Single-Employer Plan Termination Issues

Transcription

1 Single-Employer Plan Termination Issues by David R. Levin, Esq. Introduction Title IV of the Employee Retirement Income Security Act of 1974 ("ERISA") created the single-employer plan termination insurance program, administered by the Pension Benefit Guaranty Corporation ("PBGC"). Major changes affecting the termination insurance program were made under the Single-Employer Pension Plan Amendments Act of 1986, P.L ("SEPPAA") and the Pension Protection Act ("PPA"), which is found at Title IX of the Omnibus Budget Reconciliation Act of 1987, Pub. L The termination insurance program was established to ensure, among other things, that "if a worker has been promised a defined pension benefit upon retirement, and if he has fulfilled whatever conditions are required to obtain a vested benefit, he will actually receive it." Nachman Corp. v. PBGC, 446 U.S. 359, (1980). To accomplish this goal, Title IV of ERISA requires the PBGC to provide benefits to participants in defined benefit plans that terminate with insufficient assets to support their guaranteed benefits. The PBGC's guarantees of benefits are financed, in part, from insurance premiums collected from covered pension plans. See ERISA Section Coverage Generally speaking, the Title IV termination insurance program covers defined benefit pension plans. Section 4021(a) of ERISA describes the plans that are covered by Title IV; Section 4021(b) describes the plans that are excluded from coverage. Section 4021(c) sets forth certain special rules and definitions relating to coverage. To qualify for coverage, a plan must be a defined benefit plan that is maintained by an employer or an employee organization representing employees, which is engaged in commerce or in any industry or activity affecting commerce. Moreover, the plan must be either tax-qualified under the Internal Revenue Code or have operated in practice as a tax-qualified plan for the last five years prior to termination. See Williamsport Milk Products Co., 1 Employee Benefits Cas. (BNA) 1341 (M.D. Pa. 1978). Plans not covered by the Title IV termination insurance program include: defined contribution plans; government plans; church plans; plans maintained by specified fraternal societies; plans that do not provide for employer contributions; nonqualified deferred compensation plans established for management or highly compensated employees; plans that are established and maintained outside of the United States primarily for the benefit of nonresident aliens; plans that are maintained primarily for the purpose of providing benefits in excess of the limitations under Section 415 of the Internal Revenue Code; plans that are established and maintained exclusively for substantial owners; plans maintained solely to comply with workers compensation, unemployment compensation or disability insurance laws; and, plans that are established and maintained by professional service employers with fewer than 25 active participants. Guaranteed Benefits Section 4022 of ERISA governs the benefit guarantees applicable to single-employer defined benefit plans. The extent of the guarantee depends upon the type of benefit, the dollar amount of the benefit, and the date on which the benefit provision was adopted. The PBGC guarantees the payment of all basic benefits that are nonforfeitable under the terms of the pension

2 plan as of the date of plan termination. 29 C.F.R Benefits that become vested only because the plan is terminated are explicitly excluded from the PBGC's guarantee. See ERISA 4022(a). The maximum guaranteed benefit may not exceed the value of a straight life annuity beginning at age 65, equal to the lesser of the participant's average monthly gross income based upon the five highest consecutive years' compensation, or a fixed dollar amount determined annually by the PBGC, based upon changes in the contribution and benefit base under the Social Security Act. See ERISA 4022(b)(3). This maximum benefit is increased annually to account for inflation. The maximum monthly guaranteed benefit in 1974, when ERISA was enacted, was $750.00, and the maximum monthly guaranteed benefit in 1993 is $2, C.F.R. 4022, Appendix A. The benefits of plan participants are not necessarily subject to the full PBGC guarantee, until the governing benefit provisions have been in existence for five full years. The statutory guarantees are phased in at an annual rate equal to the greater of $20.00 per month or 20% of the benefit. ERISA 4022(b)(7); 29 C.F.R Notwithstanding the foregoing, there is a phase-in of the guarantee for benefits of substantial owners over a 30-year period. ERISA 4022(b)(5); 29 C.F.R The five-year phase-in rule for benefit increases applies not only to increases in the benefit formula, but also to the liberalization of requirements for benefit entitlements. 29 C.F.R In Page v. PBGC, 963 F.2d 1310 (D.C. Cir. 1992),rev'g and remanding sub nom Collins v. PBGC, 126 F.R.D. 3 (D.D.C. 1989), participants brought a class action claiming an entitlement to guaranteed benefits from plans terminating before 1980 that had not been amended prior to termination to comply with ERISA's minimum vesting rules. The PBGC declined to guarantee their benefits, because they were not nonforfeitable benefits pursuant to the plan terms under Section 4022(a) of ERISA. 2 The district court granted PBGC's summary judgment motion. The Court of Appeals for the District Court Circuit reversed, finding insupportable PBGC's view that this result is required by the plain meaning of Title IV. In analyzing Congressional intent, the court found that, consistent with its earlier decision in Rettig v. PBGC, 744 F.2d 133 (D.C. Cir. 1984), there were several possible interpretations of "nonforfeitable... under the terms of a plan", and that the probable intent of Congress was to guarantee those benefits required to be vested under Title I. After finding that Congress did not precisely consider this issue, the court concluded that the PBGC, by its own rules, was required to have a policy decision from its Board of Directors on this issue, because the decision on this issue would materially affect a substantial number of participants and employers. The court remanded the case to the district court to determine, once it had before it PBGC's final decision, whether PBGC's position is a reasonable accommodation of the policies underlying ERISA. In response, the PBGC has issued a policy statement indicating it will not guarantee benefits in plans terminated before September 26, 1980, unless the plans were amended to comply with ERISA's minimum vesting rules. In addition, the PBGC has issued Opinion Letter 91-1, dealing with guaranteed benefits and annuities purchased from insurance companies for participants in terminated plans. Suffice it to say that the PBGC has taken the position that it has no obligation to guarantee benefits, if the insurance company cannot afford to do so. But see PBGC Opinion Letter Similarly, in Opinion Letter 91-4, the PBGC concluded that former sponsors of plans, which terminated through the distribution 2

