Technical Update 07-1: Effect of Treasury Mortality Tables on PBGC Requirements

(revised February 15, 2007)

In a final rule published on February 2, 2007, in the Federal Register (72 FR 4955), the Department of the Treasury, Internal Revenue Service, provided new mortality tables to be used in determining current liability for plan years beginning on or after January 1, 2007, thereby triggering several changes to the way that unfunded vested benefits (UVBs) are determined for purposes of PBGC's variable-rate premium. This affects not only premium calculations but also certain PBGC reporting requirements under ERISA sections 4010 and 4043. This Technical Update provides guidance on how the establishment of the new mortality tables affects premium calculations and other PBGC requirements.

I. Background.

For the 2007 plan year, PBGC's required interest rate for determining variable-rate premiums (the "VRP interest rate") is the "applicable percentage" of the "Composite Corporate Bond Rate" 1) for the calendar month preceding the calendar month in which the premium payment year begins.

ERISA section 4006(a)(3)(E)(iii)(II) and (III) provides that when new mortality tables for calculating current liability become applicable to a plan, two changes occur to the assumptions and methods for determining UVBs for purposes of the variable-rate premium:

● The "applicable percentage" that is used to determine the VRP interest rate (used to value benefits) increases from 85% to 100%. (For example, the VRP interest rate for plan years beginning in January of 2007 will be 5.75%, which is 100% of the Composite Corporate Bond Rate for December, rather than 4.89%, which is 85% of that Composite Corporate Bond Rate.)

● The fair market value of plan assets, rather than the actuarial value of assets, must be used.

II. Variable-Rate Premiums

For premium payment years beginning in 2007, the VRP interest rate used for determining UVBs is 100% of the Composite Corporate Bond Rate.2 In addition, for such years, the fair market value of plan assets must be used to determine UVBs regardless of which calculation method is used (i.e., the Alternative Calculation Method (29 CFR § 4006.4(c)) or the General Rule (29 CFR § 4006.4(a)).

Note that most plans will not use the new mortality tables themselves to determine 2007 premiums. That is because the mortality table used to measure UVBs on the premium snapshot date is the table in effect for the plan year containing the premium snapshot date. For most plans, the premium snapshot date for the 2007 plan year is the last day of the plan year that began in 2006. The old mortality tables were still in effect for plan years beginning in 2006. The new tables will be used to determine 2007 UVBs by a General Rule filer whose snapshot date for the 2007 premium payment year is the first day of the 2007 plan year (i.e., new or newly covered plans and plans affected by the special rule for mergers and spinoffs in 29 CFR § 4006.5(e)), or a filer whose snapshot date occurs in a short 2007 plan year.

On February 8, 2007, at 72 FR 6102, PBGC published a Federal Register notice with the VRP interest rate for premium payment years beginning in January 2007. This notice revised the rate PBGC published on January 12, 2007, before IRS published its final rule providing the new mortality tables. PBGC also posted the revised rate on its Web site at www.pbgc.gov/prac/interest/vrp.html.

III. PBGC Reporting Requirements

A. Employer Annual Reporting Under ERISA Section 4010

Background

ERISA section 4010 generally requires a controlled group to report to PBGC if the aggregate UVBs in plans maintained by the controlled group, as determined for VRP purposes under ERISA section 4006(a)(3)(E)(iii), exceed $50 million, disregarding plans with no UVBs (the "$50 Million 4010 Gateway Test").3 UVBs are calculated on a plan‑by‑plan basis as of the last day of the plan year that ends within the Information Year4 (the "$50 Million 4010 Gateway Testing Date"). Because this determination tracks the determination of UVBs for VRP purposes,5 the establishment of the new mortality tables affects gateway testing under ERISA section 4010.

Effect

As a result of the new mortality tables, for $50 Million Gateway Testing Dates on or after December 31, 2006, and on or before December 30, 2007, UVBs are determined using 100% of the Composite Corporate Bond Rate and the fair market value of plan assets.

Note that for $50 Million 4010 Gateway Testing Dates on or after December 31, 2006, and on or before December 30, 2007, the new mortality tables themselves generally do not apply. (See the discussion above under Variable-Rate Premiums.)

Example

Consider a controlled group with a calendar year information year. Further assume that the controlled group has two defined benefit plans: Plan A with a calendar year plan year and Plan B with a plan year beginning July 1 and ending June 30. The following table summarizes the assumptions and method used to determine if a section 4010 filing is required for the information years ending December 31, 2006.

