Benefits and Compensation

PBGC Staff Suggests Plan Spinoffs Made to Reduce Premiums ‘Should Be Disregarded’

“Reverse spinoff” transactions being considered by some retirement plans to avoid Pension Benefit Guaranty Corp. (PBGC) premiums “should be disregarded” by the agency, staff suggested in a recent web posting.

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The interpretation was posted on a new web page offering staff responses to practitioners’ questions about requirements such as Employee Retirement Income Savings Act (ERISA) Title IV, which outlines the plan termination insurance program covering defined benefit (DB) pension plans. The interpretations posted on the new PBGC page reflect the views of agency staff but are not rules, regulations, or statements of the agency, the page states (see related story).

The 2-step spinoffs the agency said are being considered by some DB plans move most participants late in the year to a new plan that is virtually identical to the old one, but with a new name, employer identification number (EIN), and plan number. A small group of retirees is left in the original plan, which is then terminated and annuities are purchased for them.

Allowed Under Current Regulations

Special premium reduction rules in ERISA Section 4006 say a DB plan is exempt from PBGC variable rate premiums in its final year, and that total PBGC premiums are prorated in the first year of new plans.

“ERISA section 4006 does not provide for reducing the premium obligation in either of the situations noted above (i.e., when a plan is exiting the DB system or when the plan year is less than 12 months).”

PBGC said it adopted the special premium reduction rules because “it seemed overly burdensome to charge the entire statutory premium in a year when either of these one-time events took place.” PBGC staff explained the special premium reduction rules in its response listed under the “Premiums” tab of the web page.

Applying the special rules results in much lower premiums, PBGC staff noted. However, with the spinoff strategy noted above, the benefits of the vast majority of the participants who were in the plan at the beginning of the year have not been fully funded or paid in full, and PBGC coverage is still in effect for these participants.

As a result, PBGC said, federal common law under ERISA and cases that look to the substance and not the form of a transaction suggest that this 2-step transaction, and similar ones, “should be disregarded and premiums assessed as if such transaction had not occurred.”

“We are especially skeptical of this strategy because it seems plausible that some plans could engage in this sort of two-step transaction year after year,” PBGC said in its interpretation.

Barrier to Strategy

One employment benefits law firm sounded a warning on the PBGC statement about 2-step spinoffs. “Even though it is not formal guidance from the PBGC, this interpretation will undoubtedly hamper those types of strategies going forward,” wrote Groom Law Group in a July 26 client bulletin.

“It is not yet clear whether PBGC will undertake an enforcement initiative in this area or propose a change in its regulations. In the meantime, plan sponsors actively engaged (or previously engaged) in this or similar transactions should understand the risks and evaluate their next steps,” the law firm said.

The questions, responses, and examples on the PBGC web page also cover issues such as bankruptcy claims, liens arising from large missed contributions, guaranteed benefits, distress terminations, and reportable events, among other topics.