3 to participants of annuities from an insurer, are not liable under Title IV of ERISA, if the insurer is subsequently financially unable to meet its commitment to pay benefits under the terms of the annuity contracts. Plan Termination Insurance Premiums Since the enactment of ERISA, the rules for when and how pension plans can be terminated- -as well as the impact of termination upon the sponsoring employer--have changed drastically. Plan terminations caused a drain on the termination insurance system of a magnitude apparently not anticipated when the law was enacted. The size of the financial drain is evidenced by the increase in the insurance premium established to fund the termination insurance program. When ERISA was enacted, the premium was $1.00 per participant per year. On December 8, 1994, the Retirement Protection Act ("RPA") was enacted as part of the General Agreement on Tariffs and Trade legislation ("GATT"). Under RPA, the premiums paid by some underfunded single employer defined benefit plans will increase significantly. Under prior law, per participant PBGC premiums were equal to a flat rate of $19 and a variable rate of $9 per $1,000 of underfunding with a ceiling of $53 per participant. RPA phases out the cap over three years, effective for plan years beginning after June 30, The PBGC has announced new rules for the imposition of penalties for the late payment of premiums. See PBGC News Release (December 2, 1996). The penalty had been five percent of the unpaid amount per month. Under the new rules, effective for plan years beginning in or after January 1996, the PBGC will assess a penalty of one percent of the unpaid premiums until the amount is paid. However, this lesser penalty is only applicable, if the payment is made on or before the date that the PBGC informs the plan sponsor that there are or may be delinquent premiums. If the payment is made after receipt of the notice from the PBGC, the penalty is five percent per month. Plan Termination Under Title IV of ERISA, as enacted in 1974, a single-employer, defined benefit pension plan could be terminated without regard to the extent to which the plan's benefits were funded. Under the original ERISA Section 4041, the plan administrator initiated the termination process by notifying the PBGC of the intent to terminate the plan. The plan administrator proposed a termination date, which had to be at least ten days after the filing of the notice of intent to terminate with the PBGC. If the PBGC found, within 90 days, that the plan had sufficient assets to satisfy its obligations for guaranteed benefits, then the PBGC would issue a notice of sufficiency. The plan administrator would distribute the plan assets, in the usual case by purchasing annuity contracts from an insurance company or by making other allowable forms of distribution under the plan, e.g., lump sum payments. If the PBGC were not able to determine that the plan assets were sufficient to cover guaranteed benefits, then the PBGC would proceed, either by agreement or court order, to have itself appointed trustee of the plan. As plan trustee, the PBGC assumed the obligation to pay guaranteed benefits. In addition, under ERISA Section 4042 (as enacted in 1974), in certain specifically delineated circumstances, the PBGC could initiate an involuntary termination under the authority of a federal district court, in order to protect the interests of a plan's participants, to avoid further 3