B. Post-Event Reporting under ERISA Section 4043(a)

1. Waivers and Extensions for Post-event Reporting in General

Background

ERISA section 4043(a) and PBGC's regulations (29 CFR §§ 4043.1-.35) require plan administrators and contributing sponsors to notify PBGC within 30 days after they know or have reason to know that a reportable event has occurred (post-event reporting). PBGC's reportable events regulation contains a variety of reporting waivers that are tied to the VRP status of a plan for the plan year in which the reportable event occurs (the "Event Year"). The regulation also contains a variety of reporting extensions that are tied to the VRP status of a plan for the plan year preceding the Event Year. For purposes of determining whether one of these waivers applies, UVBs are calculated as of the premium snapshot date for the Event Year, using the VRP interest rate for the Event Year. For purposes of determining whether one of these extensions applies, UVBs are calculated as of the premium snapshot date for the plan year preceding the Event Year, using the VRP interest rate for that preceding plan year.

Effect

For determining whether a waiver (other than a waiver pursuant to Technical Update 97-6 or a waiver based on "no unfunded vested benefits," discussed below) of post-event reporting applies to a reportable event that occurs in a plan year beginning in 2007, UVBs are determined using 100% of the Composite Corporate Bond Rate and the fair market value of plan assets.7

For determining whether a reporting extension (other than an extension based on "no unfunded vested benefits") applies, UVBs are determined using 100% of the Composite Corporate Bond Rate and the fair market value of plan assets if the plan year preceding the event year begins in 2007. (Such a reporting extension generally will apply only to a reportable event occurring in a plan year beginning in 2008.)8

Note that for purposes of determining whether a waiver applies to a post-event reportable event that occurs in a plan year beginning in 2007, the new mortality tables themselves generally do not apply. For purposes of determining whether a reporting extension applies to a post-event reportable event, the new mortality tables themselves generally do not apply if the plan year preceding the event year begins in 2007. (See the discussion above under Variable-Rate Premiums.)

2. Waivers and Extensions Based on "No Unfunded Vested Benefits"

Background

Several types of reportable events are waived if "as of the testing date for the event year, the plan would have no unfunded vested benefits if unfunded vested benefits were determined in accordance with the assumptions and methodology in 29 CFR § 4010.4(b)(2)." Although the optional assumptions and methodology under 29 CFR § 4010.4(b)(2) were removed from PBGC's regulations when PBGC revised part 4010 in 2005 (70 FR 11540), PBGC has allowed the continued use of the waiver based on "no unfunded vested benefits." See the Instructions to Form 10, Post-Event Notice of Reportable Events. However, 29 CFR § 4010.4(b)(2) provided that the optional assumptions apply only "prior to the first information year in which the mortality assumptions prescribed under section 302(d)(7)(C)(ii)(II) of ERISA apply to all the plans maintained by a controlled group." 29 CFR § 4010(b)(2).

Effect

For any reportable event that occurs in a plan year that ends in an information year (determined under 29 CFR § 4010.5) for which the new mortality tables apply to all of the plans in the controlled group (i.e., all of the plan years ending in that information year began in 2007 or later), the waiver based on "no unfunded vested benefits" is not available. (For example, assume a controlled group has one plan, which is a calendar year plan that is not new, newly covered, or part of a merger or spinoff. Assume a calendar year information year. The waiver based on "no unfunded vested benefits" would not be available for a reportable event occurring on or after January 1, 2007.)

For determining whether a reporting extension applies, the extension based upon "no unfunded vested benefits" is not available if the plan year preceding the event year ends in an information year (determined under 29 CFR § 4010.5) for which the new mortality tables apply to all of the plans maintained by the controlled group (i.e., all of the plan years ending in that information year began in 2007 or later). (In the example above, an extension based on "no unfunded bested benefits" would not be available for a reportable event occurring on or after January 1, 2008.)

This Technical Update 07-1 updates the guidance provided in the instructions to PBGC Form 10. Also note that for purposes of determining whether a waiver based on "no unfunded vested benefits" applies, the new mortality assumptions prescribed by PBGC under part 4044 of its regulations (see 70 Fed. Reg. 72205, Dec. 2, 2005) must be used for testing dates in plan years that end on or after January 1, 2006. See Part IV - Funding Based Waivers and Extensions of the instructions to Form 10. PBGC intends to revise these instructions.

3. Waivers and extensions in Technical Update 97-6

Background

In addition to the reporting waivers and extensions contained in PBGC's reportable events regulation, PBGC, in Technical Update 97-6, waived post-event reporting for certain small employers that fail to make quarterly contributions. Technical Update 97-6 applies to all plans that satisfy one of the following two conditions: (1) The employer had 100 or fewer participants in its defined benefit plans; or (2) The employer had 500 or fewer participants in its defined benefit plans and a Participant Notice for the plan under section 4011 of ERISA (a) was not required for the plan year for which the quarterly contribution is owed or (b) was not required for the prior plan year. The Participant Notice element of that waiver requires the determination of whether a variable-rate premium is required for the plan year for which the quarterly contribution is owed or for the prior plan year.

