[Federal Register Volume 80, Number 21 (Monday, February 2, 2015)]
[Rules and Regulations]
[Pages 5626-5663]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-01884]
[[Page 5625]]
Vol. 80
Monday,
No. 21
February 2, 2015
Part II
Department of Labor
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Employee Benefits Security Administration
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29 CFR Part 2520
Annual Funding Notice for Defined Benefit Plans; Final Rule
Federal Register / Vol. 80 , No. 21 / Monday, February 2, 2015 /
Rules and Regulations
[[Page 5626]]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Part 2520
RIN 1210-AB18
Annual Funding Notice for Defined Benefit Plans
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Final rule.
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SUMMARY: This document contains a final rule implementing the annual
funding notice requirement of section 101(f) of the Employee Retirement
Income Security Act of 1974, as amended (ERISA). The final rule
requires the administrators of defined benefit plans (single-employer
and multiemployer) to furnish an annual funding notice to participants,
beneficiaries, the Pension Benefit Guaranty Corporation, and certain
other persons. The rule enhances retirement security and increases
pension plan transparency by ensuring that workers receive timely and
accurate notification annually of the funded status of their defined
benefit pension plans. This document also contains necessary conforming
amendments to other regulations under ERISA, such as the summary annual
report regulation.
DATES: Effective date: March 4, 2015.
Applicability date: The final rule is applicable to notices for
plan years beginning on or after January 1, 2015. Prior to this
applicability date, however, plan administrators may elect to comply
with the requirements of the final regulation and the Department of
Labor, as a matter of enforcement, will consider such compliance as
satisfying the requirements of section 101(f) of ERISA. This temporary
enforcement policy does not address the rights or obligations of other
parties.
FOR FURTHER INFORMATION CONTACT: Thomas M. Hindmarch or Stephanie Ward
Cibinic, Office of Regulations and Interpretations, Employee Benefits
Security Administration, (202) 693-8500. This is not a toll-free
number.
SUPPLEMENTARY INFORMATION:
A. Executive Summary
In accordance with Executive Order 13563 (76 FR 3821), this section
of the preamble contains an executive summary of the rulemaking in
order to promote public understanding of the content of the final rule.
Sections B through G of this preamble, below, contain a more detailed
description of the final regulatory provisions and need for the
rulemaking as well as its costs and benefits.
1. Purpose of Regulatory Action
This final rule implements the annual funding notice requirement of
section 101(f) of ERISA as amended by the Pension Protection Act of
2006 (PPA), Public Law 109-280, 120 Stat. 780. The PPA made significant
changes to the existing funding notice requirement by enhancing the
content of the notice, shortening the timeframe for providing notices,
and expanding the requirement to provide funding notices from
multiemployer defined benefit plans (which have been required to
provide funding notices starting with plan years beginning in 2005) to
all defined benefit plans. Section 501 of the PPA authorizes the
Secretary of Labor to promulgate rules to implement the amendments to
the annual funding notice requirement and to publish model notices.
2. Summary of Major Provisions
The final rule requires the plan administrator of a defined benefit
pension plan that is subject to the Pension Benefit Guaranty
Corporation's Insurance Program to furnish a funding notice annually to
participants, beneficiaries, labor organizations representing such
participants or beneficiaries, employers obligated to make
contributions to a multiemployer plan, and the Pension Benefit Guaranty
Corporation (PBGC). Large plans must furnish the notice by the 120th
day following the end of the plan year to which the notice relates (the
``notice year''). A small plan may furnish a funding notice on or
before the due date, with extensions, of the plan's Form 5500 Annual
Return/Report filed with the Department of Labor (the Department).
While the Department made some changes, the final rule is substantially
the same as the proposal (published in November 2010) with respect to
specific funding information disclosed in the notice. For example, the
funding notice must show the plan's funding percentage, the assets and
liabilities that determine the funding percentage, the fair market
value of the plan's assets on the last day of the plan year, the plan's
funding and investment policies and allocation of assets, known events
that are projected to have a material effect on the plan's funding, and
other information. Significant changes from the proposal include:
exempting certain terminating single-employer plans from furnishing
their funding notices; establishing alternative methods of compliance
for multiemployer pension plans that have terminated by mass withdrawal
and for plans described in section 412(e)(3) of the Internal Revenue
Code of 1986, as amended (hereinafter ``Code''); and including a rule
of administrative convenience that if an otherwise disclosable material
event first becomes known to the plan administrator 120 days or less
before the due date of the funding notice, the event is not required to
be disclosed in the notice.
3. Costs and Benefits
The Department estimates that the costs attributable to the final
rule will be approximately $51 million in the first year and $46.5
million in each subsequent year.\1\ The Department expects that the
final rule will increase the transparency of information about the
funding status of defined benefit plans, which benefits all parties
interested in the financial viability of such plans by providing them
with a greater opportunity to monitor the plans' funding status and
take action when necessary. In addition, the rule will benefit plan
administrators by providing them with model notices, which should
mitigate burden and contribute to the efficiency of compliance. The
Department believes that these benefits justify the costs associated
with the final rule. The Department's full cost/benefit analysis is set
forth below in Section G of this preamble, entitled ``Regulatory Impact
Analysis.''
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\1\ This is approximately $6 million less than the total cost
the Department estimated at the proposed rule stage. The cost
reduction results primarily from a reduction in the clerical time
required to prepare and distribute the notices based on a comment
from an actuary. The Department has estimated minimal start-up costs
(primarily to review and update the model notice), because plans
have been complying with the annual funding notice requirement for
several years.
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B. Background
In 2006, section 501(a) of the PPA significantly amended section
101(f) of ERISA. Before the PPA, section 101(f) of ERISA only required
multiemployer defined benefit pension plans to furnish a funding notice
annually to plan participants and others.\2\ Now, section 101(f) of
ERISA, as amended by the PPA, requires administrators of all defined
benefit plans that are subject to title IV of ERISA, not only
multiemployer plans, to furnish annual
[[Page 5627]]
funding notices. In addition, the PPA shortened the time frame for
providing funding notices and changed the content requirements. These
changes and others are discussed in detail below. Pursuant to section
501(d) of the PPA, the amendments to section 101(f) apply to plan years
beginning after December 31, 2007.
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\2\ In 2004, the Pension Funding Equity Act, Public Law 108-218,
amended title I of ERISA by adding section 101(f), which required
multiemployer defined benefit plans to furnish a funding notice
annually to each participant and beneficiary, to each labor
organization representing such participants or beneficiaries, to
each employer that has an obligation to contribute under the plan,
and to the Pension Benefit Guaranty Corporation.
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In 2009, the Department issued Field Assistance Bulletin 2009-01
(FAB 2009-01) to provide interim guidance to plan administrators in
discharging their obligations under the new annual funding notice
requirements. FAB 2009-01 addresses a number of issues under section
101(f) of ERISA and includes model funding notices. Much of the
guidance in FAB 2009-01 was incorporated into the proposed regulation
and now into the final regulation contained in this document. The final
rule supersedes FAB 2009-01 as of the applicability date of the final
rule. Until the applicability date, plan administrators may continue to
rely on FAB 2009-01 or they may elect to comply with the requirements
of the final regulation.
In 2010, the Department published in the Federal Register a
proposed rule under section 101(f) of ERISA and invited interested
parties to comment.\3\ The Department received 11 written comments on
the proposal. Copies of these comments are available to the public on
the Department's Web site at http://www.dol.gov/ebsa.
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\3\ 75 FR 70625 (Nov. 18, 2010).
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In 2012, section 40211(b)(2)(A) of the Moving Ahead for Progress in
the 21st Century Act (MAP-21), Public Law 112-141, 126 Stat. 405,
amended the annual funding notice requirements by adding a new
paragraph (2)(D) to ERISA section 101(f). The additional MAP-21
disclosures relate to the effect of the ERISA section 303(h)(2)(C)(iv)
funding stabilization rules on single-employer plan liabilities and
minimum required contributions to such plans for the 2012, 2013, and
2014 plan years. Section 40211(b)(2)(B) of MAP-21 directed the
Department to modify the model annual funding notice required under
section 501(c) of the PPA to prominently include these new disclosures.
On March 8, 2013, the Department issued Field Assistance Bulletin 2013-
01 (FAB 2013-01), which included a supplement to the model annual
funding notice for single-employer defined benefit pension plans and a
number of questions and answers providing guidance on how to comply
with the MAP-21 requirements.
In 2014, section 2003(b) of the Highway and Transportation Funding
Act of 2014 (HATFA), Public Law 113-159, 128 Stat. 1839, modified the
MAP-21 funding stabilization rules of section 303(h)(2)(C)(iv) of ERISA
and the disclosure requirements of section 101(f)(2)(D) of ERISA and
directed the Department to modify the MAP-21 supplement to the model
annual funding notice. To reflect the changes made to the funding
stabilization rules, section 2003(b)(2)(A)(ii) of HATFA changed the
plan years subject to disclosures required by section 101(f)(2)(D) from
plan years 2012 through 2014 to plan years 2012 through 2019. Section
2003(b)(2)(A)(i) of HATFA added a reference to HATFA in the disclosure
statements required by sections 101(f)(2)(D)(i)(I) and (II) of ERISA.
On January 14, 2015, the Department issued Field Assistance Bulletin
2015-01 (FAB 2015-01), providing guidance on how to comply with the
HATFA requirements.\4\
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\4\ Because the MAP-21 and HATFA supplemental disclosures are
temporary and otherwise have no effect on the permanent disclosure
requirements in section 101(f) of ERISA, they are not addressed in
this final rule. Instead, plan administrators may rely on FAB 2013-
01 and FAB 2015-01 or any other guidance issued by the Department
under section 101(f) of ERISA until the expiration date.
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The Multiemployer Pension Reform Act of 2014 (MPRA), Public Law
113-235 (2014), added new disclosure requirements to section
101(f)(2)(B) of ERISA relating to the new multiemployer funding
classification of ``critical and declining status.'' In addition to
these new disclosures, other MPRA changes affect the model annual
funding notice for multiemployer plans.
After careful consideration of the issues raised by the written
comments, the Department is adopting the final rule contained herein.
While the Department has made some changes to the proposed rule, the
final regulation, described below, is substantially the same as the
proposal.
C. Overview of Final Rule
1. In General Sec. 2520.101-5(a)
a. Scope
Paragraph (a)(1) of the final regulation sets forth the general
requirement that, unless otherwise exempted, all defined benefit plans
subject to title IV of ERISA must furnish compliant funding notices to
eligible recipients. Paragraphs (a)(2) and (3) of the final regulation
provide limited exceptions for certain plans, and paragraphs (j), (k)
and (l) provide alternative methods of compliance where exceptions are
not appropriate. The limited exceptions are discussed immediately below
and the alternative methods of compliance are discussed in subsection
C.8 of this preamble.
b. Limited Exceptions for Certain Multiemployer Plans
The exception to the annual funding notice requirement for
insolvent multiemployer plans in paragraph (a)(2)(i) of the proposal
was reordered as paragraph (a)(2)(i)(A) in the final regulation, but
the substance is unchanged from the proposal. Under this exception, the
plan administrator of an insolvent multiemployer plan that is in
compliance with the insolvency notice requirements of sections 4245(e)
or 4281(d)(3) of ERISA before the due date of the funding notice for a
plan year is not, for such year, required to furnish the funding notice
to the parties otherwise entitled to such notice. Inasmuch as this
exception is predicated on sufficient alternative notification under
sections 4245(e) and 4281(d)(3) of ERISA, the exception would cease to
be available with respect to a plan that emerges from insolvency or
ceases to comply with the insolvency notice requirements under title IV
of ERISA. The Department received no comments on this provision.
Under paragraph (a)(2)(i)(B) of the final regulation, the plan
administrator of a multiemployer plan that has terminated by mass
withdrawal under section 4041A(a)(2) of ERISA is not required to
furnish a funding notice for a plan year if the due date for such
notice is on or after the date the plan has distributed assets in
satisfaction of all nonforfeitable benefit liabilities in accordance
with section 4041A of ERISA and Subpart D of 29 CFR part 4041A. This
new provision provides relief to multiemployer plans similar to the
relief available under paragraph (a)(2)(ii)(C) for single-employer
plans.
c. Limited Exceptions for Certain Single-Employer Plans
Proposed paragraph (a)(2)(ii)(A) provided that the plan
administrator of a single-employer plan is not required to furnish a
funding notice for a plan year if the due date for such notice is on or
after the date the PBGC is appointed trustee of the plan pursuant to
section 4042 of ERISA. Proposed paragraph (a)(2)(ii)(B) provided for
similar relief when a plan has distributed assets in satisfaction of
all benefit liabilities in a distress termination pursuant to section
4041(c)(3)(B)(i) or of all guaranteed benefits in a distress
termination pursuant to section 4041(c)(3)(B)(ii) of ERISA. The
Department's rationale for these exceptions was based on termination
procedures and the disclosure regime under title IV of ERISA discussed
in the preamble to the
[[Page 5628]]
proposal.\5\ The Department received no negative comments on these
provisions. They have been adopted as is from the proposal.
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\5\ See 75 FR 70625, 70627 (explaining that because of the
separate disclosure requirements applicable to such plans under
title IV of ERISA, a funding notice may be unnecessary or confusing
to participants where the PBGC is appointed trustee of a terminated
single-employer plan or where a terminated single-employer plan has
already satisfied all benefit liabilities or all guaranteed
benefits. For example, under a standard termination, participants
are provided a notice of intent to terminate 60 to 90 days prior to
the proposed termination date (29 CFR 4041.23), a notice of plan
benefits by the time PBGC Form 500 is filed with the PBGC (29 CFR
4041.24), and a notice of annuity information in the notice of
intent to terminate or, in certain cases, 45 days prior to the
distribution date (29 CFR 4041.23(b)(5) and 29 CFR 4041.27)).
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Based in large part on the exceptions discussed immediately above,
paragraph (a)(2)(ii)(B) of the proposal provided similar relief for a
plan that distributed assets in satisfaction of all benefit liabilities
in a standard termination pursuant to section 4041(b). One commenter
requested that this exception be expanded to provide relief from the
annual funding notice requirements for plan years after the plan's
termination, but before the plan actually distributes assets in
satisfaction of all benefit liabilities. Typically this occurs when a
plan is waiting for a favorable determination letter from the Internal
Revenue Service (IRS). Such plans, according to a commenter, ordinarily
will not have the information they need to complete annual funding
notices during this period. The funding target attainment percentage,
value of assets and liabilities that determine the plan's funding
target attainment percentage, and year-end liabilities will not be
readily available because such plans are no longer subject to the
minimum funding requirements in section 430 of the Code (ERISASec.