4 deterioration of a plan's financial condition, or to prevent an unreasonable increase in the liability that would eventually be absorbed by the PBGC and the termination insurance system. Within less than two decades after its enactment, ERISA was significantly modified to impose substantial limitations upon the ability to initiate voluntary plan terminations. These limitations were designed to restrict employers from shifting all or a portion of the unfunded liability for guaranteed benefits onto the termination insurance program. These statutory changes have also limited the ability of employers to avoid their statutory obligation to fund nonguaranteed benefits. As a result of the passage of the Single Employer Pension Plan Amendments Act and the Pension Protection Act, a plan administrator can generally terminate a single-employer plan, only if the plan has sufficient assets to pay all benefit liabilities. Benefit liabilities include all fixed and contingent benefits that would be provided as of the date of termination, if the plan had sufficient assets. See ERISA 4001(a)(16) and 4041(b)(1)(D). 3 A pension plan that does not have sufficient assets to satisfy all benefit liabilities can now be voluntarily terminated only in certain bankruptcy situations or if the "contributing sponsor" and its controlled group meet specific criteria demonstrating financial distress. 4 These two types of voluntary termination are designated "standard termination" and "distress termination," the former for sufficient plans and the latter for insufficient plans. Section 4041(a)(1) of ERISA endeavors to make clear that these two types of termination, together with an involuntary termination initiated by the PBGC under ERISA Section 4042, represent the only permissible methods of terminating a single-employer, defined benefit pension plan. 5 See Phillips v. Bebber, 914 F.2d 31 (4th Cir. 1990). It should be noted that adoption of a plan amendment, which converts a defined benefit plan to an individual account plan, also constitutes a plan termination. See ERISA 4041(e). However, such an amendment may take effect only after the plan satisfies the requirements for either a standard or distress termination. Id. Standard Termination A standard termination, governed by Section 4041(b) of ERISA, is permitted if the plan has sufficient assets to discharge all "benefit liabilities." The term "benefit liabilities" is defined at ERISA Section 4001(a)(16) as "the benefits of employees and their beneficiaries under the plan (within the meaning of Section 401(a)(2) of the Internal Revenue Code)." The term "benefit liabilities" encompasses all benefits accrued under the plan, both vested and nonvested, as of the date of plan termination. 6 The term also would appear to extend to early retirement benefits and retirement-type subsidies, which are protected from reduction or elimination (as a result of changes under the Retirement Equity Act) in the case of participants who, after the date of plan termination, satisfy the condition for the benefits and subsidies. See ERISA 204(g) and Internal Revenue Code 411(d)(6). The legislative history of the Pension Protection Act indicates that the term "benefit liabilities" also includes "benefits in effect on the date of termination that are not protected under Section 411(d)(6) of the Code and Section 204(g) of ERISA." H.R. Conf. Rep. No. 495, 100th Cong., 1st Sess. 881, 882 (1987). This may be a reference to medical benefits, qualified disability benefits, and plant shutdown benefits that do not continue after retirement age--all of which are identified as otherwise not protected in the legislative history of the Retirement Equity Act 4

5 modifications to ERISA Section 204 and Code Section 411. See S. Rep. No. 575, 90th Cong., 2d Sess. at 30, reprinted in 1984 U.S.C.C.A.N. 2547, The sufficiency of plan assets to satisfy all benefit liabilities is determined as of the date that the assets are to be distributed. See ERISA 4041(b)(1)(D). Hence, even if the assets are not actually sufficient when the notice of intent to terminate the plan is filed, the plan administrator may nonetheless proceed with a standard termination, provided that the plan sponsor has made a commitment to pay into the plan the shortfall, if any, before the date of distribution. A sample form commitment to make a plan sufficient is set forth in Appendix A of 29 C.F.R If, as of the date of distribution, the assets unexpectedly prove to be insufficient to provide for all benefit liabilities, the proposed termination would be nullified, and the plan would continue as an ongoing plan. Collective Bargaining ERISA Section 4041(a)(3) prohibits the PBGC from proceeding with either a standard termination or distress termination "if the termination would violate the terms and conditions of an existing collective bargaining agreement." Questions arose whether this provision included expired collective bargaining agreements that still bind the parties under applicable labor law. The PBGC has announced its definition of the term "existing collective bargaining agreements," in connection with its issuance of final regulations on plan terminations. See 29 C.F.R According to the PBGC, that statutory term means "a collective bargaining agreement that (1) by its terms, (A) has not expired, or (B) is extended beyond its stated expiration date because neither of the collective bargaining parties took the required action to terminate it, and (2) has not been made inoperative by judicial ruling. When a collective bargaining agreement no longer meets these conditions, it ceases to be an 'existing collective bargaining agreement' whether or not any or all of its terms continue to apply by operation of law." Id. The final regulation defines "formal challenge to termination" at 29 C.F.R The term means the occurrence of any of the following actions "asserting that the termination will violate the terms and conditions of an existing collective bargaining agreement: (1) the commencement of any procedure specified in the collective bargaining agreement for resolving disputes under the agreement; (2) the commencement of any action before an arbitrator, administrative agency or board, or court under applicable labor-management relations law." Id. Distress Termination A plan may qualify for a distress termination if, as of the proposed termination date, each entity that is a contributing sponsor of the plan or a member of the sponsor's controlled group satisfies one of the several tests set forth in ERISA Section 4041(c)(2)(B): (1) Liquidation. As of the proposed termination date, the entity is in a liquidation proceeding under federal bankruptcy law or similar state law, and the case has not been dismissed. (2) Reorganization. As of the proposed termination date, the entity is the subject of voluntary or involuntary reorganization under federal bankruptcy law or under any similar state law. As of the proposed termination date, the case must not have been dismissed. The PBGC must be given timely notice of any request for court approval of termination. And, the court must determine that unless the plan is terminated, such entity will be unable to pay all of its debts pursuant to a plan of reorganization and will be unable to continue in business outside the Chapter 5

