Technical Update 04-3: Transition from Use of 30-Year Treasury Yield to Corporate Bond Index for Certain PBGC Purposes

This Technical Update 04-3 explains how the provisions of the Pension Funding Equity Act of 2004 ("PFEA") that relate to the PBGC's variable-rate premium interest rate ("the VRP interest rate") apply to PBGC reporting and disclosure requirements.¹ This Technical Update 04-3 also coordinates the relief provided by PFEA, which was enacted on April 10, 2004, and effective retroactively, with the reporting relief the PBGC provided in Technical Update 02-1, "PBGC Reporting Relief Relating to Use of 100% of 30-Year Treasury Yield" (May 1, 2002), and Technical Update 04-2, "Extension of PBGC Reporting Relief Relating to Use of 100% of 30-Year Treasury Yield" (March 19, 2004), and the reporting relief that the PBGC is providing in this Technical Update 04-3.

The PBGC reporting relief provided in these three Technical Updates ensures that those who are subject to PBGC reporting requirements tied to PBGC premium calculations will be able to rely on those calculations to determine their reporting obligations. Absent this relief, in many instances the premium calculation would have to be redone to determine the obligation to report to the PBGC, and failure to do so could lead to a reporting failure.

I. Background

The Job Creation and Worker Assistance Act of 2002 ("JCWAA") temporarily increased the required interest rate for calculating vested benefits for the PBGC's VRP from 85% to 100% of the annual yield on 30-year Treasury securities (the "JCWAA 100% Treasury Rate") for plan years beginning in 2002 or 2003. This statutory change, however, did not apply for purposes of PBGC reporting and disclosure requirements that are tied to the VRP calculation.

In Technical Update 02-1, the PBGC allowed the use of the JCWAA 100% Treasury Rate for certain PBGC reporting (but not disclosure) purposes. As a result, plans were permitted to use the JCWAA 100% Treasury Rate in determining reporting obligations in the following situations:

• Information years ending in calendar years 2002 or 2003, in the case of annual employer reporting under section 4010 of ERISA;

• Reportable events that occurred in calendar years 2002 or 2003, in the case of post-event reporting under section 4043(a) of ERISA; and

• Reportable events with effective dates in calendar years 2002 or 2003, in the case of advance reporting under section 4043(b) of ERISA.

On March 19, 2004, while PFEA was pending, the PBGC issued Technical Update 04-2, which allowed continued use of the JCWAA 100% Treasury Rate through and including May 31, 2004, in the following situations:

• Employer annual reporting (ERISA section 4010), for Information Years that end between January 1, 2004, and May 31, 2004;

• Post-event reporting (ERISA section 4043(a)), in the case of reportable events that occur between January 1, 2004, and May 31, 2004; and

• Advance reporting (ERISA section 4043(b)), in the case of reportable events with effective dates between January 1, 2004, and May 31, 2004.

PFEA set the PBGC's VRP interest rate for plan years beginning in 2004 or 2005 at 85% of the annual rate of interest determined by the Secretary of the Treasury on amounts invested conservatively in long-term investment grade corporate bonds ("the PFEA 85% Corporate Rate") for the calendar month preceding the calendar month in which the plan year begins. (The PBGC publishes VRP interest rates on its Web site at www.pbgc.gov.) The new PFEA 85% Corporate Rate applies to all PBGC reporting and disclosure requirements that are tied to the VRP calculation for plan years that begin in 2004 or 2005. The PBGC reporting relief provided by PFEA is in addition to the PBGC reporting relief in Technical Updates 02-1 and 04-2, and this Technical Update 04-3.

II. Relief Granted by this Technical Update 04-3

This Technical Update 04-3 expands the relief provided in Technical Updates 02-1 and 04-2 by allowing the further use of the JCWAA 100% Treasury Rate to value vested benefits in certain situations. Absent such further relief, the rate to be used for valuing vested benefits in these situations would be, depending on the plan year involved, either the pre-JCWAA 85% Treasury Rate or the PFEA 85% Corporate Rate. The further relief the PBGC is providing in this Technical Update 04-3 applies in the following situations:

• Employer annual reporting (ERISA section 4010) for Information Years ending on or after June 1, 2004, where the last day of the plan year ending within the Information Year is on or before December 30, 2003;

• Post-event reporting (ERISA section 4043(a)) for reportable events that occur on or after June 1, 2004:

  • In the case of a waiver contained in the PBGC's reportable events regulation, where the Event Year began in 2003;

  • In the case of the waiver contained in Technical Update 97-6 (relating to small employer reporting of missed quarterly contributions), where the plan year for which the contribution was owed or the prior plan year began in 2002 or 2003; and

  • In the case of an extension contained in the PBGC's reportable events regulation, where the plan year preceding the Event Year began in 2002 or 2003; and

• Advance reporting (ERISA section 4043(b)) for reportable events with effective dates on or after June 1, 2004, where the Event Year began in 2003.