303) or the requirement to file a Schedule SB to the Form 5500 Annual
Return/Report after the plan year of termination.\6\ Thus, in the
absence of the exception in paragraph (a)(2)(ii) of the final
regulation, such plans would have to hire an actuary as if the plan
were subject to these requirements, solely to obtain the missing
section 101(f) information. The commenter argues that valuable
resources will be expended unnecessarily in this regard. The Department
agrees with this commenter that such an outcome is not in the best
interests of plan participants and beneficiaries in these limited
circumstances. For these reasons, and after consulting with the PBGC,
Treasury and the IRS, the Department adopts paragraph (a)(2)(ii)(C) of
the final rule which exempts the plan administrator from providing a
funding notice for a plan year if the due date for the funding notice
is on or after the date the plan administrator files a standard
termination notice (i.e., PBGC Form 500) pursuant to 29 CFR 4041.25,
provided that the proposed termination date is on or before the due
date of the funding notice and a final distribution of assets in
satisfaction of the plan's benefit liabilities proceeds according to
the requirements of section 4041(b) of ERISA. If, for some reason, the
termination does not proceed according to the requirements of section
4041(b) of ERISA with a distribution of assets in satisfaction of all
benefit liabilities and the plan again becomes subject to the minimum
funding standards, the exception ceases to apply.
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\6\ See also the instructions to Schedule SB of the 2013 Form
5500 Annual Return/Report, which state: ``For terminating plans,
Rev. Rul. 79-237, 1979-2 C.B. 190 provides that minimum funding
standards apply until the end of the plan year that includes the
termination date. Accordingly, the Schedule SB is not required to be
filed for any later plan year.''
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The following example illustrates the exception in paragraph
(a)(2)(ii)(C).
Example: On March 1, 2017, the plan administrator furnishes to
all affected parties a notice of intent to terminate, stating that
Plan Y, a calendar year plan, will terminate on April 30, 2016. On
April 15, 2017, the plan administrator files a standard notice of
termination (PBGC Form 500) with the PBGC. Under the exception in
paragraph (a)(2)(ii)(C) of the final rule, the funding notice for
the 2015 notice year (due no later than April 30, 2016) is the final
funding notice of Plan Y, since both the proposed termination date
and the date the PBGC Form 500 is filed with the PBGC occur on or
before the April 30, 2017, due date of the 2016 funding notice.
Finally, one commenter recommended expanding the exception to
excuse the plan administrator of a single-employer plan from furnishing
a funding notice if the plan administrator reasonably believed that the
PBGC would appoint itself trustee within the next 12 months. The same
commenter also recommended excusing the plan administrator from
furnishing a funding notice after commencement of the distribution of
assets under a standard or distress termination instead of after the
final distribution of all assets as set out in the proposal. Neither of
these recommendations is adopted in the final rule. The first
recommendation, without more, would give too much discretion to the
plan administrator to determine whether or not to provide the funding
notice. In addition, unlike the other exceptions in the final rule, the
first recommendation is not grounded on a factor such as cost savings
to the plan or an absence of information needed to complete the annual
funding notice (for example, because the plan is no longer subject to
the funding rules under the Code or ERISA's annual reporting
requirements); nor does it appear to rest on any separate disclosure
requirements applicable to such plans under title IV of ERISA. The
commenter's second recommendation was not adopted for essentially the
same reasons against the first recommendation, but also because the new
exception in paragraph (a)(2)(ii)C), in the Department's view, provides
substantially equivalent relief in the case of a standard termination.
d. Mergers and Consolidations
Paragraph (a)(3) of the final regulation, like the proposal,
provides relief in the case of a merger or consolidation of two or more
plans. The final plan year of a plan that has legally transferred
control of its assets to a successor plan (hereafter the ``non-
successor plan'') ends upon the occurrence of the merger or
consolidation. Under this exception, the plan administrator of a non-
successor plan is not required to furnish a funding notice for its
final plan year.
For example, if plan A were to merge with plan B in 2017 and plan B
is the successor plan (i.e., the plan to which control of the assets of
plan A was legally transferred), then the plan administrator of plan A
is not required to furnish a funding notice for plan A for its final
plan year, which ends upon the occurrence of the merger in 2017.
However, the funding notice of plan B (i.e., the plan to which control
of the assets of plan A was legally transferred) must satisfy the
general content requirements in paragraph (b) of the final regulation
and, in addition, contain a general explanation of the merger or
consolidation. The general explanation must include the effective date
of, and identify each plan involved with, the merger or consolidation.
Given that participants and beneficiaries will look to the successor
plan for their pension benefits following the merger or consolidation,
rather than the plan whose assets and liabilities were transferred to
the successor plan, the Department believes that participants and
beneficiaries would realize little, if any, benefit from receiving a
funding notice from the non-successor plan. In addition, including an
explanation of the merger in the funding notice of the successor plan
should abate any participant confusion that might exist by virtue of
not receiving a funding notice from the non-successor plan.
One commenter requested clarification whether the funding notice of
the successor plan for the year of the
[[Page 5629]]
merger must reflect the funding percentages, assets, and liabilities of
the non-successor plan for the two preceding plan years. Because the
assets and liabilities of the non-successor plan were not assets and
liabilities of the successor plan before the merger or consolidation,
the successor plan's funding notice for the year of the merger would
not have to reflect this information. The year-end data in this funding
notice, however, would reflect the combined assets (both single and
multiemployer plans) and liabilities (single-employer plans only). No
changes to the operative text were needed for this clarification.
2. Content Requirements Sec. 2520.101-5(b)
a. Identifying Information (Sec. 2520.101-5(b)(1))
Paragraph (b)(1) of the final regulation, like the proposal,
provides that a funding notice must include the name of the plan, the
plan number, name of each plan sponsor, the employer identification
number of the plan sponsor, and the name, address and telephone number
of the plan administrator (and the name, address and phone number of
the plan's principal administrative officer if the principal
administrative officer is different from the plan administrator). For
purposes of this requirement, employer identification numbers, name of
plan sponsor, and plan numbers are the same as those used in the Form
5500 Annual Return/Report filed in accordance with section 104(a) of
ERISA. The Department received no comments on this provision, as
proposed, and it is adopted without change in the final rule.
b. Funding Percentage (Sec. 2520.101-5(b)(2))
Paragraph (b)(2) of the final regulation, like the proposal,
requires disclosure of a plan's funding percentage. Specifically, in
the case of a single-employer plan, paragraph (b)(2)(i) of the final
regulation provides that a notice must include a statement as to
whether the plan's funding target attainment percentage for the notice
year, and for each of the two preceding plan years, is at least 100
percent (and, if not, the actual percentages). The term ``funding
target attainment percentage'' is defined in section 303(d)(2) of
ERISA, which corresponds to Code section 430(d)(2). Guidance issued by
the Department of the Treasury under Code section 430 also applies for
purposes of section 303 of ERISA. Treasury regulations under Code
section 430 provide that the funding target attainment percentage of a
plan for a plan year is a fraction (expressed as a percentage), the
numerator of which is the value of the plan's assets for the plan year
(determined under the rules of 26 CFR 1.430(g)-1) after subtracting the
prefunding balance and funding standard carryover balance (collectively
the ``credit balances'') under section 430(f)(4)(B) of the Code and
Sec. 1.430(f)-1(c), and the denominator of which is the funding target
of the plan for the plan year (determined without regard to the at-risk
rules of section 430(i) of the Code and Sec. 1.430(i)-1).\7\ Thus,
this percentage for a plan year is calculated by dividing the value of
the plan's assets for that year (after subtracting the credit balances,
if any) by the funding target of the plan for that year (disregarding
the at-risk rules).
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\7\ See 26 CFR 1.430(d)-1(b)(3)(i); 74 FR 53004, 53036 (Oct. 15,
2009).
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One commenter expressed concern with using the funding target
attainment percentage calculated in the manner described above. This
commenter believes there are circumstances when this percentage does
not necessarily show the most accurate picture of the plan's funded
status. For instance, this commenter believes it is misleading to
subtract the credit balances discussed above when the plan otherwise is
100 percent funded. Such a subtraction, according to this commenter,
could show a funding target attainment percentage of less than 80
percent when the plan is 100 percent or more funded before such
subtraction and needlessly raise the concerns of participants regarding
the application of the benefit restrictions and limitations of section
436 of the Code.\8\ ERISA section 101(f)(2)(B)(i), however,
specifically requires a plan administrator to disclose the funding
target attainment percentage determined by subtracting the credit
balances from the value of the plan's assets.
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\8\ Section 436(j)(3) of the Code states that if the funding
target attainment percentage is 100% or more before the value of
plan assets is reduced by the credit balances, the funding target
attainment percentage is determined without regard to such reduction
for purposes of calculating the adjusted funding target attainment
percentage used to determine whether the benefit restrictions and
limitations of Code section 436 apply.
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Paragraph (b)(12) of the final rule permits plan administrators to
include additional information in funding notices if the additional
information is either necessary or helpful to understanding the
mandated information. The Department is of the view, however, that
ordinarily a funding notice with more than one funding percentage for
the same plan year would be very confusing to participants and
beneficiaries. Thus, the Department strongly discourages this practice.
One exception may be when the plan administrator concludes it is
necessary or helpful to explain that a benefit restriction or
limitation under Code section 436 has not been triggered despite the
funding target attainment percentage disclosed in the funding notice
being below 80 percent. Even in these circumstances, however, a
narrative explanation ordinarily should suffice.
In the case of a multiemployer plan, paragraph (b)(2)(ii) of the
final regulation, like the proposal, provides that a notice must
include a statement as to whether the plan's funded percentage for the
notice year, and for each of the two preceding plan years, is at least
100 percent (and, if not, the actual percentages). The term ``funded
percentage'' is defined in section 305(i) of ERISA, which corresponds
to section 432(i) of the Code. Guidance issued by the Department of the
Treasury under section 432 of the Code also applies for purposes of
section 305 of ERISA. Proposed Treasury regulations under Code section
432 provide that the funded percentage of a plan for a plan year is a
fraction (expressed as a percentage), the numerator of which is the
actuarial value of the plan's assets as determined under section
431(c)(2) of the Code and the denominator of which is the accrued
liability of the plan, determined using the actuarial assumptions
described in section 431(c)(3) of the Code and the unit credit funding
method.\9\ Thus, this percentage for a plan year is calculated by
dividing the plan's assets for that year by the accrued liability of
the plan for that year, determined using the unit credit funding
method. The Department received no comments on this provision and it
was adopted in the final rule without change.
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\9\ See proposed Treasury regulation 26 CFR 1.432(a)-1(b)(7); 73
FR 14417, 14423 (March 18, 2008).
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c. Assets and Liabilities (Sec. 2520.101-5(b)(3))
(i) Single-Employer Plans--Assets and Liabilities as of the Valuation
Date
In the case of a single-employer plan, paragraph (b)(3)(i)(A) of
the final regulation, like the proposal, requires that a funding notice
include a statement of the total assets (separately stating the
prefunding balance and the funding standard carryover balance) and
liabilities of the plan for the notice year and each of the two
preceding plan years. Like section 101(f)(2)(B)(ii)(I)(aa)
[[Page 5630]]
of the statute, the final regulation provides that assets and
liabilities are to be determined ``in the same manner as under section
303'' of ERISA. The Department interprets the quoted statutory language
to mean that the total assets and liabilities used for this purpose are
the same as those used to determine a plan's funding target attainment
percentage (as well as the plan's ``at-risk'' liabilities pursuant to
section 303(i) of ERISA, taking into account section 303(i)(5), if the
plan is in ``at-risk'' status). The Department received no comments on
this provision, as proposed. It was adopted without change in the final
regulation.
(ii) Single-Employer Plans--Assets and Liabilities as of the Last Day
of the Plan Year
Section 101(f)(2)(B)(ii)(I)(bb) of ERISA states that a funding
notice must include, in the case of a single-employer plan, ``the value
of the plan's assets and liabilities for the plan year to which the
notice relates as of the last day of the plan year to which the notice
relates determined using the asset valuation under subclause (II) of
section 4006(a)(3)(E)(iii) and the interest rate under section
4006(a)(3)(E)(iv)[.]''
Based on the foregoing, paragraph (b)(3)(i)(B) of the proposal
provided that a single-employer plan must include a statement of the
value of the plan's assets and liabilities determined as of the last
day of the notice year. For purposes of this statement, plan
administrators must report the fair market value of assets as of the
last day of the plan year. In addition, a plan's liabilities as of the
last day of the plan year are equal to the present value, as of the
last day of the plan year, of benefits accrued as of that same date.
With the exception of the interest rate assumption, the present value
should be determined using the assumptions used to determine the
funding target under ERISA section 303. The interest rate assumption is
the interest rate provided under section 4006(a)(3)(E)(iv) of ERISA in
effect for the last month of the notice year rather than the rate in
effect for the month preceding the first month of the notice year. For
the reasons set forth below, this proposed provision is adopted without
change.
Some commenters expressed their concerns that this aspect of the
proposal would lead to confusion. More specifically, they argued that
participants and beneficiaries will be confused by seeing year-end
figures that are calculated with different assumptions than those used
to calculate beginning-of-the-year figures. To illustrate the confusing
effect of the proposal, the commenters explained by way of example that
a plan's assets and liabilities as of one second before midnight on
December 31 could be dramatically different from that plan's assets and
liabilities one second later on January 1, for no reason other than the
different assumptions prescribed by paragraphs (b)(3)(i)(A) and
(b)(3)(i)(B) of the proposal.
The solution offered by one of these commenters is that the
proposal should be revised to mandate use of identical assumptions for
both dates. Thus, the same interest rate, mortality, and other
actuarial assumptions would be used to determine the present value of
both the year-end liabilities for the notice year and the valuation
date liabilities of the next plan year. This would eliminate the
December 31/January 1 difference described above. In this regard, the
commenter suggested using the same assumptions used by the plan sponsor
to determine pension liabilities in its SEC filings.
The Department did not adopt this recommendation. Because the
disclosure requirements in paragraph (b)(3)(i)(B) of the proposal track
the statutory requirements in section 101(f)(2)(B)(ii)(I)(bb) of ERISA,
adopting this commenter's recommendation would effectively read these
requirements out of the statute. Whatever the differences that might
exist between year-end assets and liabilities and the next year's
valuation date assets and liabilities, such differences result from the
actuarial assumptions and methods mandated by the statute.
Other commenters recommended enhanced disclosure of the assumptions
behind the year-end figures, including an explanation of how such
assumptions differ from the assumptions used for the beginning-of-the-
year (i.e., valuation date) figures. These commenters suggested that
enhanced disclosure of this type could be helpful in explaining the
December 31/January 1 difference described above. Because paragraph
(b)(12) of the final regulation permits plan administrators to add
additional or supplemental information to funding notices, if
appropriate, the Department decided against mandating the specific
disclosures suggested by these commenters.