The Pension Protection Act of 2006 (PPA) repealed ERISA section 4011 (Notice to Participants) for plan years beginning after December 31, 2006. However, in Technical Update 06-4, PBGC said that for purposes of determining whether a waiver under Technical Update 97-6 applies to missed quarterly contributions for the 2007 plan year, PBGC will consider a plan to meet the requirement that "a Participant Notice for the plan under section 4011 of ERISA was not required for the plan year for which the quarterly contribution is owed," only if, for that 2007 plan year, a Participant Notice would not be required under part 4011 of PBGC's regulations in effect as of December 31, 2006 (i.e., without regard to PPA's repeal of section 4011 of ERISA for plan years beginning after December 31, 2006).

Effect

For purposes of determining whether a waiver under Technical Update 97-6 applies to a reportable event, 100% of the Composite Bond Rate and the fair market value of plan assets are used for determining whether a variable-rate premium is required if the plan year to be tested begins in 2007.9

C. Advance Reporting under ERISA Section 4043(b)

Background

ERISA section 4043(b) and PBGC's regulations (29 CFR §§ 4043.1-.8 and §§ 4043.61-.68) require certain non-public companies to give PBGC notice at least 30 days before the effective date of certain reportable events ("advance reporting"). Generally, a company is subject to advance reporting if: (1) in the aggregate, the vested benefits of plans maintained by the controlled group exceed the actuarial value of plan assets by more than $50 million (disregarding plans with no unfunded vested benefits) and (2) the aggregate funded vested benefit percentage for those plans that are underfunded is less than 90%. Vested benefits for both the $50 million and the 90% gateway tests are computed as of the premium snapshot date for the plan year that includes the effective date of the reportable event, using the VRP interest rate for that plan year.

Effect

For advance reporting of a reportable event with an effective date in a plan year beginning in 2007, 100% of the Composite Corporate Bond Rate and the fair market value of assets are used to determine whether a company is subject to advance reporting.10 (Note that due to Treasury's establishment of the new mortality tables, 29 CFR § 4043.61 is superseded to the extent it requires using the actuarial value of assets.)

Note that for advance reporting of a reportable event with an effective date in a plan year beginning in 2007, the new mortality tables themselves generally do not apply. (See the discussion above under Variable-Rate Premiums.)

This Technical Update 07-1 updates the guidance provided in the instructions to Form 10-Advance (see the note on p. 2 of those instructions under Contributing Sponsors Subject to Advance Reporting).

IV. PBGC Contact Points

For questions about this Technical Update 07-1, contact Amy Viener of the Policy, Research and Analysis Department at (202) 229-4000, ext. 3919, or viener.amy@pbgc.gov.

1 The term "Composite Corporate Bond Rate" is used to refer to the annual rate of interest determined by the Secretary of the Treasury on amounts invested conservatively in long-term investment-grade corporate bonds. ERISA section 4006(a)(3)(E)(iii)(V).

2 For plan years beginning on or after January 1, 2008, The Pension Protection Act of 2006 (PPA) significantly changed the structure for determining UVBs for purposes of the variable-rate premium. This Technical Update does not provide guidance on how UVBs will be determined under the new structure established by PPA. PBGC expects to issue regulations in this area.

3 The Pension Protection Act of 2006 (PPA) provides new rules for determining whether reporting is required under ERISA section 4010 "with respect to years beginning after 2007." PPA Sec. 505. PBGC expects to issue regulations on these changes, including when the changes are applicable.

4 Information Year is generally the employer's fiscal year, which in most cases is the calendar year. See 29 CFR § 4010.5.

5 This determination tracks the determination of UVBs for variable-rate premium purposes for the plan year that begins on the day after the $50 Million 4010 Gateway Testing Date, e.g., the 2007 calendar plan year where the $50 Million 4010 Gateway Testing Date is December 31, 2006. The $50 Million 4010 Gateway Testing Date generally serves as the premium snapshot date for that next plan year. See Footnote 2 to Technical Update 04-3, which is on PBGC's Web site at https://www.pbgc.gov/prac/other-guidance/tu/technical-update-04-3-transition-use-30-year-treasury-yield-corporate-bond.

6 These tables are set forth in Rev. Rul. 95-28 and Rev. Rul. 96-7. The tables for participants and beneficiaries (other than disabled participants) are based on GAM 83.

7 See footnote 2.

8 See footnote 2.

9 As noted in Technical Update 06-4, PBGC will issue further guidance on how Technical Update 97‑6 applies to plan years beginning after December 31, 2007.

10 See footnote 2.