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PBGC Releases Proposed Rule Implementing PPA Provision on Bankruptcy Filing Date

The Pension Benefit Guaranty Corp. (PBGC) has released a proposed rule to implement section 404 of the Pension Protection Act (PPA). Section 404 amended ERISA to provide that when an underfunded PBGC-covered single-employer pension plan terminates while its contributing sponsor is in bankruptcy, ERISA sections 4022 and 4044(a)(3) are to be applied by treating the date the sponsor's bankruptcy was filed as the termination date of the plan. Section 4022 determines which benefits are guaranteed by the PBGC and section 4044(a)(3) determines which benefits are entitled to priority in "priority category 3" in the statutory hierarchy for allocating the assets of a terminated plan. Thus, under the 2006 amendments, when a plan terminates while the sponsor is in bankruptcy, the amount of benefits guaranteed by the PBGC and the amount of benefits in priority category 3 are fixed at the date of the bankruptcy filing rather than at the plan termination date. This will, in most cases, reduce the amount of guaranteed benefits and the amount of benefits in priority category 3. Comments are due on or before September 2, 2008.

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