Finally, the Department, in the preamble to the proposal,
recognized that some plans may need to estimate their year-end
liabilities for the notice year. For instance, this would be necessary
if the plan lacked up-to-date information (e.g., hours of service,
compensation, eligibility status, etc.) to calculate year-end
liabilities by the due date of the funding notice. The preamble
discussion further provided that, inasmuch as section 101(f) of ERISA
does not specifically set forth any standards to govern such
estimations, pending guidance to the contrary, plan administrators may,
in a reasonable manner, project liabilities to year-end using standard
actuarial techniques. While the Department specifically solicited
comments on this issue, none were received. Accordingly, the Department
has no reason at this time to provide contrary guidance.
One commenter noted that instructions to ``round off all amounts in
this notice to the nearest dollar'' located under the ``Funding Target
Attainment Percentage'' chart in Appendix A would be difficult in the
context of estimating year-end liabilities. The commenter interpreted
these instructions to mean plan administrators must estimate year-end
liabilities to the nearest dollar. The Department intended for the
rounding instruction to apply to valuation date liabilities used to
determine the funding target attainment percentage because by the due
date of the funding notice, the valuation date liabilities should be
precise to the nearest dollar. Accordingly, no change was made to the
rounding instruction in the final version of the model notice. With
respect to year-end liabilities, however, the plan should use rounding
conventions that are standard for estimating projected plan liabilities
and are reasonable with regard to the plan. The Department recognizes
that plans may not be able to achieve the same level of precision with
respect to estimated year-end liabilities as with valuation date
figures.
(iii) Multiemployer Plans--Assets and Liabilities as of the Valuation
Date
In the case of a multiemployer plan, paragraph (b)(3)(ii)(A) of the
final regulation, like the proposal, requires a statement of the value
of the plan's assets (determined in the same manner as under section
304(c)(2) of ERISA) and liabilities (determined in the same manner as
under section 305(i)(8) of ERISA, using reasonable actuarial
assumptions as required under section 304(c)(3) of ERISA) for the
notice year and each of the two plan years preceding the notice year.
The assets and liabilities are to be measured as of the valuation date
in each of these three years. These are the same assets and liabilities
used to determine the plan's funded percentage required to be disclosed
under paragraph (b)(2)(ii) of the final regulation. Thus, the
recipients of a funding notice will receive not only their plans'
funded percentage, pursuant
[[Page 5631]]
to paragraph (b)(2)(ii), but, pursuant to paragraph (b)(3)(ii)(A), they
also will receive the numbers behind that percentage. Under section
305(i)(8) of ERISA, liabilities are determined using the unit credit
funding method whether or not that actuarial method is used for the
plan's actuarial valuation in general. There were no comments on this
provision and it is adopted without change.
(iv) Multiemployer Plans--Assets as of the Last Day of the Plan Year
In the case of a multiemployer plan, paragraph (b)(3)(ii)(B) of the
final regulation, like the proposal, requires a statement of the fair
market value of plan assets as of the last day of the notice year, and
as of the last day of each of the two preceding plan years as reported
in the annual report filed under section 104(a) of ERISA for each such
preceding plan year. There were no comments on this provision and it is
adopted in the final regulation without change.
(v) Year-end Statement of Plan Assets--Contributions Receivable
As discussed above, funding notices must contain a statement of the
fair market value of plan assets as of the last day of the notice year.
Plans may receive contributions for the notice year after the close of
that year but before the funding notice is sent to recipients. In such
circumstances, these contributions may be included in the fair market
value of assets, but only if they are attributable to the notice year
for funding purposes. The regulation does not require these
contributions to be included in the year-end asset statement.
In the case of a single-employer plan, such contributions must be
discounted back to the last day of the notice year using the effective
interest rate for the notice year. The effective interest rate is
defined under section 303(h)(2)(A) of ERISA (section 430(h)(2)(A) of
the Code). This approach ensures consistency with section 303(g)(4) of
ERISA (section 430(g)(4) of the Code) relating to prior year
contributions.\10\ For example: Plan X is a calendar year plan. The
plan's funding notice for 2012 was timely furnished in 2013. The year-
end statement of assets was based on December 31, 2012, fair market
value. The plan administrator included the present value of
contributions made to the plan on February 14, 2013, in the year-end
statement of assets. The effective interest rate for the plan was five
percent in 2012 and four percent in 2013. The contributions would be
discounted from February 14, 2013, to December 31, 2012, using a
discount rate of five percent per annum, which was the effective
interest rate for 2012.
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\10\ This approach is consistent with the position taken by the
PBGC regarding the treatment of contributions made on account of the
prior year in determining the fair market value of assets under
section 4006(a)(3)(E)(iii). See page 17 of the PBGC's 2013
Comprehensive Premium Payment Instructions.
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In the case of a multiemployer plan, section 304(c)(8) of ERISA
provides that contributions made by an employer for the plan year after
the last day of the plan year, but not later than two and one-half
months after such day (which may be extended for not more than six
months under regulations prescribed by the Secretary of the Treasury),
shall be deemed made on the last day of the plan year. Section
304(c)(8) of ERISA corresponds to section 431(c)(8) of the Code.
Section 431(c)(8) of the Code is the post-PPA counterpart to former
section 412(c)(10)(B) of the Code. Pursuant to the Treasury regulations
under former section 412(c)(10)(B) of the Code (26 CFR 11.412(c)-12),
contributions for a plan year that are made within eight and one-half
months after the end of a plan year are deemed to have been made on the
last day of that plan year. Therefore, consistent with section
304(c)(8) of ERISA and the corresponding section 431(c)(8) of the Code,
and Treasury regulations under former section 412(c)(10)(B) of the
Code, it is not necessary for a multiemployer plan to discount such
contributions for interest when stating its year-end asset value in a
funding notice.
The foregoing provisions were discussed in the preamble of the
proposal. The Department received no negative commentary on them. They
were adopted and codified at paragraph (b)(3)(iii) of the final
regulation.
(vi) Addressing Changes in Assets and Liabilities After the Notice Is
Furnished
One commenter requested clarification on whether a plan
administrator would be required to issue a revised funding notice for a
plan year if the funding percentage data (described by this commenter
as valuation date assets and liabilities and the funding percentage
derived therefrom) in the notice were to change between the date the
notice was furnished to participants and the date of the filing of the
plan's Form 5500 Annual Return/Report for that same year. The commenter
stated that this might occur, for example, because of an error or
mistake in preparing the notice or if a plan were to change its
actuarial assumptions in the period between the respective due dates of
the notice and the Form 5500. The view of the Department, generally, is
that funding percentage data in the notice for a particular plan year
should not differ from the funding percentage data that must be
reported on that plan's Schedule SB or MB, as applicable, for that same
plan year. However, in those rare circumstances where there is a
difference because of a good faith error or changes in actuarial
assumptions, for example, the view of the Department is that a plan
administrator is not obligated by section 101(f) of ERISA to revise and
restate the funding notice for that year. If the difference in the data
in the notice and the data in the annual report is substantial, plan
administrators should consider explaining the discrepancy in the
funding notice for the next plan year.
d. Demographic Information (Sec. 2520.101-5(b)(4))
Paragraph (b)(4) of the final regulation, like the proposal,
requires a statement of the number of participants who, as of the
valuation date of the notice year, are: (i) Retired or separated from
service and receiving benefits; (ii) retired or separated from service
and entitled to future benefits (but currently not receiving benefits);
or (iii) active participants under the plan. Plan administrators must
state the number of participants in each of these categories and the
sum of all such participants. For purposes of this statement, the terms
``active'' and ``retired or separated'' have the same meaning given to
those terms in instructions to the latest annual report filed under
section 104(a) of the Act (currently, instructions relating to lines 5
and 6 of the 2013 Form 5500 Annual Return/Report).
In response to one comment, the Department clarifies that
beneficiaries of deceased participants should be accounted for in the
disclosure of demographic information required under paragraph (b)(4)
and should be reflected in the relevant ``retired or separated''
category based on whether the beneficiary of the deceased participant
is receiving benefits or is entitled to receive benefits in the future
(but currently is not receiving them). These beneficiaries are similar
to retired or separated participants who are themselves receiving, or
are entitled to receive, benefits under the plan in that the plan's
liabilities include benefits accrued by such deceased participants.
A few commenters asked the Department to enhance this disclosure
requirement by mandating the disclosure of demographic information
covering a longer period of time, such as the notice year and two
preceding plan years, similar to disclosure of the
[[Page 5632]]
plan's funding percentage over a three year period. Such information,
they suggest, could help participants and, in the case of multiemployer
plans, unions and contributing employers, draw a positive correlation
between demographic trends and changes in funding status, e.g., a
downward slope in active participants would offer a possible
explanation of a declining funding percentage or, possibly, be
indicative of such a decline in the future. Other commenters, however,
questioned whether such information would be helpful to participants,
even if the data allowed for a positive correlation, and pointed out
that such information already is publicly available. They also noted
that any new disclosure mandate would come at a cost. The Department
notes that this data already is required to be reported in the Form
5500 Annual Return/Report, so there would be little cost associated
with the commenter's suggested expansion. Nonetheless, the Department
declined to adopt the requested expansion. The Department agrees with
the commenters who question the value to participants of the additional
information. A plan, for example, may have few active participants and
a high funding percentage or many active participants and a low funding
percentage. In addition, the statute affords no clear basis for
imposing such a requirement. Congress was careful to specify a three-
year period in other parts of section 101(f) of ERISA but failed to do
so in section 101(f)(2)(B)(iii) of ERISA.
e. Funding and Investment Policies; Asset Allocation (Sec. 2520.101-
5(b)(5))
Paragraph (b)(5)(i) through (iii) of the proposal provided that a
funding notice must include a statement setting forth the funding
policy of the plan, the asset allocation of investments under the plan
(expressed as percentages of total assets) as of the end of the notice
year, and a general description of any investment policy of the plan as
it relates to the funding policy and the asset allocation of
investments. This provision is adopted without change.
(i) Investment Policy
One commenter was opposed to the proposed requirement to include a
``general description of any investment policy of the plan.'' The
commenter argued that this requirement is not explicitly in the
statute, that investment policies often can be complex and lengthy, and
that such policies may be irrelevant to participants and
beneficiaries.\11\ Even though a particular plan's investment policy
might be lengthy and complex in its totality, the final regulation
requires only a ``general description'' of the policy. Thus, except in
rare cases, the Department does not expect that a plan's entire
investment policy would be restated in the annual funding notice.
Further, to ensure relevance, the final regulation requires that the
general description must relate to the funding policy and asset
allocation of investments. The purpose of the requirement to include a
``general description of any investment policy of the plan'' simply is
to provide participants and beneficiaries with contextual information
to help them better understand and appreciate the plan's approach to
funding benefits.\12\ Use of the word ``any'' in paragraph (b)(5)(iii)
reflects that the maintenance of a written statement of investment
policy is not specifically required under ERISA, although the
Department expects that it would be rare for a plan subject to section
101(f) of ERISA not to have such a policy.
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\11\ Section 101(f)(2)(B)(iv) of ERISA provides that a funding
notice must include ``a statement setting forth the funding policy
of the plan and the asset allocation of investments under the plan
(expressed as percentages of total assets) as of the end of the plan
year to which the notice relates[.]''
\12\ A requisite feature of every employee benefit plan is a
procedure for establishing a funding policy to carry out plan
objectives. See section 402(b)(1) of ERISA. The maintenance by an
employee benefit plan of a statement of investment policy is
consistent with the fiduciary obligations set forth in ERISA section
404(a)(1)(A) and (B). A statement of investment policy is a written
statement that provides the fiduciaries who are responsible for plan
investments with guidelines or general instructions concerning
various types or categories of investment management decisions. A
statement of investment policy is distinguished from directions as
to the purchase or sale of a specific investment at a specific time.
See 29 CFR 2509.08-2(2) (formerly 29 CFR 2509.94-2).
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(ii) Year-End Asset Allocation of Investments
Section 101(f)(2)(B)(iv) of ERISA, in relevant part, provides that
a funding notice must include a statement setting forth ``the asset
allocation of investments under the plan (expressed as percentages of
total assets) as of the end of the plan year to which the notice
relates[.]'' Like the proposal, paragraph (b)(5)(ii) of the final
regulation directly incorporates this statutory requirement. The
Department anticipates that plan administrators may satisfy the
requirements in paragraph (b)(5)(ii) in any number of ways.
For example, one way a plan administrator may satisfy this
requirement is by using the appropriate model notice in the appendices
to the final rule. The asset classes in the models are based on the
asset classes listed in Part 1 of the Asset and Liability Statement of
Schedule H of the Form 5500 Annual Return/Report.\13\ Plan
administrators who use the models must insert an appropriate percentage
with respect to each asset class, using the same valuation and
accounting methods as for Form 5500 Schedule H reporting purposes. For
this purpose, the master trust investment account (MTIA), common/
collective trust (CCT), pooled separate account (PSA), and 103-12
investment entity (103-12IE) investment categories have the same
definitions as for the Form 5500 instructions. If a plan held at year-
end an interest in one or more direct filing entities (DFEs), i.e.,
MTIAs, CCTs, PSAs, or 103-12IEs, the plan administrator should include
in the model notice a statement apprising recipients how to obtain more
information regarding the plan's DFE investments (e.g., a plan's
Schedule D and R and/or the DFE's Schedule H). The model notice
provides a statement immediately following the asset allocation table
for contact information, which a plan administrator should complete and
include if the plan held an interest in one or more DFEs. The reason
for this special treatment for plans investing in DFEs is that such
plans often do not know the precise year-end holdings of a DFE by the
due date of the annual funding notice. One commenter questioned whether
this special treatment is appropriate for single-employer plans that
use MTIAs, on the theory that administrators of such plans have more
control over and access to information about such investment
arrangements than, say, CCTs. Given that plan fiduciaries have a duty
not to misrepresent material information relating to the plan, plan
administrators should not report a percentage interest in MTIAs if they
know the MTIA's actual asset allocation sufficiently in advance of the
due date of the annual funding notice. Instead, they should use the
other asset categories in Schedule H.
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\13\ See lines 1a, 1c, 1d and 1(e) of the 2013 Schedule H. The
asset classes identified in the models do not include any
receivables reportable on Schedule H of the Form 5500 (see lines
1b(1)-(3) of the 2013 Schedule H).