III. Revised 2004 PBGC Premium Payment Package

The PBGC issued the 2004 Premium Payment Package before PFEA was enacted. Subsequently, the PBGC issued a 2004-R Premium Payment Package to reflect changes resulting from the new legislation. Plan administrators may use either the 2004 or 2004-R package. The Form 1, the Schedule A to Form 1, and the Form 1-EZ are the same in both packages. Plan administrators using the 2004 package should disregard the reference to 85% of the Treasury yield in the definition of Required Interest Rate on page 5 of the instructions and instead use the PFEA 85% Corporate Rate as the Required Interest Rate.

The PBGC has posted on its Web site (www.pbgc.gov) the new VRP interest rates and revised 2004-R Premium Payment Package instructions incorporating the PFEA 85% Corporate Rate.

IV. PBGC Reporting and Disclosure Requirements

The sections that follow explain how various PBGC reporting and disclosure requirements apply in light of JCWAA, PFEA, and the PBGC reporting relief in Technical Updates 02-1 and 04-2, and this Technical Update 04-3.

A. Employer Annual Reporting Under ERISA Section 4010

ERISA section 4010 generally requires controlled groups to report to the PBGC if the aggregate unfunded vested benefits in plans maintained by the controlled group exceed $50 million (disregarding plans with no unfunded vested benefits) ("the 4010 Gateway Test"). Vested benefits are calculated on a plan-by-plan basis as of the last day of the plan year that ends within the Information Year ("the 4010 Gateway Testing Date").²

The following chart shows the interest rates³ that may be used for valuing vested benefits for purposes of the 4010 Gateway Test for 4010 Gateway Testing Dates on or after January 1, 2002, in light of JCWAA, PFEA, and the PBGC reporting relief in Technical Updates 02-1 and 04-2, and this Technical Update 04-3:

Section 4010 Gateway Test
For 4010 Gateway Testing Dates on or after January 1. 2002

Example: A controlled group with an Information Year ending May 31, 2004, has two plans. Plan A has a 4010 Gateway Testing Date of September 30, 2003, and Plan B has a 4010 Gateway Testing Date of December 31, 2003. For purposes of the 4010 Gateway Test:

• Vested benefits in Plan A must be valued using the JCWAA 100% Treasury Rate for the plan year that began October 1, 2003 (i.e., the September 2003 rate of 5.14%).
• Vested benefits in Plan B could be valued using either the JCWAA 100% Treasury Rate or the PFEA 85% Corporate Rate for the plan year that began January 1, 2004 (i.e., the December 2003 rate of 5.07% or 4.94%, respectively).

B. Participant Notices under ERISA Section 4011

Plan administrators of certain underfunded PBGC-insured plans are required to issue a Participant Notice under section 4011 of ERISA disclosing the plan's funded current liability percentage and describing the limitations on the PBGC's guarantee should the plan terminate while underfunded. Except for plan years beginning in 2002 or 2003, a plan administrator may be required to issue a Participant Notice for a plan year only if a VRP is payable for that plan year.⁴ This Technical Update 04-3 uses the term, "Participant Notice VRP Test," to refer to whether a VRP is payable (or considered to be payable) for a plan year for purposes of determining whether a Participant Notice is required for that plan year.

For plan years beginning in 2002 or 2003, the interest rate used for valuing vested benefits for purposes of calculating the PBGC's VRP is the JCWAA 100% Treasury Rate. However, plan administrators had to continue to use the pre-JCWAA 85% Treasury Rate for purposes of the Participant Notice VRP Test because JCWAA did not allow plan administrators to use the JCWAA 100% Treasury Rate for this purpose. Thus, a plan administrator may have been required to issue a Participant Notice for the 2002 or 2003 plan year even if a VRP was not payable for that plan year using the JCWAA 100% Treasury Rate but would have been payable for that plan year using the pre-JCWAA 85% Treasury Rate.⁵

For plan years beginning in 2004 or 2005, plan administrators may use the same PFEA 85% Corporate Rate for purposes of the Participant Notice VRP Test as they use to calculate the PBGC's VRP. Thus, a plan administrator will not be required to issue a Participant Notice for a plan year beginning in 2004 or 2005 if a VRP is not payable for that plan year using the PFEA 85% Corporate Rate.

