
estimated guaranteed benefit of $455 per month, in accordance with 
Sec.  4022.61(d), the benefit payable to the participant is the 
estimated priority category 3 benefit of $500 per month.

PART 4041--TERMINATION OF SINGLE-EMPLOYER PLANS

0
10. The authority citation for part 4041 continues to read as follows:

    Authority: 29 U.S.C. 1302(b)(3), 1341, 1344, 1350.


Sec.  4041.2  [Amended]

0
11. In Sec.  4041.2:
0
a. Amend the introductory text by removing the words ``mandatory 
employee contributions'' and adding in their place the words ``majority 
owner, mandatory employee contributions''; and
0
b. Remove the definition of ``majority owner''.

PART 4043--REPORTABLE EVENTS AND CERTAIN OTHER NOTIFICATIONS

0
12. The authority citation for part 4043 continues to read as follows:

    Authority:  29 U.S.C. 1083(k), 1302(b)(3), 1343.

0
13. In Sec.  4043.2:
0
a. Amend the introductory text by removing the words ``single-employer 
plan, and substantial owner'' and by adding in their place the words 
``and single-employer plan''.
0
b. Add in alphabetical order a definition for ``substantial owner''.
    The addition reads as follows:


Sec.  4043.2  Definitions.

* * * * *
    Substantial owner means a substantial owner as defined in section 
4021(d) of ERISA.
* * * * *

PART 4044--ALLOCATION OF ASSETS IN SINGLE-EMPLOYER PLANS

0
14. The authority citation for part 4044 continues to read as follows:

    Authority: 29 U.S.C. 1301(a), 1302(b)(3), 1341, 1344, 1362.

Sec.  4044.2  [Amended]

0
15. In Sec.  4044.2(a):
0
a. Remove the words ``irrevocable commitment'' and add in their place 
the words ``irrevocable commitment, majority owner''; and
0
b. Remove the words ``substantial owner,''.
0
16. Amend Sec.  4044.10 by revising paragraph (e) to read as follows:


Sec.  4044.10  Manner of allocation.

* * * * *
    (e) Allocating assets within priority categories. Except for 
priority categories 4 and 5, if the plan assets available for 
allocation to any priority category are insufficient to pay for all 
benefits in that priority category, those assets shall be distributed 
among the participants according to the ratio that the value of each 
participant's benefit or benefits in that priority category bears to 
the total value of all benefits in that priority category. If the plan 
assets available for allocation to priority category 4 are insufficient 
to pay for all benefits in that category, the assets shall be 
allocated, first, to the value of all participants' nonforfeitable 
benefits that would be assigned to priority category 4 other than those 
impacted by the majority-owner limitation under Sec.  4022.26. If 
assets available for allocation to priority category 4 are sufficient 
to fully satisfy the value of those other benefits, the remaining 
assets shall then be allocated to the value of the benefits that would 
be guaranteed but for the majority-owner limitation. These remaining 
assets shall be distributed among the majority owners according to the 
ratio that the value of each majority owner's benefit that would be 
guaranteed but for the majority-owner limitation bears to the total 
value of all benefits that would be guaranteed but for the majority-
owner limitation. If the plan assets available for allocation to 
priority category 5 are insufficient to pay for all benefits in that 
category, the assets shall be allocated, first, to the value of each 
participant's nonforfeitable benefits that would be assigned to 
priority category 5 under Sec.  4044.15 after reduction for the

[[Page 9723]]

value of benefits assigned to higher priority categories, based only on 
the provisions of the plan in effect at the beginning of the five-year 
period immediately preceding the termination date. If assets available 
for allocation to priority category 5 are sufficient to fully satisfy 
the value of those benefits, assets shall then be allocated to the 
value of the benefit increase under the oldest amendment during the 
five-year period immediately preceding the termination date, reduced by 
the value of benefits assigned to higher priority categories (including 
higher subcategories in priority category 5). This allocation procedure 
shall be repeated for each succeeding plan amendment within the five-
year period until all plan assets available for allocation have been 
exhausted. If an amendment decreased benefits, amounts previously 
allocated with respect to each participant in excess of the value of 
the reduced benefit shall be reduced accordingly. In the subcategory in 
which assets are exhausted, the assets shall be distributed among the 
participants according to the ratio that the value of each 
participant's benefit or benefits in that subcategory bears to the 
total value of all benefits in that subcategory.
* * * * *


Sec.  4044.14  [Amended]

0
17. In Sec.  4044.14, remove the word ``phase-in'' and add the word 
``guarantee'' in its place; and remove the word ``substantial'' and add 
the word ``majority'' in its place.

    Issued in Washington, DC.
W. Thomas Reeder,
Director, Pension Benefit Guaranty Corporation.
[FR Doc. 2018-04609 Filed 3-6-18; 8:45 am]
BILLING CODE 7709-02-P