---------------------------------------------------------------------------
A number of commenters on the proposal favored the asset categories
in Schedule R over the asset categories in the Schedule H. The Schedule
R categories are stocks, investment-grade debt, high-yield debt, real
estate, and other. These commenters suggested either replacing the
Schedule H approach in the model notice with the categories in Schedule
R, or perhaps
[[Page 5633]]
establishing the Schedule R approach as an alternative to the Schedule
H approach. In some cases the asset categories in Schedule R may better
align with a plan's investment policy. In other cases, the asset
categories in the Schedule R may be more informative to participants
and beneficiaries. For these reasons, the Department has determined
that the Schedule R asset categories are an acceptable alternative to
the asset categories in the Schedule H for purposes of the model
notices in the appendices to the final rule. Thus, the Department is of
the view that a plan administrator may substitute the Schedule R
categories for asset categories in Schedule H in the model notices, and
remain eligible for the relief provided in paragraph (h) of the final
regulation. Plan administrators who use the Schedule R alternative must
insert an appropriate percentage with respect to each asset class.
Another commenter suggested allowing the plan administrator
discretion when using the model notice to break out the investments
held in a DFE among the other Form 5500 Schedule H asset classes where
the plan administrator knows the underlying make-up of the assets held
by the DFE. The Department never intended to preclude plan
administrators from breaking out the DFE's investments among the other
asset classes, since the disclosure of such information will better
inform participants about the plan's asset allocation of investments.
To make this option clear, the final model notice instructions
expressly permit plan administrators to break-out DFE investments in
the notice, or to include a statement informing participants how to get
additional information regarding DFE investments. See the model notice
in appendices A and B.
One commenter recommended deleting the phrase ``Under the plan's
investment policy'' from the section of the model notice addressing the
year-end percentage allocation of investments. The commenter believes
this language implies that the allocation percentages reflect the
investment policy. The commenter opposes this implication because the
asset allocation percentages under paragraph (b)(5) of the regulation
are a snapshot of information and may not accurately reflect the plan's
long-term investment policy. The Department declined to adopt this
recommendation. The commenter appears to be concerned with inferences
of wrongdoing or investment imprudence that might be drawn by
participants and others if their plan's asset allocation percentages do
not precisely match the plan's investment policy, and believes those
inferences would be less likely with the recommended deletion. The
Department disagrees with the commenter that the quoted phrase would
imply wrongdoing if the asset allocation differed from the investment
policy. The objective of the disclosures under paragraph (b)(5), in the
aggregate, is to help participants and other recipients understand that
there is a relationship between funding, investment policies, and asset
allocations. The commenter's recommendation appears to run contrary to
that objective.
f. Endangered, Critical, or Critical and Declining Status (Sec.
2520.101-5(b)(6))
Paragraph (b)(6) of the final regulation requires that the funding
notice for a multiemployer plan indicate whether the plan was in
endangered, critical, or critical and declining status for the notice
year. For this purpose, ``endangered, critical, or critical and
declining status'' is determined in accordance with section 305 of
ERISA, which corresponds to section 432 of the Code. Paragraph
(b)(6)(i) requires that the funding notice of a plan in endangered,
critical, or critical and declining status must describe how a person
may obtain a copy of the plan's funding improvement or rehabilitation
plan, as appropriate, and the actuarial and financial data that
demonstrate any action taken by the plan toward fiscal improvement.
Paragraph (b)(6)(ii) requires that the funding notice of a plan in
endangered, critical, or critical and declining status must contain a
summary of the plan's funding improvement or rehabilitation plan and a
description of any updates or modifications to such funding improvement
or rehabilitation plan adopted during the notice year. A summary of the
funding improvement or rehabilitation plan is required not only for the
notice year in which such plan was adopted, but for every plan year
thereafter until the funding improvement or rehabilitation plan ceases
to be in effect. Paragraph (b)(6)(iii) requires that the funding notice
of a plan in critical and declining status also must include the
projected date of insolvency; a clear statement that such insolvency
may result in benefit reductions; and a statement describing whether
the plan sponsor has taken legally permitted actions to prevent
insolvency. The requirements in paragraph (b)(6)(iii) were not part of
the proposed regulation. These requirements were added to the final
regulation to reflect recent amendments to section 101(f) of ERISA by
the MPRA.\14\
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\14\ See section 201(a)(4) of the MPRA (adding new disclosure
requirements to section 101(f)(2)(B)(vi) of ERISA and renumbering
former clauses (vi) through (x) of section 101(f) as clauses (vii)
through (xi)). See also section 201(a)(2) of this Act, which added
section 305(b)(6) of ERISA to define ``critical and declining''
status. See also section 201(a)(1)(C) of this Act, adding new
section 305 (a)(3)(A) to ERISA, which subjects a multiemployer plan
in critical and declining status to the same requirements as a
multiemployer plan in critical status.
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g. Material Effect Events (Sec. 2520.101-5(b)(7) and Sec. 2520.101-
5(g))
(i) The Statute and Proposed Rule
Paragraph (b)(7) of the proposed regulation directly incorporated
the requirements of section 101(f)(2)(B)(vii) of ERISA, which requires:
``in the case of any plan amendment, scheduled benefit increase or
reduction, or other known event taking effect in the current plan year
and having a material effect on plan liabilities or assets for the year
(as defined in regulations by the Secretary), an explanation of the
amendment, schedule increase or reduction, or event, and a projection
to the end of such plan year of the effect of the amendment, scheduled
increase or reduction, or event on plan liabilities [.]'' Beyond this
direct incorporation, the Department took three other steps in the
proposal to clarify and implement the material effect requirements.
First, the preamble to the proposal noted ambiguity with respect to
the term ``current plan year'' in the language quoted above. The
question is whether this term refers to the notice year or the plan
year following the notice year. The proposal adopted the view that such
term means the plan year following the notice year (i.e., the plan year
in which the notice is due). Thus, for a calendar year plan that must
furnish its 2010 annual funding notice no later than the 120th day of
2011, the ``notice year'' is the 2010 plan year and the ``current plan
year'' for purposes of paragraph (b)(7) of the proposal is the 2011
plan year. The Department's rationale for this interpretation, as
explained in the preamble of the proposal, was that it is difficult to
find meaning in the phrase ``a projection to the end of such year'' if
``current plan year'' is interpreted to mean the notice year because
the notice year has already ended. Comments were solicited on this
issue specifically.
Second, in an effort to bring clarity to the language ``having a
material effect on plan liabilities or assets for the year'' in section
101(f)(2)(B)(vii) of ERISA, the proposal set forth two tests for
determining whether an event has a material effect on assets or
liabilities.
[[Page 5634]]
The first test, at paragraph (g)(1)(i) of the proposal, provided that a
plan amendment, scheduled benefit increase (or reduction), or other
known event has a material effect on plan liabilities or assets for the
current plan year if it results, or is projected to result, in an
increase or decrease of five percent or more in the value of assets or
liabilities from the valuation date of the notice year. For example, if
the liabilities of a calendar year plan were $100 million on January 1,
2010, (the valuation date for the 2010 notice year), a scheduled
increase in benefits taking effect in 2011 will have a material effect
if the present value of the increase, determined using the same
actuarial assumptions used to determine the $100 million in
liabilities, equals or exceeds $5 million. Under the second test, an
event has a material effect on plan liabilities or assets for the
current plan year if, in the judgment of the plan's enrolled actuary,
the event is material for purposes of the plan's funding status under
section 430 or 431 of the Code, without regard to an increase or
decrease of five percent or more in the value of assets or liabilities
from the prior plan year. The second test is in paragraph (g)(1)(ii) of
the proposal.
Third, the preamble to the proposal also specifically solicited
comments on an issue addressed in the Department's Field Assistance
Bulletin 2009-01 (February 10, 2009). In that Bulletin, the Department
provided interim guidance under section 101(f) of ERISA in the form of
an enforcement policy. Under this policy, if an otherwise disclosable
event first became known to the plan administrator 120 days or less
before the due date for furnishing the funding notice, the
administrator did not have to disclose the event in the notice. See
Question 12 of FAB 2009-01. The rationale behind this policy is that at
some close point in time before the due date for furnishing the notice,
it becomes impracticable for, and unreasonable to expect, plan
administrators to satisfy the detailed material effect provisions even
though an otherwise disclosable event is known. In addition, the
event's effect on the plan's assets and liabilities will in any event
be reflected in the next annual funding notice. This policy was not
included in the operative text in the proposal. However, the preamble
to the proposal solicited comments on whether this 120-day ``rule''
should be included in the final regulation.
(ii) Public Comments and Questions
In general, the public comments on the material effect provisions
focused on the 120-day policy articulated in FAB 2009-01 and its
absence from the operative text of the proposal. One commenter,
however, criticized the position of the Department on the ``current
plan year'' language. This person is concerned that some material
events would not be covered if ``current plan year'' means the plan
year following the notice year. Another commenter believes the five
percent test to determine materiality is unnecessary in light of the
actuary judgment test. This commenter, therefore, recommends deleting
the five percent test. This commenter also asked the Department to
consider a third alternative based on Code section 436. These questions
and comments are addressed in the context of explaining the final rule
below.
(iii) The Final Rule
The framework of the final rule is substantially the same as in the
proposal. The general requirement to explain and project events that
have a material effect on the assets and liabilities of the plan is in
paragraph (b)(7) of the final regulation. As in the proposal, paragraph
(b)(7) of the final rule simply incorporates the language from section
101(f)(2)(B)(vii) of ERISA. Paragraph (g) contains special rules and
definitions related to the general requirement in paragraph (b)(7) of
the final regulation. The substantive modifications to the proposal are
in paragraph (g) of the final rule.
General Requirement
Paragraph (b)(7) of the final rule requires, ``in the case of any
plan amendment, scheduled benefit increase or reduction, or other known
event taking effect in the current plan year and having a material
effect on plan liabilities or assets for the year, an explanation of
the amendment, scheduled benefit increase or reduction, or event, and a
projection to the end of such plan year of the effect of the amendment,
scheduled benefit increase or reduction, or event on plan
liabilities.'' The final regulation explicitly makes this requirement
subject to the special rules and definitions in paragraph (g) of the
final regulation.
Special Rules and Example
Paragraph (g) contains several special rules and definitions that
collectively clarify, limit, and illustrate application of the material
effect content requirement in paragraph (b)(7) of the final regulation.
Paragraph (g)(1) provides that ``current plan year'' in paragraph
(b)(7) means the plan year after the notice year. Paragraph (g)(2) of
the final regulation states that ``[a]n event described in paragraph
(b)(7) is recognized as `taking effect' in the current plan year if the
effect of the event is taken into account for the first time for
funding under section 430 or 431 of the Internal Revenue Code, as
applicable.'' Paragraphs (g)(3) and (g)(4) of the final regulation
provide the standards for determining if an event described in
paragraph (b)(7) has a ``material effect.'' Paragraph (g)(3) states
that such an event ``has a `material effect' if it results, or is
projected to result, in an increase or decrease of five percent or more
in the value of assets or liabilities from the valuation date of the
notice year.'' Paragraph (g)(4) provides that an event also ``has a
`material effect' if, in the judgment of the plan's enrolled actuary,
the effect of the event is considered material for purposes of the
plan's funding status under section 430 or 431, as applicable, of the
Internal Revenue Code, without regard to paragraph (g)(3). . . .''
Paragraph (g)(5) states that ``[a]n event described in paragraph (b)(7)
of this section is `known' only if it is known by the plan
administrator prior to 120 days before the due date of the notice.''
The following example illustrates these requirements.
Facts: Plan Y is a single-employer calendar year plan. Company
X, the sponsor of Plan Y, adopts an amendment on June 1, 2017,
offering a subsidized early retirement benefit to participants age
50 or older who retire on or after September 1, 2017 and before
March 1, 2018. The amendment increases the liabilities of Plan Y by
an amount greater than 5% of the value of Plan Y's liabilities on
January 1, 2017. Company X does not make an election under Code
section 412(d)(2) to accelerate recognition of the event for
funding. The amendment is taken into account for the first time
under section 430 of the Code as of the January 1, 2018, valuation
date. The notice year is 2017.
Conclusions: Pursuant to paragraph (g)(1) of the final rule, the
``current plan year'' is 2018 because the notice year is 2017.
Pursuant to paragraph (g)(2) of the final rule, the amendment is
recognized as ``taking effect'' in 2018 because it is first taken
into account for funding purposes as of the January 1, 2018
valuation date. Pursuant to paragraph (g)(3) of the final rule, the
event has a ``material effect'' on plan liabilities because it
results in an increase of five percent or more in the value of
liabilities. Pursuant to paragraph (g)(5), the amendment is
``known'' because it is adopted on June 1, 2017, which is more than
120 days prior to the April 30, 2018 due date of the 2017 funding
notice. Therefore, an explanation of the amendment must be included
in the 2017 funding notice.
``Taking Effect'' and ``Current Plan Year''
As mentioned above, one commenter raised a concern that by
interpreting
[[Page 5635]]
``current plan year'' as the year after the notice year, as opposed to
the notice year itself, the proposal effectively created a loophole
that might result in a substantial number of events not being covered
by the material effect disclosure provisions. To illustrate the
commenter's point, assume the same facts as in the example above. Also
assume the amendment was not known by the plan administrator before
January 1, 2017. Applying the proposal, the early retirement amendment
would not be explained in the 2017 notice because it does not take
effect in the current plan year (i.e., 2018). Nor would the amendment
be explained in the 2016 notice because it was not known by the plan
administrator more than 120 days before the deadline of that notice.
New paragraph (g)(2) of the final regulation addresses this
loophole. Specifically, it states that ``[a]n event described in
paragraph (b)(7) is recognized as `taking effect' in the current plan
year if the effect of the event is taken into account for the first
time for funding under section 430 or 431 of the Internal Revenue Code,
as applicable.'' Thus, a material effect event is recognized as
``taking effect'' in the first plan year that the effect of the event
is taken into account for funding. Events occurring in the notice year,
therefore, would not escape disclosure as feared by the commenter, if
the effect of the event is taken into account for funding for the first
time in a subsequent plan year. The term ``taking effect'' under the
final regulation does not have the same meaning as ``take effect''
under Code sections 430 and 436 and the regulations promulgated
thereunder.
Materiality--the Five Percent Test
As noted above, one commenter recommended eliminating the five
percent materiality test on the grounds that it is unnecessary in light
of the actuary judgment test. It is unnecessary, according to this
commenter, because five percent events are the kind of events that also
would be considered material to funding under the actuary judgment
test. From this premise, the commenter argues that plans should not
have to incur the cost of performing an unnecessary test. No data were
provided regarding potential cost savings if the recommendation were
adopted. The Department does not agree that the actuary judgment test
makes the five percent test unnecessary. The five percent test is an
objective test; it has all the certainty of a bright line, numerical
test. It ensures that participants will be informed automatically of
any event if its financial impact meets or exceeds this percentage. The
plan has no discretion when the effect of an event is at or above the
established numerical threshold. It effectively reflects the
Department's determination of baseline materiality for purposes of
section 101(f) disclosures, without regard to what a plan, or its
enrolled actuary, may think of the significance of the event. The
actuary judgment test in the proposal, by contrast, operates underneath
the five percent ceiling. Below the ceiling, the plan has discretion
and is not required to explain the effect of each and every event that
has any effect on assets or liabilities. Instead, disclosure is
required only if the plan's actuary determines the effect of the event
is material for funding purposes. Even if, as is suggested by the
commenter, there is some overlap in the two-test approach in the
proposal, the framework recommended by the commenter would lack the
certainty and consistency of the proposal and it would confer too much
discretion on the plan to decide whether and what events are material
under section 101(f) of ERISA. For these reasons, the Department
declined to adopt this commenter's recommendation, and the final rule
therefore continues to contain the five percent test.