6 11 reorganization process...." ERISA 4041(c)(2)(B)(ii)(IV). 9 The court must also approve the termination. Id. (3) Business Hardship. Termination is required to enable the entity to pay its debts while staying in business or to avoid unreasonably burdensome pension costs that are caused by a declining work force. In such cases, the PBGC must determine that, unless the termination occurs, an entity will be unable to pay its debts when due and will be unable to continue in business. Or, the PBGC must determine that the cost of maintaining the pension plan has become unreasonably burdensome solely as a result of a decline in that part of such entity's work force, covered as participants under all single-employer pension plans of which such entity is a contributing sponsor. ERISA 4041(c)(2)(B)(iii)(II). Even with respect to distress terminations, the PBGC cannot proceed with a plan termination if the termination would violate the terms and conditions of an existing collective bargaining agreement. ERISA 4041(a)(3). The only exception to this requirement, vis-a-vis collective bargaining agreements, may be involuntary terminations initiated by the PBGC under ERISA Section Termination Process Under Section 4041 of ERISA, a plan termination--whether standard or distress--must be initiated by the plan administrator. Under Section 4001(a)(1), "administrator" is defined as having the same meaning for Title IV as it does under Section 3(16) of Title I of ERISA. See also Treas. Reg (g)-1. Thus, the administrator is the person or entity specifically designated by the terms of the plan's governing documents. Absent such designation, the administrator is the plan sponsor. See ERISA 3(16)(A)(ii). The PBGC has considered the designation in the plan documents to be controlling, even where the plan sponsor has, in practice, taken an active role in administering the plan. See, e.g., PBGC Op. Let , 82-6 and Determining who the plan administrator is may, in fact, be of critical import in any given termination. For, although the federal judiciary has concluded that the decision to terminate a plan is generally not a fiduciary decision, the federal courts do hold that the implementation of the termination decision is a fiduciary activity that must be completed in compliance with the plan's governing documents. 10 It is important that the plan administrator follow the rules and procedures set forth in ERISA and the regulations, because failure to do so can result in a nullification of the proposed termination. See 29 C.F.R (e). However, the regulation (and its preamble) indicate that, in the normal course, the PBGC will give notice of an incomplete filing in order to allow the plan administrator to correct the filing. See 29 C.F.R (c). The first step in the standard termination process is for the plan administrator to provide a notice of intent to terminate to each "affected party" at least 60 days (and no more than 90 days) before the proposed date of termination. 29 C.F.R (a). "Affected party," defined at 29 C.F.R , means each plan participant, each beneficiary of a deceased participant or alternate payee under an applicable qualified domestic relations order, and each union representative. 11 ERISA 4001(a)(21). The statutory definition of "affected party" also includes the PBGC, but the notice need not be sent to the PBGC in the case of a standard termination. See ERISA 4041(a)(2). The regulation's definition of "affected party" also includes "[f]or any group of participants not currently represented by an employee organization, the employee organization,if any, that last 6

7 represented such group of participants within the 5-year period preceding issuance of the notice of intent to terminate," 29 C.F.R The date of plan termination is critical for a number of reasons. In a standard termination, benefit accruals and vesting apparently cease as of that date. The end of the period for which the contributing sponsor has an ongoing funding obligation also is a function of the termination date. Under Section 4041(b)(2) of ERISA, the plan administrator must notify the PBGC of the proposed termination. That notice must designate the proposed date for distributing plan assets and must contain, among other things, not only an enrolled actuary's certification that the plan will be sufficient for benefit liabilities as of the proposed distribution date, but also the plan administrator's certification as to the accuracy of the information on which the actuary's certification is based. 12 Pursuant to 29 C.F.R , notice to the PBGC must be made using PBGC Form 500 (Standard Termination Notice, Single-Employer Plan Termination), along with a Schedule EA-S, which is the standard termination certification of sufficiency. Using the Schedule EA-S, an enrolled actuary certifies that the terminating plan is projected to have sufficient assets to provide all benefit liabilities. 13 Under Section 4041(b)(2), the notice to the PBGC must be filed "as soon as practicable after the date on which the notice of intent to terminate is provided...." Under 29 C.F.R , the Form 500, along with the Schedule EA-S, must be filed with the PBGC on or before the 120th day after the proposed termination date. No later than the date on which the standard termination notice is sent to the PBGC, the plan administrator must send to each participant and beneficiary a notice setting forth the amount and form of that person's benefits, as well as the data used to determine those benefits, and such other information as the PBGC may require. ERISA 4041(b)(2)(B); 29 C.F.R and Moreover, the notice "shall be written in such manner as is likely to be understood by the participant or beneficiary...." ERISA 4041(b)(2)(B). See 29 C.F.R (b) (use of foreign languages in notices). The PBGC has 60 days from its receipt of the complete Standard Termination Notice to review the proposed termination. 29 C.F.R The PBGC must notify the plan administrator that the PBGC has received the complete Standard Termination Notice, so that the administrator can determine when the 60-day review period will expire. Id. The PBGC and the plan administrator may agree to extend the 60-day period. In the event that the PBGC determines either that any of the applicable procedural requirements have not been satisfied or that the plan is not sufficient for benefit liabilities, then the PBGC must issue a notice of noncompliance. The notice of noncompliance is to be issued within the 60-day period (or any agreed-upon extension of the period), in order to stop the plan administrator from completing the termination process and distributing the assets. See ERISA 4041(b)(2)(C); 29 C.F.R The issuance of a notice of noncompliance is subject to review under the PBGC's administrative appeals procedure. See 29 C.F.R and (c). "A notice of noncompliance ends the standard termination proceeding, nullifies all actions taken to terminate the plan and renders the plan an ongoing plan." 29 C.F.R (b). ERISA Section 4041(b)(2)(D) requires the plan administrator to begin the final distribution of assets "as soon as practicable after the expiration of the 60-day (or extended) period...." Distribution is to occur if the plan administrator has not received a notice of noncompliance from the PBGC during the applicable period and if, when such final distribution is to occur, the plan is 7