The following chart shows the interest rates that must be used, in light of JCWAA and PFEA, for valuing vested benefits for purposes of the Participant Notice VRP Test in the case of Participant Notices for the 2002 through 2005 plan years:

Participant Notice VRP Test

Example: Plan C has an October 1, 2003 - September 30, 2004, plan year. A PBGC variable-rate premium was not payable for Plan C for its 2003 plan year because it had no unfunded vested benefits based on use of the JCWAA 100% Treasury Rate to value vested benefits. However, a Participant Notice may be required for Plan C for its 2003 plan year if a VRP would have been payable for that plan year if vested benefits had been valued using the pre-JCWAA 85% Treasury Rate.

The PBGC will issue a separate Technical Update providing additional guidance (including a Model Participant Notice) on Participant Notice requirements for the 2004 plan year.

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

ERISA section 4043(a) and the PBGC's regulations (29 CFR §§ 4043.1-.35) require plan administrators and contributing sponsors to notify the PBGC within 30 days after they know or have reason to know that a reportable event has occurred (post-event reporting). The 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"), and 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, vested benefits 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, vested benefits 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.

In addition to the reporting waivers and extensions contained in the PBGC's reportable events regulation, the PBGC, in Technical Update 97-6 (discussed below), has waived post-event reporting for certain small employers that failed to make quarterly contributions.

1. Waivers in PBGC Reportable Events Regulation

The following chart shows the interest rates that may be used for valuing vested benefits for purposes of determining whether a waiver contained in the PBGC's post-event reportable events regulation6 applies, in light of JCWAA, PFEA, and the PBGC reporting relief in Technical Updates 02-1 and 04-2, and this Technical Update 04-3:

Post-Event Reporting Waivers under PBGC Regulations

Examples: (1) Two reportable events occur with respect to calendar year Plan D. Event 1 occurs on April 30, 2004, and Event 2 occurs on September 30, 2004. For purposes of determining whether a waiver of post-event reporting applies:

• With respect to Event 1, vested benefits would be valued using either the JCWAA 100% Treasury Rate or the PFEA 85% Corporate Rate for the plan year that began January 1, 2004 (i.e., the December 2003 rate of 5.07% or 4.94%, respectively).
• With respect to Event 2, vested benefits would be valued using the PFEA 85% Corporate Rate for the plan year that began January 1, 2004 (i.e., the December 2003 rate of 4.94%).

(2) A reportable event occurs on June 15, 2004, with respect to Plan E, which has a July 1 - June 30 plan year. For purposes of determining whether a waiver of post-event reporting applies, vested benefits would be valued using the JCWAA 100% Treasury Rate for the plan year that began July 1, 2003 (i.e., the June 2003 rate of 4.37%).

2. Special Waiver of Small Employer Reporting of Missed Quarterly Contributions

In Technical Update 97-6, "Waiver for Small Employer Reporting of Missed Quarterly Contributions" (November 3, 1997), the PBGC provided a special waiver of post-event reporting for certain small employers that failed to make quarterly contributions. The waiver applies if:

(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 determination of whether a Participant Notice is required for a plan year depends, in part, on the Participant Notice VRP Test described above.)

The following chart shows the interest rates that may be used for valuing vested benefits for purposes of applying the Participant Notice VRP Test to waiver criterion (2), above, in light of JCWAA, PFEA, and the PBGC reporting relief in Technical Updates 02-1 and 04-2, and this Technical Update 04-3:

Post-Event Reporting Waiver under Technical Update 97- 6

Example: Plan F, which has 300 participants at all relevant times, has a July 1 - June 30 plan year. The fourth quarterly contribution for the 2003 plan year, due July 15, 2004, is not made. A PBGC variable-rate premium was not payable for Plan F for its 2003 plan year because it had no unfunded vested benefits based on use of the JCWAA 100% Treasury Rate to value vested benefits. However, a Participant Notice was required for Plan F for the 2003 plan year because: (1) a VRP would have been payable for that plan year if vested benefits had been valued using the pre-JCWAA 85% Treasury Rate; and (2) the plan did not pass the funding-related test that is tied to the Deficit Reduction Contribution rules as described at 29 CFR § 4011.3(b).

Plan F qualifies for a waiver of post-event reporting of this missed quarterly contribution because it had 500 or fewer participants and a Participant Notice would not have been required for the 2003 plan year if the JCWAA 100% Treasury Rate had been used to value vested benefits for purposes of applying the Participant Notice VRP Test to criterion (2) of Technical Update 97-6.

3. Extensions in PBGC Reportable Events Regulation

The following chart shows the interest rates that may be used for valuing vested benefits for purposes of determining whether an extension contained in the PBGC's post-event reportable events regulation applies⁷, in light of JCWAA, PFEA, and the PBGC reporting relief in Technical Updates 02-1 and 04-2, and this Technical Update 04-3:

Post-Event Reporting Extensions under PBGC Regulations

Example: Two reportable events occur with respect to calendar year Plan G. Event 1 occurs on April 30, 2004, and Event 2 occurs on April 30, 2005. For purposes of determining whether an extension of post-event reporting applies:

• With respect to Event 1, vested benefits would be valued using the JCWAA 100% Treasury Rate for the plan year that began January 1, 2003 (i.e., the December 2002 rate of 4.92%).
   