Materiality--the Actuary Judgment Test
As mentioned above, if, in the judgment of the plan's enrolled
actuary, the effect of an event is material for purposes of the plan's
funding status under section 430 or 431 of the Code, paragraph
(g)(1)(ii) of the proposal deemed the event to have a material effect
under paragraph (b)(7). The final rule retains this provision. See
paragraph (g)(4). The purpose of this ``actuary judgment test'' is to
disclose any event that is not picked up by the five percent test which
the actuary determines has a material effect on the funding status of
the plan under section 430 or 431 of the Code (sections 303 and 304 of
ERISA). Although the actuary's exercise of judgment under paragraph
(g)(4) of the final regulation would not ordinarily rise to the level
of fiduciary conduct, see 29 CFR 2509.75-5 D-1, it is expected that the
plan's enrolled actuary will make a determination under paragraph
(g)(4) in a manner that is consistent with the standards for
performance of actuarial services set out in 20 CFR 901.20.
Other Known Events
Paragraph (g)(2) of the proposal contains a non-exclusive list of
events that could constitute an ``other known event'' for purposes of
paragraph (b)(7) of the regulation. Paragraph (g)(6) of the final rule
retains this list with two noteworthy modifications. First, the
examples in paragraph (g)(2)(iv) and (v) of the proposal, relating to a
retirement window benefit and a cost-of-living increase for retirees,
were eliminated because they describe events that typically do not
happen in the absence of a plan amendment or scheduled benefit
increase. Since such events constitute amendments or increases already
covered by other language in the regulation, the Department, on
reflection, determined that the two examples were not very helpful and
possibly misleading. The second change clarifies that the Department
does not view general market fluctuations (as compared to a fraud, such
as a Ponzi scheme, or other similar event affecting the value of a
specific investment) as an event contemplated by the material effect
disclosure provision in section 101(f) of ERISA. Market fluctuations
theoretically could result in numerous, yet offsetting, material effect
disclosures all in the same funding notice. For instance, assume a
precipitous decline in the equity market in a given month results in a
10 percent reduction in the value of a plan's assets. Also assume the
decline is followed by a market correction in the next month and the
correction results in a 10 percent increase in the fair market value of
the plan's assets. Thus, although the plan has no net gain or loss over
this two month period, its assets have changed more than five percent
twice during this time. Such a decline and correction could happen over
the course of two days rather than two months. The Department agrees
with the commenters who believe that this kind of information is not
likely to be very helpful or informative to participants in defined
benefit plans, and possibly confusing to them. The Department also
thinks it would be administratively burdensome for small plans to track
and explain market fluctuations. Accordingly, the proposal was modified
and paragraph (g)(6) of the final regulation clarifies that market
fluctuations are not ``other known events'' for purposes of the
material effect disclosure requirement in paragraph (b)(7), and are not
required to be explained or projected in funding notices. The
Department is of the view that a voluntary explanation of the effect of
a market fluctuation could be added to the notice pursuant to paragraph
(b)(12) of the final rule, if the plan administrator determined that
the explanation would be helpful and the explanation is not misleading
or confusing.
[[Page 5636]]
Finally, we have been asked if changes in actuarial assumptions
constitute a material event for this purpose. The Department is not
prepared to conclude categorically that changes in actuarial
assumptions should never be subject to the material event disclosure
provisions. Minor changes in actuarial assumptions or methods sometimes
can result in substantial increases or decreases in liabilities whether
the change in assumptions arises by operation of law, from an election
or action of the plan sponsor, or automatically under the terms of the
plan. Disclosure of a change in actuarial assumptions or methods could
help participants better understand a material increase or decrease in
the value of the plan's liabilities. Consequently, such changes have
not been given the same treatment as market fluctuations and,
therefore, in deciding whether such changes trigger disclosure, plans
must determine whether, in the aggregate, any change or changes in
actuarial assumptions or methods are material under the applicable
tests.
Projection of Liabilities
The Department received a number of inquiries regarding the
requirement in section 101(f)(2)(B)(vii) of ERISA to project the effect
of a material effect event on liabilities to the end of the current
plan year. Section 101(f)(2)(B)(vii), in relevant part, requires ``a
projection to the end of such plan year of the effect of the amendment,
scheduled increase or reduction, or event on plan liabilities[.]'' The
inquiries illustrated numerous approaches to carry out such projection
and asked whether the Department contemplated a specific methodology.
The Department does not contemplate a single projection method. The
Department expects only that plan administrators act reasonably and in
good faith when choosing a projection method. A reasonable
interpretation of the projection requirement would be to show
liabilities with and without the material effect event as of last day
of the current plan year based on the interest rate as of the valuation
date of the notice year, with the difference expressed as a percentage,
dollar amount, or both. For example:
----------------------------------------------------------------------------------------------------------------
Plan liabilities after the
Plan liabilities before the scheduled scheduled benefit Increase in liabilities Percentage
benefit increase increase change
----------------------------------------------------------------------------------------------------------------
$525 million........................... $557 million.............. $32 million............... 6%
----------------------------------------------------------------------------------------------------------------
The projection requirement in section 101(f)(2)(B)(vii) of ERISA
applies to any material effect event. However, paragraph (g)(7) of the
final regulation gives plan administrators the option of foregoing
projections in limited situations. Specifically, if an event is not
expected to change the plan's liabilities by five percent or more, then
a projection is not required, but the funding notice must contain an
explanation of why the specific event is considered material. This
special provision will reduce administrative burdens on plans because
they will not have to perform projections, which may be complex and
time consuming. At the same time, participants and beneficiaries will
not be adversely affected by the special provision because they will
receive an explanation of why the event is considered material. Knowing
why an event is considered material may be significantly more helpful
to participants and beneficiaries than the projection contemplated by
section 101(f)(2)(B)(vii).
h. Rules on Termination or Insolvency (Sec. 2520.101-5(b)(8))
Paragraph (b)(8) of the final regulation, like the proposal,
requires a summary of the rules under title IV of ERISA relating to
plan termination or insolvency, as applicable. Specifically, in the
case of single-employer plans, the regulation provides that a notice
shall include a summary of the rules governing termination of single-
employer plans under subtitle C of title IV of ERISA. See paragraph
(b)(8)(i). In the case of multiemployer plans, the regulation provides
that a notice shall include a summary of the rules governing
insolvency, including limitations on benefit payments. See paragraph
(b)(8)(ii). The Department received no comments on this provision and
it is adopted in the final regulation without change (except for
modifications to update the rule for a statutory change). \15\
---------------------------------------------------------------------------
\15\ The proposal also required the funding notices of
multiemployer plans to include a summary of the reorganization
rules. This requirement was deleted from the final rule as the
result of the repeal of the reorganization rules of title IV of
ERISA by section 108 of the MPRA.
---------------------------------------------------------------------------
i. PBGC Guarantees (Sec. 2520.101-5(b)(9))
Paragraph (b)(9) of the final regulation, like the proposal,
requires a funding notice to include a general description of the
benefits under the plan that are eligible to be guaranteed by the PBGC,
and an explanation of the limitations on the guarantee and the
circumstances under which such limitations apply. The requirement in
paragraph (b)(9) directly incorporates the requirements of the statute.
See section 101(f)(2)(B)(ix) of ERISA. One commenter observed that the
information required under paragraph (b)(9) is somewhat similar to
information that pension plans already must include in their summary
plan descriptions pursuant to 29 CFR 2520.102-3, although the commenter
also noted that the funding notice is an annual disclosure and the
summary plan description is not. This commenter asked the Department to
consider exercising its authority under section 110 of ERISA to
establish an alternative method of compliance under which a plan
administrator's obligation under paragraph (b)(9) of the regulation
(and, therefore, section 101(f)(2)(B)(ix) of ERISA) would be considered
satisfied if the plan administrator otherwise complied with summary
plan description requirements under Sec. 2520.102-3. Section 110 of
ERISA grants the Secretary of Labor authority to prescribe an
alternative method of compliance for any requirement of part 1 of
subtitle B of title I of ERISA, under certain circumstances, if the
Secretary makes certain findings, including that the requirement would
increase the costs to or impose unreasonable administrative burdens on
the plan and be adverse to the interests of plan participants in the
aggregate and that the alternative is consistent with the purposes of
title I of ERISA and provides adequate disclosure to the participants
and beneficiaries in the plan. The public record, however, does not
contain sufficient information on whether, and to what extent, the
specific content requirement of section 101(f)(2)(B)(ix) would increase
the costs to plans or impose unreasonable administrative burdens. Nor
does it contain sufficient information on whether, and to what extent,
the specific content requirement of section 101(f)(2)(B)(ix) would be
adverse to the interests of plan participants in the aggregate. In the
absence of such information, and evidence that the proposed alternative
method provides adequate disclosure to the participants
[[Page 5637]]
and beneficiaries in the plan, the Department is unable to accommodate
the commenter's request. Nothing in this final rule, however, precludes
the commenter, or any other interested person, from pursuing this
matter further with the Department in the future and supplying the
information needed for the Department to make the requisite
determinations under section 110 of ERISA.
j. Annual Report Information (Sec. 2520.101-5(b)(10))
Paragraph (b)(10) of the final regulation, like the proposal,
provides that a funding notice shall include a statement that any
person entitled to notice under paragraph (f) may obtain a copy of the
annual report of the plan filed under section 104(a) of ERISA upon
request, through the Internet Web site of the Department of Labor
(www.efast.dol.gov), or through any Intranet Web site maintained by the
applicable plan sponsor (or plan administrator on behalf of the plan
sponsor). The Department received no comments on this provision and it
is adopted in the final regulation without change.
k. Information Disclosed to PBGC (Sec. 2520.101-5(b)(11))
Paragraph (b)(11) of the proposal required funding notices to state
whether the contributing sponsor or a controlled group member was
subject to the reporting requirements under section 4010 of ERISA.
Section 4010 of ERISA generally requires plan sponsors (and each member
of their controlled group) to report identifying, financial, and
actuarial information about themselves and their plans to the PBGC if
one or more single-employer plans maintained by any member of the
controlled group has a funding target attainment percentage of less
than 80 percent, has a minimum funding waiver in excess of $1 million
any portion of which is still outstanding, or has met the conditions
for imposition of a lien for failure to make required contributions
(including interest) with an unpaid balance in excess of $1 million.
The Department received no comments on this provision.
The requirement is adopted in the final rule with a slight
technical adjustment in response to an issue raised by PBGC. PBGC
advised that the section 4010 reporting obligation relates to the
``information year'' and not the ``plan year.'' Generally, the
information year is the fiscal year of the plan sponsor. However, if
any two members of the controlled group report financial information on
the basis of different financial years, the information year is the
calendar year. Thus, ``information year'' does not necessarily align
with the plan year or the notice year. Accordingly, the final
regulation was modified to deal with possible misalignments such that
the statement requirement under paragraph (b)(11) is triggered if an
ERISA section 4010 report is required for the information year ending
within the notice year.
l. Additional Information (Sec. 2520.101-5(b)(12))
Paragraph (b)(12) of the final regulation, like the proposal,
permits the plan administrator to include in a funding notice any
additional information that the administrator determines would be
necessary or helpful to understanding the information required to be
contained in the notice. The purpose of this provision is to limit the
type of information that may be added to these notices so that
recipients do not face confusion or distraction based on information
lacking an appropriate nexus to the funding status of the plan. In
addition, paragraph (b)(12) also permits information that is
``otherwise permitted by law.'' This clause, by contrast, reflects the
fact that some plan administrators may elect to satisfy the
requirements of section 101(f) and other disclosure requirements
through a combined notification where such combined notification is
permitted by law. For example, where a plan elects the waiver described
in 29 CFR 2520.104-46 (small pension plan audit waiver regulation), the
plan administrator must include specified information about the waiver
in the funding notice in order to satisfy the requirements of Sec.
2520.104-46.\16\ No public comments were received on this provision as
proposed and it is adopted without change in the final regulation.
---------------------------------------------------------------------------
\16\ Section D of this preamble discusses amendments to Sec.
2520.104-46.
---------------------------------------------------------------------------
3. Style and Format (Sec. 2520.101-5(c))
Paragraph (c) of the final regulation sets forth the style and
format requirements for the annual funding notice requirements.
Specifically, it provides that funding notices shall be written in a
manner that is consistent with the style and format requirements of 29
CFR 2520.102-2 (style and format requirements for summary plan
descriptions). Thus, as with summary plan descriptions, funding notices
shall be written in a manner calculated to be understood by the average
plan participant and in a format that does not have the effect of
misleading or misinforming recipients. This means that plan
administrators must, among other things, exercise considered judgment
and discretion by taking into account such factors as the level of
comprehension and education of typical participants in the plan.
4. Timing Requirements (Sec. 2520.101-5(d))
Paragraph (d) of the final regulation, like the proposal, describes
when a funding notice must be furnished to recipients. Paragraph (d)(1)
provides that notices generally must be furnished not later than 120
days after the end of the notice year. Paragraph (d)(2) provides that
in the case of small plans, notices must be furnished no later than the
earlier of the date on which the annual report required by section 104
of ERISA is filed or the latest date the report could be filed (with
granted filing extensions). For this purpose, a plan is a small plan if
it had 100 or fewer participants on each day during the plan year
preceding the notice year. See section 101(f)(3)(B) of ERISA
(referencing section 303(g)(2)(B) of ERISA). Although section
303(g)(2)(B) of ERISA relates to single-employer plans only, the
Department interprets section 101(f)(3)(B) of ERISA as applying the 100
or fewer participant standard in section 303(g)(2)(B) of ERISA to both
single-employer and multiemployer plans.
One commenter recommended that the deadline for furnishing the
funding notice for large plans be shortened from no later than 120 days
after the end of the notice year to no later than 180 days after the
valuation date of the notice year. This would accelerate the deadline
by approximately 10 months for plans whose valuation date is January 1.