8 still sufficient for benefit liabilities determined as of the termination date. If a notice of noncompliance has been received, or if the plan is not sufficient for benefit liabilities, then the statute does not permit the distribution of assets. The PBGC has issued a Form 501, Post-Distribution Certification for Standard Termination. This is the Form that must be used by the plan administrator to certify that the final distribution of assets was completed as required under Section 4041(b) of ERISA. See 29 C.F.R (h). The Form 501 must be filed with the PBGC within 30 days after the completion of the final distribution of assets. Id. Although ERISA Section 4041(b)(2)(D) provides only a general statement about the commencement of distribution "as soon as practicable," the PBGC's final regulations on plan terminations provide that the plan administrator must make the final distribution of plan assets within 180 days after the expiration of the PBGC's review period for determining whether to issue a notice of noncompliance. 29 C.F.R (a). Failure to distribute the plan assets within the 180-day period "shall nullify the termination. All actions taken to effect the plan's termination shall be null and void, and the plan shall be an ongoing plan." 29 C.F.R (d). Notwithstanding the foregoing, in certain limited circumstances, the PBGC will allow an extension of the 180-day distribution deadline. See 29 C.F.R (f). In addition, the plan administrator is entitled to an automatic extension of time for distribution of the 180-day period for completing distribution of plan assets, if the plan administrator (1) has submitted a request to the IRS for a determination with respect to the plan's tax-qualified status upon termination, on or before the date that the administrator files the standard termination notice with the PBGC; (2) does not receive a determination letter from the IRS at least 60 days before the expiration of the 180-day period for distribution; and, (3) on or before the end of the 180-day period, notifies the PBGC in writing that "an extension of the distribution deadline is required" and certifies that the foregoing conditions have been met. 29 C.F.R (e). On March 3, 1992, the PBGC issued a Statement of Policy implementing authority under ERISA 4071 to assess a penalty against persons failing to provide a notice or other material information required, within applicable specified time limits. The statement provided notice and an explanation of the factors and circumstances the PBGC will consider in assessing the penalty, and described the decision and appeal processes. The factors include: the extent of the failure; financial or administrative harm to the PBGC's program; willfulness of the failure; and, likelihood that the penalty would be paid. Areas which were cited as examples included failure to file a postdistribution certification and a notice of reportable event. 57 Fed. Reg (1992). Whenever the PBGC is advised, prior to the expiration of the time within which it may issue a notice of noncompliance, that a formal challenge to termination has been initiated, the PBGC must suspend the processing of the termination and notify the plan administrator in writing of the suspension. 29 C.F.R (a). The suspension will stop the running of all time periods specified in Title IV, relating to the termination process. Id. This stay is to remain in effect until the final resolution of the challenge. If the challenge to the termination is upheld, the PBGC will dismiss the termination proceeding and all actions taken to effect the plan termination will be null and void. 29 C.F.R (c). If the challenge is denied, the termination process may be resumed at the point at which it had been suspended. Id. See also PBGC Op. Let

9 Between the date that the plan administrator issues a notice of intent to terminate and the expiration of the PBGC's review period, the plan administrator is prohibited from commencing final distribution of assets. ERISA 4041(b)(2)(D); 29 C.F.R During this interim period, the plan administrator must continue to administer the plan as usual, including paying benefits to retirees and putting new retirees into pay status as they become eligible. As with respect to a standard termination, the procedure for initiating a distress termination is the issuance of a notice of intent to terminate by the plan administrator at least 60 days prior to the proposed date of termination. ERISA 4041(a)(2). However, in the case of a distress termination, the notice of intent to terminate must be filed with the PBGC, as well as provided to each of the other affected parties. Id. The notice to the PBGC must be filed on PBGC Form 600, Distress Termination, Notice of Intent to terminate. The notice of intent to terminate must be issued to each person who is an affected party (within the meaning of 29 C.F.R ) at least 60 days and no more than 90 days prior to the proposed date of plan termination. 29 C.F.R The termination date for a distress termination is "the date established by the plan administrator and agreed to by" the PBGC. ERISA 4048(a)(2). If no agreement is reached between the plan administrator and the PBGC, then the termination date is established by court order. ERISA 4048(a)(4). ERISA Section 4041(c)(2)(A) directs the plan administrator to provide notice to the PBGC with data that will permit the PBGC to determine whether the criteria for a distress termination are satisfied. The PBGC must be notified "as soon as practicable" after issuing the notice of intent to terminate to the other affected parties. Using the Form 600, Distress Termination Notice of Intent to Terminate, the plan administrator provides the PBGC with data regarding the plan and its sponsor. The PBGC has also issued Form 601, the Distress Termination Notice, pursuant to ERISA Section 4041(c)(2)(A). Using Form 601, the plan administrator supplies the PBGC with information to support a finding that the distress criteria, discussed above, have been satisfied. Additional plan sponsor and participant data are also submitted with the Form 601. Included with the Form 601 is a Schedule EA-D, which is the enrolled actuary's certification as to the level of plan benefits that can be provided by plan assets. Form 601, along with the Schedule EA-D and any required supplemental information, must be filed with the PBGC no later than 120 days after the proposed termination date. 29 C.F.R Unless the enrolled actuary certifies in the Schedule EA-D that the plan is sufficient either for guaranteed benefits or for benefit liabilities, the plan administrator must submit detailed participant and benefit information to the PBGC by the later of (a) 120 days after the proposed termination date or (b) 30 days after receipt of the PBGC's determination that the Section 4041(c)(2)(B) requirements for a distress termination have been satisfied. See 29 C.F.R (b). Among the detailed information required to be provided to the PBGC is the enrolled actuary's certification of the amount of plan assets; the value of the benefit liabilities; the value of guaranteed benefits; whether the plan has sufficient assets to provide benefit liabilities; and, whether the plan has sufficient assets to provide guaranteed benefits. The PBGC first determines whether the plan qualifies for a distress termination--that is, whether the contributing sponsor and each member of its controlled group satisfy at least of one the distress criteria described above. The statute does not require that the contributing sponsor and each 9