• With respect to Event 2, vested benefits would be valued using the PFEA 85% Corporate Rate for the plan year that began January 1, 2004 (i.e., the December 2003 rate of 4.94%). (Revised June 9, 2004.)

D. Advance Reporting under ERISA Section 4043(b)

ERISA section 4043(b) requires certain non-public companies to give the 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) the aggregate unfunded vested benefits of plans maintained by the controlled group exceed $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 (the "Event Year"), using the VRP interest rate for the Event Year.

The following chart shows the interest rates that may be used for valuing vested benefits for purposes of the $50 million and the 90% gateway tests, in light of JCWAA, PFEA, and the PBGC reporting relief provided in Technical Updates 02-1 and 04-2, and this Technical Update 04-3:

Section 4043(b) Advance Reporting Gateway Tests

Example: Two reportable events occur with respect to Plan H, which has an April 1 - March 31 plan year. Event 1 is effective on April 30, 2004, and Event 2 is effective on September 30, 2004. For purposes of determining whether advance reporting is required:

• With respect to Event 1, vested benefits would be valued (as of the March 31, 2004, premium snapshot date) using either the JCWAA 100% Treasury Rate or the PFEA 85% Corporate Rate for the plan year that began April 1, 2004 (i.e., the March 2004 rate of 4.74% or 4.62%, respectively).
• With respect to Event 2, vested benefits would be valued (as of the March 31, 2004, premium snapshot date) using the PFEA 85% Corporate Rate for the plan year that began April 1, 2004 (i.e., the March 2004 rate of 4.62%).

V. PBGC Contact Points

For questions about this Technical Update in general contact the Corporate Finance & Restructuring Department. Questions about specific section 4010 filings or specific section 4043 advance notice filings should be directed to Karen Krist Justesen at (202) 229-4070, ext. 3647, or Justesen.Karen@PBGC.gov.

Footnotes

¹ In addition to temporarily changing the VRP interest rate, PFEA made several other changes, including permitting certain employers (mainly those in the airline and steel industries) to make a reduced additional pension contribution under Internal Revenue Code section 412(l)(12) for plan years 2004 and 2005. One of the conditions for the relief is that electing employers provide notices to participants, beneficiaries, and the PBGC. Those notices are within the jurisdiction of the IRS and are addressed in IRS Announcement 2004-43.

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² This determination tracks the determination of unfunded vested benefits for premium purposes for the plan year that begins on the day after the 4010 Gateway Testing Date, e.g., the 2004 calendar plan year where the 4010 Gateway Testing Date is December 31, 2003. (The 4010 Gateway Testing Date generally serves as the premium snapshot date for that next plan year.)

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³ In the usual situation where the 4010 Gateway Testing Date is the last day of a calendar month (e.g., December 31, 2003), the applicable rate (e.g., the PFEA 85% Corporate Rate) to be used is the rate for that calendar month (e.g., December 2003). If the 4010 Gateway Testing Date is any day other than the last day of a calendar month (e.g., July 14, 2004), the rate to be used is the rate for the preceding calendar month (e.g., June 2004).

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⁴ Even if a VRP is payable for a plan year, a Participant Notice may not be required for that plan year if the plan meets a funding-related test that is tied to the Deficit Reduction Contribution rules (see 29 CFR § 4011.3(b)).

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⁵ May 7, 2004, the PBGC announced in the Federal Register (69 Fed. Reg. 25792) that it is expanding its Participant Notice enforcement program with a view toward more actively auditing compliance and assessing penalties for noncompliance. In the same Federal Register notice, the PBGC launched a Participant Notice Voluntary Correction Program ("VCP") under which the PBGC will not assess a penalty for a 2002 or 2003 Participant Notice failure if the plan administrator corrects the failure in accordance with the VCP guidelines. For information on the VCP, visit the PBGC's Web site.

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⁶ This chart does not apply to waivers other than those contained in the PBGC's post-event reportable events regulation, such as a case by case extension granted by the PBGC or the waiver contained in Technical Update 97-6, which is addressed separately in this Technical Update 04-3.

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⁷ This chart does not apply to extensions other than those contained in the PBGC's post-event reportable events regulation, such as a case-by-case extension granted by the PBGC.

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⁸ If an event occurs on or before May 31, 2004, in a 2004 plan year and (as a result of a change in plan year) the plan year preceding that 2004 plan year is also a 2004 plan year, the JCWAA 100% Treasury Rate may be used (as an alternative to the PFEA 85% Corporate Rate) based on the relief provided in Technical Update 04-2.

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