The commenter favors timelier information. The Department also favors
timely information for participants and beneficiaries. However, the
statutory deadline is clear and unambiguous, thereby limiting the
Department's authority to accept this comment under section 101(f) of
ERISA. In addition, adopting the commenter's recommendation would make
it impossible for many plan administrators to comply with other content
requirements in section 101(f) of ERISA. For instance, section
101(f)(2)(B)(iv) of ERISA requires that funding notices contain a
statement setting forth the asset allocation of investments under the
plan as of the end of the plan year. For plans with a January 1
valuation date, the plan administrators could not comply with the
foregoing requirement because the end of the plan year always would be
after the 180-day deadline
[[Page 5638]]
recommended by the commenter. Accordingly, the Department did not adopt
this recommendation.
5. Manner of Furnishing (Sec. 2520.101-5(e))
Paragraph (e) of the regulation relates to how funding notices must
be furnished to recipients, with paragraph (e)(1) addressing how
notices must be furnished to participants and beneficiaries and
paragraph (e)(2) addressing how notices must be furnished to the PBGC.
As with the proposal, paragraph (e)(1) of the final regulation is
reserved. The reservation reflects the fact that the Department has not
yet finished exploring whether, and possibly how, to expand or modify
the standards in 29 CFR 2520.104b-1(c) applicable to the electronic
distribution of required plan disclosures.\17\ Pending the completion
of this review and issuance of further guidance, the Department notes
that the general disclosure regulation at Sec. 2520.104b-1 applies to
material furnished under this regulation, including the safe harbor for
electronic disclosures at paragraph (c) of that regulation. Paragraph
(e)(2) of the final regulation provides that funding notices shall be
furnished to the PBGC consistent with the requirements of 29 CFR part
4000.
---------------------------------------------------------------------------
\17\ The same reasoning was behind the reservation in the
Department's final regulation on fiduciary requirements for
disclosure in participant-directed individual account plans. See 29
CFR 2550.404a-5(g), 75 FR 64910, 64922 (October 20, 2010). See also
Request for Information Regarding Electronic Disclosure by Employee
Benefit Plans, 76 FR 19285 (April 7, 2011).
---------------------------------------------------------------------------
6. Persons Entitled to Notice (Sec. 2520.101(5)(f))
Paragraph (f) of the proposed regulation defines a person entitled
to receive a funding notice as: each participant covered under the plan
on the last day of the notice year, each beneficiary receiving benefits
under the plan on the last day of the notice year, each labor
organization representing participants under the plan on the last day
of the notice year, the PBGC, and, in the case of a multiemployer plan,
each employer that, as of the last day of the notice year, is a party
to the collective bargaining agreement(s) pursuant to which the plan is
maintained or who otherwise may be subject to withdrawal liability
pursuant to section 4203 of ERISA.
One commenter asked for clarification whether alternate payees must
be furnished annual funding notices under this provision. The language
in the proposal could be read as mandating disclosure to alternate
payees only after they have entered pay status. We agree with the
commenter that there is a need for further clarification on this issue.
Section 206(d)(3)(J) of ERISA, in relevant part, explicitly states that
``a person who is an alternate payee under a qualified domestic
relations order shall be considered for purposes of any provision of
this Act a beneficiary under the plan.'' Section 101(f) of ERISA, in
relevant part, states that for each plan year the plan administrator
shall provide a funding notice to ``each plan participant and
beneficiary.'' Unlike the summary plan description and summary annual
report requirements of sections 104(b)(1) and 104(b)(3) of ERISA,
respectively, the annual funding notice disclosures are not limited
expressly to beneficiaries ``receiving benefits under the plan.'' Of
course, the Department is concerned that furnishing annual funding
notices to all beneficiaries could result in costs and burdens that
outweigh the benefits. However, the Department agrees with the
commenter that alternate payees, especially those who have a separate
interest qualified domestic relations order, have an interest in the
plan's funding status equal to the other categories of persons entitled
to notices listed in paragraph (f) of the proposal. The Department,
therefore, has provided the clarification requested by the commenter by
adding ``[e]ach alternate payee under the plan on the last day of the
notice year . . .'' to the list of persons entitled to a funding notice
under paragraph (f) of the final regulation. See Sec. 2520.101-
5(f)(3).
Another commenter suggested that plan administrators should have
the option of using either the first or last day of the notice year to
determine whether someone is entitled to a notice, subject to a
consistency rule. According to this commenter, valuation date data may
be the most up to date data available to a plan sponsor without
additional cost and effort to the plan. In the Department's view,
however, the identity of each participant and alternate payee covered
under the plan and each beneficiary receiving benefits on the last day
of the plan year should be readily available to the plan administrator
by the due date of the funding notice. The commenter offers no
empirical data showing a cost differential between valuation date
determinations and determinations on the last day of the plan year. In
addition, if, in accordance with the commenter's recommendation, the
participant/beneficiary population were determined on the valuation
date, which is generally the first day of the plan year, any
individuals who become participants, alternate payees or beneficiaries
receiving benefits during the notice year would not receive a notice
for that year. For these reasons, the Department did not adopt the
commenter's suggestion.
7. Model Notices (Sec. 2520.101-5(h))
The appendices to Sec. 2520.101-5 include two model notices (one
for single-employer plans and one for multiemployer plans) that may be
used by plan administrators for purposes of section 101(f) of ERISA.
The model in Appendix A is for single-employer plans (including
multiple employer plans) and the model in Appendix B is for
multiemployer plans. These models are intended to assist plan
administrators in discharging their notice obligations under section
101(f) of ERISA and the regulation. Use of a model notice is not
mandatory. However, the regulation provides that use of a model notice
will be deemed to satisfy the content requirements in paragraph (b) of
the regulation, as well as the style and format requirements in
paragraph (c) of the regulation.
The Department solicited comments on how the models could be
improved to enhance understandability and comprehensibility. One
commenter submitted an alternative to the Department's model for
single-employer plans. This alternative essentially would move
definitions and descriptions to a glossary at the end of the notice on
the premise that it would help participants to focus on the funding
status data located in the chart in the front of the notice. Another
commenter subjected both notices to a passive sentences readability
test, the Flesch Reading Ease Test, and the Flesch-Kincaid Grade Level
Test. The tests were applied to both models and to each paragraph
within the models. Both models are below the suggested readability
scores according to the commenter. This commenter recommended improving
readability by replacing much of the content in the models with a
single sentence; for single-employer plans, the sentence would state
whether the plan is or is not ``at risk;'' for multiemployer plans, the
sentence would state whether the plan is a ``green, yellow, orange or
red'' zone plan. Another commenter encouraged the Department to create
a model notice that does not exceed a single page. This commenter would
limit the content to the name of the plan, the funded percentage, the
dollar amount of the shortfall, the risk of not being able to fund
pension obligations, a description of the plan sponsor's plan to reduce
such risk, and an explanation
[[Page 5639]]
of how to get more information, in order to meet the one page standard.
Other miscellaneous comments were made to improve the single-employer
plan model. Many of these comments focused on emphasizing or
deemphasizing certain information relative to other information, such
as, for example, emphasizing the fact that the notice is ``required by
law.''
The Department retained the general framework of the proposed
models. The Department was unable to accommodate the single page and
single sentence approaches discussed above without eliminating
statutorily mandated information. However, the models were revised to
eliminate passive sentences where possible. Modifications to address
the Flesch scores, on the other hand, were more difficult given the
nature of the specific disclosure requirements under section 101(f) of
ERISA. Nonetheless, where possible, lengthy sentences were made shorter
and more concise, funding jargon was removed, and readability was
improved determined using the same testing methods used by the
commenter. The Department was not persuaded that the alternative with a
glossary, submitted by one commenter, is any more user-friendly or
understandable than the models appended to the final rule. Finally, the
opening paragraph of the models now contains the following sentence:
``The notice is required by federal law.''
The Department's intent behind models, in part, is to ease the
burden on plan administrators by providing model language to satisfy
applicable regulatory requirements. As noted above, use of a model
notice is not mandatory. To the extent a plan administrator elects to
include in a model notice additional information described in paragraph
(b)(12) of the regulation, such additional information must be
consistent with the style and format requirements in paragraph (c) of
the regulation. Thus, such additional information should not have the
effect of misleading or misinforming recipients.
8. Alternative Methods of Compliance
The Department recognizes that there are situations in which some
of the information to be provided in the annual funding notice is
duplicative of other information sources or irrelevant. In the preamble
to the proposed rule, the Department discussed and sought comments on
whether there should be special rules with respect to (1) the
furnishing of an annual funding notice to the PBGC in the case of
certain single-employer plans; (2) the scope of the content of a notice
for multiemployer plans terminated by mass withdrawal; and (3) the
scope of the content of a notice for certain insurance contract plans
to which Code section 412(e)(3) applies.
Section 110 of ERISA permits the Department to prescribe
alternative methods of complying with any of the reporting and
disclosure requirements of ERISA if it finds: (1) That the use of the
alternative is consistent with the purposes of ERISA and that it
provides adequate disclosure to plan participants and beneficiaries and
to the Department; (2) that the application of the statutory reporting
and disclosure requirements would increase the costs to the plan or
impose unreasonable administrative burdens with respect to the
operation of the plan; and (3) that the application of the statutory
reporting and disclosure requirements would be adverse to the interests
of plan participants in the aggregate. The Department finds, for the
reasons discussed below, these three conditions to be satisfied in each
of the circumstances described above. Thus, it includes in paragraphs
(j), (k), and (l) of this final regulation alternative methods of
complying with the annual funding notice requirements under section
101(f) in these limited circumstances.
a. Alternative Method of Compliance for Furnishing Notice to PBGC for
Certain Single-Employer Plans (Sec. 2520.101-5(j))
The final regulation includes an alternative method of compliance
for single-employer plans to furnish their funding notices to the PBGC.
Under this alternative, the plan administrator of a single-employer
plan with liabilities that do not exceed plan assets by more than $50
million is not required to furnish a funding notice to the PBGC
provided that the administrator furnishes the latest available funding
notice to the PBGC within 30 days of receiving a written request from
the PBGC. To determine whether a plan's liabilities exceed its assets
by more than $50 million, the plan administrator should subtract the
plan's total assets from its liabilities, using the assets and
liabilities disclosed in the funding notice in accordance with
paragraph (b)(3)(i)(A) of this regulation. The alternative method of
compliance does not have any effect on the plan administrator's
obligation to furnish notices to parties other than the PBGC.
The Department explained the rationale for this alternative in the
proposal. First, the PBGC has determined that, in light of the extended
due date for small plans, it will have electronic access to the
information included on the funding notice for most single-employer
plans as a result of ERISA's annual reporting requirement under section
104(a) on or around the time it would receive a copy of a funding
notice under section 101(f) of ERISA. Second, under the PBGC's
Reportable Events regulation (29 CFR part 4043), the PBGC typically
would receive information about certain events that might indicate
increased exposure or risk before it would receive information under
either ERISA section 101(f) or 104(a). Third, the Department believes
the alternative method will reduce administrative burdens for plans
that meet its conditions. Fourth, such an alternative should be limited
to single-employer plans because PBGC does not have the same early
access to this information in the case of multiemployer plans. For
instance, multiemployer plans are not subject to ERISA section 4043 and
very few multiemployer plans will qualify for the small plan extended
annual funding notice due date. The Department received only positive
comments on the proposed provision. The final regulation adopts the
alternative, with only minor changes to improve readability.
b. Alternative Method of Compliance for Multiemployer Plans That
Terminate by Reason of Mass Withdrawal (Sec. 2520.101-5(k))
The Department sought comments on whether a special rule should be
provided for multiemployer plans that terminate by mass withdrawal
pursuant to ERISA section 4041A(a)(2). ERISA section 4041A(a)(2)
provides that the termination of a multiemployer plan occurs as a
result of the withdrawal of every employer from the plan or the
cessation of the obligation of all employers to contribute under the
plan. Specifically, the Department noted that while some information
required by the regulation may not be relevant, other information, such
as PBGC guarantee levels, assets and liabilities, participant status,
and insolvency information may still be important to participants and
beneficiaries receiving benefits from such plans. Specific comments
were requested on whether a special rule should be provided, and if so,
information that should be excluded from the notice as well as the
information that should be included, and any data on cost savings as a
result of a special rule.
Commenters made the following observations about these plans.
First, the minimum funding standards cease to apply to these plans and
the Schedule MB of the Form 5500 is no longer required. Second, because
of that, the Code's critical/endangered status rules become inoperable.
Third, since the
[[Page 5640]]
minimum funding and Schedule MB reporting requirements no longer apply,
there is no reason for the plan's enrolled actuary to perform a funding
valuation. Thus, information needed to satisfy section 101(f) and the
requirements of the regulation is not readily available. Fourth, the
actuarial and other costs needed to generate such information will be
borne entirely by the participants and beneficiaries because there are
no contributing employers to defray the costs. Fifth, participants in
these plans might be better served with different or less information
than is otherwise included in an annual funding notice.
Based on the foregoing, the Department has adopted an alternative
method of compliance in paragraph (k) of the final regulation for plans
that terminate pursuant to section 4041A(a)(2) of ERISA. These plans no
longer have any contributing employers and, therefore, typically have
no cash in-flow other than investment return and, perhaps, withdrawal
liability payments. Thus, such a plan exists merely to pay benefits to
participants, until such time as the plan's trust runs out of money.
This ``wasting trust'' period often can span several years depending on
the particular plan.
The rules in paragraph (k), on the one hand, acknowledge that such
plans hardly ever have all the section 101(f) information because they
are no longer required to comply with the minimum funding rules. At the
same time, however, these rules acknowledge that participants and
beneficiaries continue to have an interest in the funding status of the
plan during the wasting trust period. Thus, instead of the specific
funding information required by the regulation more generally, the
final rule allows plan administrators of a plan terminated by mass
withdrawal to comply with the annual funding notice rules under ERISA
section 101(f) through this alternative method. The rules in paragraph
(k) focus mainly on the plan's assets and benefit payments being made
so that participants are able to draw a rough estimate of how long the
plan will be able to pay benefits. Paragraph (k) also focuses on
information about PBGC guarantees, insolvency and possible benefit
reductions, i.e., the kind of information that is directly relevant to
participants when their plan is in this situation. The rules do not
require disclosure of this alternative notice to labor organizations
representing participants, contributing employers, or the PBGC under
paragraphs (f)(4), (5), and (6) of the final regulation.
c. Alternative Method of Compliance for Code Section 412(e)(3)
Insurance Contract Plans (Sec. 2520.101-5(l))
During the development of the proposed regulation, concerns were
expressed about the relevance of section 101(f) information to Code
section 412(e)(3) insurance contract plans. Code section 412(e)(3)
insurance contract plans are plans under which retirement benefits are
provided through contracts that are guaranteed by an insurance carrier.
In general, such contracts must provide for level premium payments over
the individual's period of participation in the plan (to retirement
age), premiums must be timely paid as currently required under the
contract, no rights under the contract may be subject to a security
interest, and no policy loans may be outstanding. Consequently, the
Department sought comments on whether a special rule should be adopted
with respect to Code section 412(e)(3) plans and if so, what
information should or should not be included in the annual funding
notice for these plans.