10 member of its controlled group satisfy the same test, only that each member satisfy at least one of the tests. The PBGC has announced that when approval of a termination is requested both from a bankruptcy court under the "reorganization test" and from the PBGC under the "ability to pay debts when due test," the PBGC will enter an appearance in the bankruptcy court, provide the court with relevant information, and consider itself bound by the court's findings with respect to the ability or inability to pay debts when due. See 52 Fed. Reg. 38,290 (Oct. 15, 1987). The PBGC also announced, in this regard, that the bankruptcy court is to look to the standards set forth in Bankruptcy Code Sections 365 and 1113, which deal with the rejection of executory contracts and the rejection of collective bargaining agreements, to determine whether the court should approve a distress termination. Id. "To avoid the possibility of a conflict in findings between the bankruptcy court and the PBGC... the PBGC will generally request that the bankruptcy court, when making a determination under 1341(c)(2)(B)(ii), make certain findings for purposes of Section 1341(c)(2)(B)(iii), and the PBGC agrees to be bound by those findings." In re Resol Manufacturing Co., 11 Employee Benefits Cas. at In other words, the PBGC asks the bankruptcy court to determine whether, but for the distress termination, the company reorganizing under Chapter 11 will be unable to pay its debts when due and continue in business. The case of PBGC v. Smith Corona Corp., 20 Employee Benefits Cas. (BNA) 2312 (D.Del. 1996), involved the distress termination of Smith Corona's defined benefit plans. Smith Corona and three of its subsidiaries had filed for relief under Chapter 11 of the Bankruptcy Code. Smith Corona filed distress termination notices with the PBGC and a distress termination motion with the Bankruptcy Court. The PBGC sought to withdraw the reference from the Bankruptcy Court, so that the District Court--not the Bankruptcy Court--could rule on the four issues presented in this case: whether Smith Corona has met the "reorganization test" for distress terminations under ERISA 4042(c)(2)(B)(ii), whether the PBGC's claims are to be classified as general unsecured claims or priority claims under the Bankruptcy Code, and how PBGC's claims are to be valued. The District Court denied the PBGC's motion. First, the Court reviewed the two-prong test used for determining whether mandatory withdrawal is required under 11 U.S.C. 157(d): There must be a need to consider "other laws" in addition to the Bankruptcy Code for resolving the issues presented and The consideration of the "other laws" must be substantial and material. The Court ruled that the PBGC had not met its burden to demonstrate that the issues presented required substantial and material consideration of ERISA. The Court also ruled that the PBGC had not demonstrated that the Court should exercise its discretion to withdraw reference. The Third Circuit has established five factors to be considered in determining whether there is "cause" for a District Court to exercise its discretionary authority to withdraw reference: fostering uniformity of bankruptcy administration reduce the incidence of forum shopping promoting the economical use of debtor and creditor resources 10

