The Pension Benefit Guaranty Corporation released Feb. 16 a proposed rule that would create a new “termination premium,” change the flat premium rate, and cap the variable rate premium in some cases.

The new termination premium would apply “only where certain distress and involuntary terminations occur and then for only three years,” the proposed rule said.

The proposed rule would amend PBGC's regulations on premium rates (29 CFR Part 4006) and payment of premiums (29 CFR Part 4007) to conform to the requirements of the Deficit Reduction Act of 2005 (DRA) and the Pension Protection Act of 2006 (PPA) and to clarify how the requirements apply.

The proposed rule provides for post-2006 flat premium rates of the greater of the preceding year's rate ($30 for single-employer plans in 2006 and $8 for multiemployer plans in 2006) or the inflation adjusted rate based on changes in the national average wage index.

The proposed rule would cap the variable rate premium for certain plans, effective for plan years beginning after 2006. The applicability does not necessarily depend on the size of a single employer (in the case of an employer with 25 or fewer employees), but rather depends on the size of a plan's controlled group. That is, the aggregate size of “all contribution sponsors and their controlled groups,” the rule said.

The per-participant variable rate premium is capped at $5 multiplied by the number of participants in the plan as of the close of the preceding plan year, the proposed rule said.

The proposed rule is scheduled to be published in the Federal Register on Feb. 20, according to PBGC.

Written comments on the proposed rule are due by April 23. Comments should be sent through the federal e-rulemaking portal at http://www.regulations.gov; by e-mail to reg.comments@pbgc.gov; by fax at (202) 326-4224; or by mail or hand delivery to Legislative and Regulatory Department, Pension Benefit Guaranty Corporation, 1200 K Street N. W., Washington, D.C. 20005.

All written comment submissions must include the regulatory information number for the rulemaking, RIN 1212-AB10).

Amendment of PBGC's Regulations.

According to the proposed rule, Section 8101 of the DRA amended Employee Retirement Income Security Act Section 4006. Section 8101(b) created a new termination premium that is payable for three years following certain distress and involuntary plan terminations that occur after 2005.

The proposed rule also implements a DRA provision that amended ERISA to add a new paragraph (7) to the end of Section 4006(a) which addresses premium rates. However, although only Section 4006 is amended, subparagraph (D) of new paragraph (7) in effect modifies Section 4007 (payment of premiums) as well, it said.

DRA Section 8101(a) changed the per participant flat premium rate for plan years beginning in 2006 from $19 to $30 for single employer plans, from $2.60 to $8 for multiemployer plans, and provided for inflation adjustments to the flat rates for future years, the proposed rule said.

The PPA made changes to the termination premium rules of DRA, the proposed rule said. PPA Section 405 amended ERISA Section 4006 to cap the variable rate premium for plans of certain small employers beginning in 2007.

Terminations.

The proposed rule would implement a PPA provision (Section 401(b)(1)) that does away with the ending date of Dec. 31, 2010, for the termination premium, instituted by the DRA, with respect to any plan terminated after Dec. 31, 2010.

Application of the new termination premium in certain Chapter 11 bankruptcy situations is further restricted but does not apply to a plan of a commercial passenger airline or airline catering service, the proposed rule said.

These restrictions turn on when a plan is terminated, it said. “The PBGC believes that the most natural reading of these provisions is that the date to look to is the termination date under ERISA Section 4048 (termination date),” it said.

The proposed rule said PBGC interprets the new termination premium as applying in any distress termination case except for liquidation, provided certain requirements are met, where at least one contributing sponsor or controlled group member meets the distress test of ERISA Section 4041 (termination of single-employer plans).

The proposed rule also said the following, among other things, about the new termination premium provisions:

• The designated payor is to be identified as of the day before the termination date under ERISA Section 4048.

• The contributing sponsor's control group members are identified as of the same above day.

• The termination premium is based on the number of participants in the plan immediately before the termination date.

• The termination premium is payable each year for three years and is due within 30 days after the beginning of each of three “applicable 12-month periods.”

• The beginning of the first applicable 12-month period in certain bankruptcy reorganization cases (liquidation) is deferred if certain requirements are met.

• Where the termination date is set retroactively, the first 12-month period does not begin immediately after the month in which the termination date falls, but rather begins immediately after the month in which the termination date is established.

• A new ERISA regulation Section 4006.7 is added to the premium rates regulation providing that the amount of the termination premium with respect to each applicable 12-month period is “generally $1,250” (but could be $2,500) times the number of participants, determined as of the day before the termination date.

• A “facts-and-circumstances” penalty is provided for failure to timely pay the termination premium.

By Michael W. Wyand