If a plan is funded exclusively by the purchase of such contracts,
the minimum funding requirements of section 412 of the Code and section
302 of ERISA do not apply for the plan year and neither the Schedule MB
nor the Schedule SB of the Form 5500 Annual Return/Report is required
to be filed. Consequently, nearly all of the content requirements in
section 101(f) are irrelevant to section 412(e)(3) plans. These content
requirements are irrelevant because they reflect funding rules and
concepts that simply are not applicable to these plans. For this
reason, the final rule adopts an alternative method of compliance for
section 412(e)(3) plans which is set forth in paragraph (l) of the
final regulation. Specifically, the alternative method focuses on
whether the premiums necessary to fund retirement benefits under these
plans are being paid to the insurer in a timely manner and the
consequences of a failure to do so. This alternative approach is needed
so that participants in section 412(e)(3) plans do not receive
information inapplicable to their plans and benefits, and so that plans
do not incur the cost of providing such information.
9. Plans Not Immediately Subject to New Funding Rules or to Which
Special Funding Rules Apply
a. CSEC Plans
On April 7, 2014, section 104(a)(1) of the Cooperative and Small
Employer Charity Pension Plan Flexibility Act (CSEC Act), Public Law
113-97, 128 Stat. 1101 (as amended by the Consolidated and Continuing
Appropriations Act, 2015, Public Law 113-235), added new disclosures to
the funding notices of CSEC plans for plan years beginning after
December 31, 2013.\18\ The additional disclosures relate to the CSEC
plan funding rules of new section 306 of ERISA.\19\ A CSEC plan is a
defined benefit pension plan (other than a multiemployer plan) that is
either a multiple employer cooperative plan described in section 104 of
the PPA, a plan that as of June 25, 2010, was maintained by more than
one employer and all of the employers were Code section 501(c)(3)
charitable organizations, or a plan, as of June 25, 2010, maintained by
a Code section 501(c)(3) charitable organization chartered under part B
of subtitle II of title 36 of the Code, with employees in at least 40
states, and whose primary exempt purpose is to provide services with
respect to children.\20\ A CSEC plan sponsor can elect out of CSEC plan
status by the end of the first plan year beginning after December 31,
2013.\21\
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\18\ ERISA section 101(f)(2)(E).
\19\ Section 306 of ERISA and corresponding section 433 of the
Code were added by sections 102 and 202 of the CSEC Act,
respectively.
\20\ ERISA section 210(f)(1). Section 210(f)(1) of ERISA and
corresponding section 414(y)(1) of the Code were added by sections
101 and 201 of the CSEC Act, respectively. These provisions were
amended by the Consolidated and Continuing Appropriations Act, 2015,
Public Law 113-235, Division P, section 3 (2014).
\21\ ERISA section 210(f)(3). Section 210(f)(3) of ERISA and
corresponding section 414(y)(3) of the Code were added by sections
103 and 203 of the CSEC Act, respectively.
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The final rule does not address the new disclosures required by the
CSEC Act. Since the CSEC Act covers only a small number of plans
subject to section 101(f) of ERISA, the Department decided it is better
for the vast majority of defined benefit plans to proceed with the
final rule now and subsequently address the disclosure requirements for
CSEC plans. The final rule, therefore, reserves paragraph (m) to
address CSEC plan disclosures in the future, if necessary. Pending
further guidance, the Department, as a matter of enforcement policy,
will treat a plan administrator as satisfying the requirements of
section 101(f)(2)(E) (which contains the new CSEC disclosures), if the
administrator acts in accordance with a good faith, reasonable
interpretation of those requirements.
b. PPA Section 104 and 402 Plans
Section 104 of the PPA defers the effective date of the amendments
to the funding rules made by the PPA for certain multiple employer
plans of rural
[[Page 5641]]
cooperatives and eligible charity plans.\22\ Generally, these plans
will be CSEC plans, unless they elect out of CSEC status (or are
maintained by charities that are under common control). In addition,
section 402 of the PPA applies special funding rules to certain plans
of commercial passenger airlines and airline caterers.\23\ Neither
section 104 nor section 402 of the PPA affected the application of
section 101(f) of ERISA to such plans. Consequently, plans electing out
of CSEC status, eligible charity plans that are not CSEC plans, and
section 402 plans should disclose their funding target attainment
percentage (and related asset and liability information) in accordance
with guidance provided by the Secretary of the Treasury until such time
as they become subject to the PPA funding rules. For example, the
funding target attainment percentage of a plan described in section 104
is determined in accordance with paragraph (b)(2)(i) of the final
regulation, except that the value of plan assets is determined without
subtraction of the funding standard carryover balance or prefunding
balance. See 26 CFR 1.430(d)-1(b)(3)(ii).
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\22\ Section 202(b) of the Preservation of Access to Care for
Medicare Beneficiaries and Pension Relief Act of 2010, Public Law
111-192, amended section 104 of the Pension Protection Act of 2006,
Pub. L. 109-280, by expanding the group of plans that are eligible
for a deferred effective date under section 104 to include eligible
charity plans.
\23\ Section 402 of the PPA as amended by the U.S. Troop
Readiness, Veterans' Care, Katrina Recovery, and Iraq Accountability
Appropriations Act, 2007, Public Law 110-28.
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10. Multiple Employer Pension Plans
After the Department issued FAB 2009-01, a number of plan
administrators of multiple employer plans raised questions regarding
whether, and how, the new annual funding notice requirements apply to
such plans. The central question was whether all participants in such a
plan must receive the same funding notice containing funding data at
the plan level or whether each participant must receive a notice that
reflects funding information relevant to his employer. It is the view
of the Department that if all assets of the multiple employer pension
plan are, on an ongoing basis, available to pay benefits to all plan
participants and beneficiaries covered under the plan, then the
information in the funding notice should be reflective of the plan as a
whole. The plan administrator need not create a separate funding notice
for the employees of each participating employer in the multiple
employer plan containing the funding information (assets, liabilities,
etc.) pertaining to that employer in the case of a multiple employer
plan to which section 413(c)(4)(A) of the Code applies. Based on the
foregoing, the proposal did not contain any special rules for multiple
employer pension plans. However, the Department requested comments on
whether funding notices for such plans should alert participants to the
fact that some funding rules under the Code, e.g., benefit restrictions
under Code section 436, may apply on an employer-by-employer basis. The
Department received no comments in response to this request. The final
rule contains no special rules for multiple employer plans.
D. Overview of Amendments to 29 CFR 2520.104-46--Waiver of Examination
and Report of an Independent Qualified Public Accountant for Employee
Benefit Plans With Fewer Than 100 Participants
Department of Labor regulation 29 CFR 2520.104-46 governs the
circumstances under which small pension plans (plans with fewer than
100 participants at the beginning of the plan year) are exempt from the
requirements to engage an independent qualified public accountant and
to include a report of the accountant as part of the plan's annual
report under title I of ERISA. The waiver of the requirement to engage
an accountant is conditioned on, among other things, the disclosure of
certain information to participants and beneficiaries. A requirement of
Sec. 2520.104-46 is that such disclosure must be included in the
summary annual report (SAR) of a plan electing the waiver. However,
section 503(c) of the PPA amended section 104(b)(3) of ERISA by
repealing the SAR requirement for defined benefit plans to which the
annual funding notice requirements of section 101(f) of ERISA
apply.\24\ Therefore, in conjunction with the annual funding notice
regulation (29 CFR 2520.101-5), as set forth in the final rule and
discussed in section C of this preamble, above, the Department is
adopting conforming amendments to Sec. 2520.104-46 to enable plans
subject to section 101(f) of ERISA to elect to use the waiver provision
in Sec. 2520.104-46. Under Sec. 2520.104-46, as amended, a plan
subject to section 101(f) of ERISA that elects to use the waiver must
include the information in Sec. 2520.104-46(b)(1)(i)(B)(1)-(4) in the
plan's annual funding notice. The model audit waiver language in the
Appendix to Sec. 2520.104-46, modified for the format of the annual
funding notice, may be used to meet those information requirements.
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\24\ The repeal is effective for plan years beginning after
December 31, 2007.
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E. Overview of Amendments to 29 CFR 2520.104b-10--Summary Annual Report
As discussed in section D of this preamble, the PPA repealed the
summary annual report (SAR) requirement for plans subject to section
101(f) of ERISA, effective for plan years beginning after December 31,
2007. The Department, therefore, is making technical conforming
amendments to the SAR regulation (Sec. 2520.104b-10) to give effect to
the repeal. Specifically, the proposal added a new paragraph (g)(9) to
provide that a SAR is not required to be furnished if the plan is
subject to title IV of ERISA. The Department received no comments on
this provision. The final regulation adopts paragraph (g)(9) of the
proposal, without change.
In the preamble of the proposal, the Department mentioned that some
items and language in the form prescribed in paragraph (d)(3) and the
appendix to Sec. 2520.104b-10 might be irrelevant on and after the
effective date of the repeal and solicited comments regarding how best
to revise the form and Appendix. The Department received no comments in
response to this request. After reviewing the coverage requirements of
titles I and IV of ERISA, the Department recognizes that not all
defined benefit plans covered under title 1 of ERISA are subject to
title IV.\25\ Such plans would remain subject to the SAR requirements
of Sec. 2520.104b-10. Accordingly, the Department is not making any
changes to paragraph (d)(3) and the appendix of Sec. 2520.104b-10 at
this time.
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\25\ A plan established and maintained by a professional
services employer which does not at any time after September 2, 1974
have more than 25 active participants is not covered by title IV.
See section 4021(b)(13) of ERISA. Also, plans funded entirely by
employee contributions are not covered by title IV. See section
4021(b)(5) of ERISA. There are no comparable provisions under
section 4 of ERISA excluding such plans from title I.
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F. Removal of 29 CFR 2520.101-4
In 2004, the Pension Funding Equity Act (PFEA '04), Public Law 108-
218, amended title I of the Employee Retirement Income Security Act of
1974 (ERISA) by adding section 101(f), which required multiemployer
defined benefit plans to furnish a plan funding notice annually to each
participant and beneficiary, to each labor organization representing
such participants or beneficiaries, to each employer that has an
obligation to contribute under the plan, and to the PBGC. On January
11, 2006, the Department published a final regulation, 29 CFR 2520.101-
4,
[[Page 5642]]
implementing the requirements of section 101(f) of ERISA as amended by
PFEA `04. The final regulation published today implements changes to
section 101(f) of ERISA, as amended by PPA, and supersedes and reserves
29 CFR 2520.101-4.
G. Regulatory Impact Analysis
Summary
The final rule contains a model notice and other guidance necessary
to implement section 101(f) of ERISA as amended. Section 101(f) and the
final rule increase the transparency of information about the funding
status of plans, affording all parties interested in the financial
viability of these plans with a greater opportunity to monitor their
funding status and take action where necessary. In addition, the rule
offers separate model notices to administrators of single-employer and
multiemployer defined benefit pension plans, which are expected to
mitigate burden and contribute to the efficiency of compliance. Another
benefit is that the rule would afford plan administrators greater
certainty that they have discharged their notice obligation under
section 101(f) by clarifying certain terms used in the statute. The
Department has concluded that the benefits of the rule justify their
costs. These benefits--increased transparency, greater efficiency,
certainty, and clarity--are expected to be substantial, but cannot be
specifically quantified.
The cost of the final rule is expected to amount to $51 million in
the first year of implementation and $46.5 million in each subsequent
year. The total estimated cost includes the one-time development of a
notice by each plan and the annual preparation and mailing of the
notices to the required recipients.\26\ The first year estimate is
higher to account for the time required for plan administrators to
adapt and review the model notice. The Department also makes the
following additional cost estimates regarding the components of the
total estimated cost:
\26\ As discussed earlier in this preamble, this final
regulation will implement the statutory requirement for defined
benefit pension plan administrators to provide an annual funding
notice that meets the requirements of ERISA section 101(f). Because
plans were required to comply with ERISA section 101(f) before the
issuance of implementing regulations, and taking into account
guidance previously issued by the Department in Field Assistance
Bulletin 2009-01, this regulatory impact analysis includes a small
initial cost for plans to make adjustments that would be necessary
to ensure compliance with implementing regulations. These estimates
then take into account the ongoing annual costs for plan
administrators to create and send the annual funding notices.
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--The total mailing costs are estimated to be about $22.6 million
annually in the first three years; and
--In addition to the mailing costs, the Department estimates that firms
will spend about $28.4 million in the year of implementation and $23.9
million in subsequent years on labor costs.\27\
\27\ The total hour burden is estimated to be about 603,000
hours in the year of implementation and 562,000 hours in each
subsequent year.
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The Department has attempted to provide guidance in the final rule
to assist administrators in meeting their responsibilities in the most
economically efficient manner possible. Because the costs of the rule
arise only from notice provisions in PPA, the data and methodology used
in developing these estimates are more fully described in the Paperwork
Reduction Act section of this analysis of regulatory impact.
Table 1--Accounting Table
--------------------------------------------------------------------------------------------------------------------------------------------------------
Section 101(f) and the final rule increase the transparency of information about the funding
status of plans, affording all parties interested in the financial viability of these plans
with a greater opportunity to monitor their funding status and take action where necessary. In
addition, the rule offers a model notice to administrators of single-employer and
multiemployer defined benefit pension plans, which is expected to mitigate burden and
Qualitative Benefits contribute to the efficiency of compliance. Another benefit is that the rule would afford plan
administrators greater certainty that they have discharged their notice obligation under
section 101(f) by clarifying certain terms used in the statute.
-----------------------------------------------------------------------------------------------
Primary Discount rate Period
estimate Low estimate High estimate Year dollar (%) covered
--------------------------------------------------------------------------------------------------------------------------------------------------------
Annualized Monetized Costs ($millions/year)............. 48.1 45.1 60.2 2014 7 2015-2017
48.0 45.0 60.0 2014 3 2015-2017
--------------------------------------------------------------------------------------------------------------------------------------------------------
Discussion of Costs..................................... Monetized costs are a result of labor hours in preparing the annual funding notice and from
materials and mailing costs.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Executive Order 12866 and 13563
Under Executive Order 12866, the Department must determine whether
a regulatory action is ``significant'' and therefore subject to review
by the Office of Management and Budget (OMB). Executive Order 13563
reaffirms the principles set forth in Executive Order 12866 by
emphasizing, among other things, the importance of proposing or
adopting regulations only upon a reasoned determination that their
benefits justify their costs (recognizing that some benefits and costs
are difficult to quantify), tailoring regulations to impose the least
burden on society consistent with obtaining regulatory objectives,
coordinating across agencies to reduce costs by simplifying and
harmonizing rules, and encouraging public participation in the
rulemaking process.