11 expediting the bankruptcy process timing of the request for withdrawal The District Court determined that discretionary withdrawal, as requested by the PBGC, would not promote these factors. If the PBGC determines that the plan sponsor or any one or more members of its controlled group do not satisfy at least one of the distress criteria, then the plan cannot be terminated, but must continue as an ongoing pension plan. If, however, the PBGC determines that the distress criteria are met, the PBGC then addresses the question of plan asset sufficiency. If the PBGC finds that the plan does have sufficient assets to satisfy all benefit liabilities, the PBGC will issue a "distribution notice," directing the plan administrator to distribute the plan assets and certify to distribution as in a standard termination. 29 C.F.R (c). See ERISA 4041(c)(3)(B)(ii). If the PBGC determines that the plan assets are sufficient to provide guaranteed benefits, but the PBGC is unable to determine that the assets are sufficient for all benefit liabilities, then the plan administrator will also be required to distribute plan assets as in a standard termination. Id. In those cases where the PBGC finds that it is unable to determine whether the plan is sufficient to pay guaranteed benefits, it will issue a notice of inability to determine sufficiency. 29 C.F.R In that event, the PBGC is required to initiate proceedings under ERISA Section 4042 to have itself (or some other entity) appointed as trustee of the plan and to assume the obligation for paying guaranteed benefits. Id. ERISA restricts the plan administrator in its activities during the pendency of a distress termination proceeding. From the date of the filing of the notice of intent to terminate with the PBGC until the receipt of the PBGC determination as to the sufficiency of plan assets, the administrator must pay benefits attributable to employer contributions (other than death benefits) only in the form of annuities; the administrator cannot purchase irrevocable commitments to provide benefits from an insurance company; and, the administrator cannot make other distributions to carry out the proposed termination. In addition to these limitations, beginning on the proposed date of termination, the plan administrator must limit benefit payments to the estimated level of benefits that are guaranteed by the PBGC or to the estimated level of benefits to which assets are allocated under Section C.F.R (c). See ERISA 4041(c)(3)(D)(ii). The methods for estimating guaranteed benefits and benefits available under the asset allocation rules in Section 4044 are described in detail in 29 C.F.R The PBGC's regulations on distress and standard terminations provide for the suspension of a termination proceeding, if there is a challenge under a collective bargaining agreement, regarding the termination. 29 C.F.R Under the regulations, if the challenge to termination is successful and the plan does not terminate, all benefit amounts that were withheld due to the estimating process would be immediately payable with interest. 29 C.F.R (c). Involuntary Terminations Although most terminations are initiated by plan administrators, the PBGC is authorized to terminate a plan by court order under limited circumstances. The PBGC is statutorily required to institute termination proceedings as soon as practicable whenever it determines that a plan does not 11

12 have assets available to pay benefits that are currently due under the terms of the plan. ERISA 4042(a). The PBGC may terminate a plan whenever it determines that the plan has failed to meet the minimum funding standards of Section 412 of the Internal Revenue Code; that the plan will be unable to pay benefits when due; that a distribution with the value of $10,000 or more has been made to a substantial owner for any reason other than in connection with the death of the owner; or, that the possible long-run loss of the PBGC with respect to the plan "may reasonably be expected to increase unreasonably if the plan is not terminated." ERISA 4042(a)(4). A plan termination initiated by the PBGC may be consummated either by an agreement between the plan administrator and the PBGC or by an action commenced by the agency in federal district court. ERISA 4042(c). The case of In re: American Door Retirement Plan; Pension Benefit Guaranty Corporation, Applicant v. American Door Company, Respondent, No. C BAC (May 10, 1994), involved the PBGC's petition to a United States district court to terminate a plan and name the PBGC as plan trustee. The action was dismissed without prejudice as not being properly before the court. The PBGC-- apparently in reliance upon ERISA Section 4003(e)(4), which provides for accelerated consideration of the appointment of a new plan trustee--applied for a Show Cause Order why the plan should not be terminated and PBGC not made plan trustee. Section 4003(e)(4) was repealed, effective November 8, However, the repeal did not apply to cases pending on that date. See Pub. L. No (33). The court concluded that the case was not properly before the court, because a case had not been commenced by the filing of a complaint, as required by Federal Rule of Civil Procedure 3. The court went on to note that had the case been properly commenced, absent special circumstances, it wold not consider the case on a specially expedited basis. To do so would risk depriving the plan sponsor of a reasonable opportunity to be heard. The case of PBGC v. Fel Corporation, 798 F. Supp. 239 (D. N.J. 1992), involved a PBGC application to show cause why a company's plans should not be involuntarily terminated and the PBGC appointed as trustee. The plans' contributing sponsor was a member of a controlled group whose other members had filed for protection under chapter 11 of the Bankruptcy Code. The contributing sponsor had a negative net worth. The PBGC determined, under Section 4042 of ERISA, that the plans should be terminated as of a date prior to the effective date of the Chapter 11 reorganization plan, because the possible long-run loss to PBGC was expected to increase unreasonably, if the plans were not terminated as of that date. The PBGC had determined that only if the plans were terminated before the effective date of the reorganization plan would the related companies in Chapter 11 incur termination liability. Also, the PBGC had determined that the plans, if not terminated immediately, would likely be terminated in the future. The Fel court first determined that the standard of review of the PBGC's decision to terminate the plans was the arbitrary and capricious standard, rather than a de novo review. This was based on the standard the Supreme Court used to review the PBGC's restoration decision in PBGC v. LTV Corp., 496 U.S. 633 (1990). The Fel court found that the PBGC, in reaching its determination that the plans should be terminated, had considered the relevant factors and reflected no clear error in judgment. Therefore, the PBGC's determination was not arbitrary and capricious, and its application was granted by the court. 12

13 Several cases have addressed the issue of establishing the termination date when the plan administrator has not agreed to the date sought by the PBGC under ERISA Section 4048(a)(3). By and large, the courts have concluded that the selection of a termination date requires a balancing of the sometimes competing interests of the participants and the PBGC. For, in many instances, the later a termination date, the greater the accrued benefits of the participants, but the greater the plan asset insufficiency to be absorbed by the PBGC. The courts generally select the earliest date that the participants have notice not only that the plan will be terminated, but also that they can no longer expect to continue to accrue benefits. See, e.g., In re Pension Plan of Broadway Maintenance, 707 F.2d 647 (2d Cir. 1983); PBGC v. Heppenstall Co., 633 F.2d 293 (3d. Cir. 1980); PBGC v. Pan Am Pension Committee, 14 Employee Benefits Cas. (BNA) 1785 (S.D.N.Y. 1991); Pension Committee for Farmstead Food Pension Plan v. PBGC, 778 F. Supp (D. Minn. 1991); PBGC v. Century Brass Products, 7 Employee Benefits Cas. (BNA) 2522 (D. Conn. 1986). The case of Pension Benefit Guaranty Corporation v. Valley-Vulcan Mold Co., 17 Employee Benefits Cas. (BNA) 1015 (W.D. Pa. 1993), involved the selection of a termination date for two collectively-bargained plans under ERISA Section 4048(a)(4). The court stated that deference is to be accorded to the PBGC's proposed date, where the PBGC "is not attempting to limit its liability by selecting a date prior to the participants' reasonable expectations that their benefits would no longer accrue." Slip op. at 2, citing Pension Committee for Farmstead Food Pension Plan v. PBGC, 991 F.2d 1415, (8th Cir. 1993); United States Steelworkers of Am. v. Harris & Sons Steel Co., 706 F.2d 1289, 1296 (3d Cir. 1983). The court noted that the instant case was unusual: "We have been unable to locate, and the parties have not provided, a published decision in which [as in the instant case], the PBGC sought a termination date which was later than that proposed by the plan's administrator." The court used the analysis enunciated in Pension Benefit Guaranty Corporation v. Heppenstall Co., 633 F.2d 293, 301 (3d Cir. 1980), and in Harris & Sons Steel Co.: "(1) identify the interests of the plan beneficiaries and the PBGC; (2) establish parameters which maximize those interests; and, (3) set the termination date accordingly." Slip op. at 3. The company argued that the termination date should have been the date that it ceased operations at the plants where the participants were employed, especially since it had earlier filed for relief under the Bankruptcy Code. The PBGC and the UAW argued that the termination date should be the date on which the participants received actual notice that the PBGC was seeking involuntary termination of the plans. The company asserted that its pension liabilities would be increased if the later plan termination date were used, because interest rates had declined. The company contended that it was unfair that the PBGC could wait for interest rates to decline, thereby increasing its claim against the plan sponsor. The court pointed out that, even if the PBGC had been purposeful in its delay, the plan sponsor could have filed a voluntary petition at an earlier date. Moreover, the court noted that the interest of an employer in its potential liability is not "a relevant consideration" in selecting a termination date under the Heppenstall and Harris & Sons Steel analysis. 13

14 Restoration Under Section 4047 of ERISA, the PBGC is authorized to restore a plan that is in the process of terminating or that has already been terminated. The statutory provision states that restoration may occur, "[w]henever the [PBGC] determines that a plan...should not be terminated... as a result of such circumstances as the [PBGC] determines to be relevant...." The standard for plan restoration was analyzed in PBGC v. LTV Corp., 496 U.S. 633 (1990), in which the Supreme Court upheld the PBGC's decision that restoration is appropriate where an employer establishes a follow-on plan that provides employees with the difference between plan benefits and guaranteed benefits. The court also held that the PBGC need not consider bankruptcy and labor law policies in making plan restoration decisions. The PBGC has issued a rule on restoration funding, i.e., repayments to the PBGC, payment of outstanding premiums, and amortization of unfunded liabilities that accrue between the dates of termination and subsequent restoration, 29 C.F.R The IRS has issued a related regulation, Treas. Reg (c)(1)-3T). Asset Allocation Upon termination of a single-employer plan, the plan assets are allocated to benefits in the following priority categories established under ERISA Section 4044: 1. Benefits attributable to voluntary employee contributions; 2. Benefits attributable to mandatory employee contributions, plus interest at the rate specified in the plan; 3. Annuity benefits that were or could have been in pay status for three years before termination, limited to the lowest benefit payable under the plan provision in effect during the five years before termination; 4. PBGC guaranteed benefits and benefits that would have been guaranteed absent limitations on guarantees, including benefits payable to substantial owners; 5. All other nonforfeitable benefits; and, 6. All other benefits under the plan. 14 If the plan's assets are insufficient to fund a priority category in full, the assets are allocated pro rata within that category. In category four, assets are allocated first to PBGC guaranteed benefits and then to the nonguaranteed benefits in that category. In addition to guaranteed benefits, the PBGC is obligated to pay to participants an amount equal to the plan's outstanding benefit liabilities multiplied by the "recovery ratio." ERISA 4022(c). The recovery ratio is generally the average percentage that the PBGC has recovered in plan terminations for which notices of intent to terminate were provided after December 17, 1987 and "during the 5-Federal fiscal year period ending with the fiscal year preceding the fiscal year in which occurs the date of the notice of intent to terminate" with respect to the subject plan. ERISA 4022(c)(3)(B)(ii). In a termination of a plan that has an outstanding amount of benefit liabilities in excess of $20 million, the actual percentage recovered by the PBGC will determine the recovery ratio. ERISA 4022(c)(3)(C). Excess Assets 15 ERISA Section 403(c)(1) sets forth the general rule that plan assets "shall never inure to the benefit of any employer and shall be held for the exclusive purposes of providing benefits to participants in the plan and their beneficiaries and defraying reasonable expenses of administering 14