Section 3(f) of Executive Order 12866 defines a ``significant
regulatory action'' as an action that is likely to result in a rule (1)
having an annual effect on the economy of $100 million or more, or
adversely and materially affecting a sector of the economy,
productivity, competition, jobs, the environment, public health or
safety, or State, local or tribal governments or communities (also
referred to as ``economically significant''); (2) creating serious
inconsistency or otherwise interfering with an action taken or planned
by another agency; (3) materially altering the budgetary impacts of
entitlement grants, user fees, or loan programs or the rights and
obligations of recipients thereof; or (4) raising novel legal or policy
issues arising out of legal mandates, the President's priorities, or
the principles set forth in the Executive Order. It has been determined
that this action is significant under section 3(f)(4) of Executive
Order 12866; therefore, OMB has reviewed this regulatory action
pursuant to the Executive Order.
[[Page 5643]]
Paperwork Reduction Act
In accordance with the requirements of the Paperwork Reduction Act
of 1995 (PRA) (44 U.S.C. 3506(c)(2)), the Department submitted an
information collection request (ICR) to OMB regarding the ICRs
contained in the final rule in accordance with 44 U.S.C. 3507(d), for
OMB's review. OMB approved the ICR under OMB Control Number 1210-0126,
which currently is scheduled to expire on January 31, 2018.
A copy of the ICR may be obtained by contacting the PRA addressee:
G. Christopher Cosby, Office of Policy and Research, U.S. Department of
Labor, Employee Benefits Security Administration, 200 Constitution
Avenue NW., Room N-5718, Washington, DC 20210. Telephone (202) 693-
8410; Fax: (202) 219-5333. These are not toll-free numbers. ICRs
submitted to OMB also are available at http://www.RegInfo.gov.
The final rule implements the disclosure requirements of section
101(f) of ERISA, as amended by section 501 of the PPA and section
201(a)(4) of MPRA. As described earlier in the preamble, section 101(f)
of ERISA and section 2520.101-5(a) of the final rule require the
administrator of a defined benefit plan to which title IV of ERISA
applies to furnish an annual funding notice to the PBGC, each
participant and beneficiary, each labor organization representing
participants and beneficiaries, and for multiemployer plans only, each
employer with an obligation to contribute to the plan. The annual
funding notice is an ICR subject to the
Paperwork Reduction Act
The content requirements for the ICR are contained in section
2520.101-5(b). Model notices are provided in the appendices to the rule
to facilitate compliance and moderate the burden attendant to supplying
notices to participants and beneficiaries, labor organizations,
contributing employers, and PBGC. Use of the model notice is not
mandatory; however, use of the model will be deemed to satisfy the
requirements for content, style, and format of the notice, except with
respect to any other information the plan administrator elects to
include. The final rule also is intended to clarify several statutory
requirements with respect to content, style and format, manner of
furnishing, and persons entitled to receive the annual funding notice.
Increasing the transparency of information about the funding status of
defined benefit plans for participants and beneficiaries, labor
organizations, contributing employers, and the PBGC will afford all
parties interested in the financial viability of these plans greater
opportunity to monitor their funding status.
In order to estimate the potential costs of the notice provisions
of section 101(f) of ERISA and the final rule, the Department estimated
the number of single-employer and multiemployer defined benefit plans,
and the numbers of participants, beneficiaries receiving benefits,
labor organizations representing participants, and employers with an
obligation to contribute to these plans. The Department lacks
sufficient information to estimate the number of alternate payees.
The PBGC Pension Insurance Data Tables 2011 indicates that there
are 1,454 multiemployer defined benefit plans with approximately 10.3
million participants and beneficiaries receiving benefits. These
estimates are based on premium filings with PBGC for fiscal year 2011.
This total has been adjusted slightly to reflect the exception from the
requirement to furnish annual funding notices to plans that are
receiving financial assistance from PBGC.\28\ The PBGC Pension
Insurance Data Tables 2011 also indicates that there are 25,607 single-
employer defined benefit plans with approximately 33.4 million
participants.
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\28\ According to the PBGC Pension Insurance Data Tables 2011,
there were 1,454 multiemployer defined benefit plans in 2010. This
number was reduced by 49 in order to account for the 49 plans that
received financial assistance and are not required to furnish an
annual funding notice.
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The Department is not aware of a direct source of information for
the number of notices that must be sent to labor organizations that
represent participants of multiemployer defined benefit plans and that
would be entitled to receive notice under section 101(f). The
Department has relied on data from the 1998 Form 5500 which collected
information on plans that are collectively bargained to approximate the
distribution of the number of unions per plan. This leads to an
estimated 1,834 labor organizations for the 1,454 multiemployer plans
and 34,263 labor organizations for the 25,607 single-employer plans (a
total of approximately 36,100 labor organizations).
There are 232,570 employers obligated to contribute to
multiemployer defined benefit plans that are required to receive a
funding notice.\29\
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\29\ PBGC, ``Multiemployer Pension Plans: Report to Congress
Required by the Pension Protection Act of 2006.) See page 13 table
3. http://www.pbgc.gov/documents/pbgc-report-multiemployer-pension-plans.pdf.
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For purposes of its estimates of regulatory impact, the Department
has assumed that each plan will develop a notice, and that each year
approximately 44.0 million notices will be prepared and sent. The 44.0
million estimate breaks down as follows: 10.3 million notices to
participants and beneficiaries of approximately 1,454 multiemployer
defined benefit plans; 33.4 million notices to participants and
beneficiaries of close to 25,607 single-employer plans; 36,100 notices
to labor organizations; 232,570 notices to contributing employers of
multiemployer plans; and 27,000 notices to the PBGC.
Estimates of notice preparations are based on the assumption that
plan service providers, actuaries, lawyers, and financial professionals
will produce the notices. It is assumed that the availability of a
model notice will lessen the time otherwise required by a plan
administrator to draft a required notice. The Department received one
comment questioning the estimates of the time required to complete the
notices. The Department did consult with an individual familiar with
the industry and adjusted its estimates as recommended. The estimates
are as follows: On average, actuaries will spend 3.5 hours in the first
year and 2.5 hours in each succeeding year preparing notices for
single-employer plans and two hours in the first year and two hours in
each succeeding year preparing notices for multiemployer plans making
specific calculations for information that must be provided in the
notice; on average legal professionals will spend one hour in the first
year and 0.5 hours in each succeeding year reviewing the notice; \30\
and financial professionals will spend on average one hour in the first
year and thereafter drafting the notice for single-employer plans and
two hours in the first year and one hour in each succeeding year
preparing the notice for multiemployer plans. The final preparation and
distribution of the notice will be done by a clerical professional
using an estimate of one minute per notice mailed.
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\30\ The estimate of the number of hours needed for a legal
professional is based on the average time required. While the
Department acknowledges that more time could be required for each
plan to draft its own notice, based on its conversations with
industry groups, the Department believes that trade associations,
service providers, or others would draft the first version of the
notice using the provided model notice as a starting point, which
could then be used by multiple plans. This economy of scale would
result in a lower average hour burden than if every plan used a
legal professional to create its own notice. The time estimate would
still allow for plans to have a legal professional review the unique
pieces of its notice.
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[[Page 5644]]
Assuming 44.0 million notices are distributed,\31\ the burden hours
for that initial year of implementation are 92,500 actuarial hours,
28,500 financial professional hours, and 27,100 legal professional
hours. Total clerical professional hours are calculated based on the
total number of notices mailed and the preparation time of one minute
per notice resulting in 454,600 hours. The total hour burden for the
year of implementation is 603,000 hours (rounded to the nearest
thousand). Each subsequent year requires 66,900 actuarial hours,
454,600 clerical hours, 27,100 financial professional hours, and 13,500
legal professional hours for a total of 562,100 hours.\32\
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\31\ The Department assumes that 38 percent of notices are sent
electronically resulting in a de minimis cost.
\32\ The average Total Annual Burden Hours over the first three
years is 575,700.
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Hourly labor rates were calculated using the rates based on the
Bureau of Labor Statistics, National Occupational Employment Survey
(March 2013) and the Bureau of Labor Statistics, Employment Cost Index
(September 2013).\33\ Calculations of the 2014 hourly labor costs were
$29.60 for a clerical professional, $68.68 for a financial
professional, $103.15 for an actuary, and $126.56 for a legal
professional.\34\
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\33\ EBSA estimates of labor rates include wages, other
benefits, and overhead.
\34\ The Department received a comment from the public
expressing concern that the wage estimate for legal professionals is
low. While the Department acknowledges that the labor rate of an
outsourced legal professional could be higher than the reported
average, many plans, service providers, and trade associations have
legal professionals on staff that have a much lower labor rate and
that the Department believes would do most of the work.
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Based on the foregoing, the total equivalent cost for the initial
year is estimated at approximately $9,545,000 for actuarial services,
$13,457,000 for clerical services, $1,958,000 for financial
professional services, and $3,425,000 for legal professional services.
The total equivalent cost is approximately $28,385,000 in the initial
year.
The total equivalent cost in each subsequent year is estimated at
approximately $6,963,000 for actuarial services, $13,457,000 for
clerical services, $1,859,000 for financial professional services, and
$1,712,000 for legal professional services. The total equivalent cost
is estimated at approximately $23,931,000 in each subsequent year.
The cost of mailing the notices was based on the assumption that
each notice would be seven pages for single-employer plans and six
pages for multiemployer plans, with printing costs of 5 cents per page
and postage of 49 cents resulting in an estimated 84 cent cost per
paper notice for single-employer plans and a 79 cent cost per paper
notice for multiemployer plans. It was further assumed that 38 percent
of notices would be sent electronically. The Department has not
estimated any additional burden for preparation or distribution of
notices via electronic means, because the Department assumes that plans
will utilize pre-existing electronic communications systems and email
lists for these purposes and the process of preparation and
distribution involves only a de minimis additional effort, e.g., a few
computer key strokes or the equivalent. This assumption will result in
a total of approximately 16.7 million notices being sent electronically
by multiemployer and single-employer plans. Single-employer plans will
mail out approximately 20.7 million paper notices and multiemployer
plans will mail out approximately 6.5 million paper notices. Total
annual paper mailing costs are estimated to be approximately $22.6
million.
Sensitivity Analysis
There is uncertainty surrounding the estimates of the time required
to prepare and review the notice. The Department has sought to model
this uncertainty by varying the time estimates and creating a range
around the estimates reported above. The Department reduced the
actuarial, financial professional and legal professional time by 25
percent. This change lowered the total cost of the rule to $47.2
million in the first year and $43.9 million in the subsequent years.
The Department is more concerned about the effect on costs if it
underestimated the cost of the rule, so it doubled the time estimates
as well and found that this increased the total costs of the rule to
$65.9 million it the first year and $57.0 million in subsequent years.
These paperwork burden estimates are summarized as follows:
Type of Review: Revised collection.
Agency: Employee Benefits Security Administration, Department of
Labor.
Title: Annual Funding Notice for Defined Benefit Plans.
OMB Control Number: 1210-0126.
Affected Public: Business or other for-profit; not-for-profit
institutions.
Respondents: 27,061.
Responses: 43,996,000. Frequency of Response: Annually.
Estimated Total Annual Burden Hours: 576,000 (average over first
three years); 603,000 (first year) (562,000 subsequent years).
Estimated Total Annual Burden Cost: $22,586,000 (first year and
subsequent years).
Regulatory Flexibility Act
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes
certain requirements with respect to Federal rules that are subject to
the notice and comment requirements of section 553(b) of the
Administrative Procedure Act (5 U.S.C. 551 et seq.) and which are
likely to have a significant economic impact on a substantial number of
small entities. Unless the head of an agency certifies that a final
rule is not likely to have a significant economic impact on a
substantial number of small entities, section 604 of the RFA requires
that the agency present final regulatory flexibility analysis
describing the rule's impact on small entities and explaining how the
agency made its decisions with respect to the application of the rule
to small entities.
For purposes of the RFA, the Department continues to consider a
small entity to be an employee benefit plan with fewer than 100
participants.\35\ Further, while some large employers may have small
plans, in general small employers maintain most small plans. Thus, the
Department believes that assessing the impact of this final rule on
small plans is an appropriate substitute for evaluating the effect on
small entities. The definition of small entity considered appropriate
for this purpose differs, however, from a definition of small business
that is based on size standards promulgated by the Small Business
Administration (SBA) (13 CFR 121.201) pursuant to the Small Business
Act (15 U.S.C. 631 et seq.).
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\35\ The basis for this definition is found in section 104(a)(2)
of ERISA, which permits the Secretary of Labor to prescribe
simplified annual reports for pension plans that cover fewer than
100 participants.
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By this standard, data from the 2011 Form 5500 indicates that for
more than 90 percent of small affected plans, the average per plan
compliance cost is $1,030 ($27.8 million/27,061 plans) plus plan
specific mailing cost (84 cents per participant in single-employer
plans, and 79 cents in multiemployer plans, which cannot exceed $84 per
plan because small plans have less than 100 participants) is less than
one percent of plan assets.
Based on the foregoing, the Department has determined that while
the rule is likely to impact a substantial number of small entities,
the economic impact on such entities will not be significant for most
small entities. Therefore, pursuant to section 605(b) of RFA, the
Assistant Secretary of the
[[Page 5645]]
Employee Benefits Security Administration hereby certifies that the
final rule will not have a significant economic impact on a substantial
number of small entities.
Congressional Review Act
The final rule is subject to the Congressional Review Act
provisions of the Small Business Regulatory Enforcement Fairness Act of
1996 (5 U.S.C. 801 et seq.) and will be transmitted to Congress and the
Comptroller General for review. The final rule is not a ``major rule''
as that term is defined in 5 U.S.C. 804, because it is not likely to
result in (1) an annual effect on the economy of $100 million or more;
(2) a major increase in costs or prices for consumers, individual
industries, or Federal, State, or local government agencies, or
geographic regions; or (3) significant adverse effects on competition,
employment, investment, productivity, innovation, or on the ability of
United States-based enterprises to compete with foreign-based
enterprises in domestic and export markets.
Unfunded Mandates Reform Act
For purposes of the Unfunded Mandates Reform Act of 1995 (Pub. L.
104-4), as well as Executive Order 12875, the final rule does not
include any Federal mandate that may result in expenditures by State,
local, or tribal governments in the aggregate of more than $100
million, adjusted for inflation, or increase expenditures by the
private sector of more than $100 million, adjusted for inflation.
Federalism Statement
Executive Order 13132 (August 4, 1999) outlines fundamental
principles of federalism, and requires the adherence to specific
criteria by Federal agencies in the process of their formulation and
implementation of policies that have substantial direct effects on the
States, the relationship between the national government and States, or
on the distribution of power and responsibilities among the various
levels of government. The final rule does not have federalism
implications because it has no substantial direct effect on the States,
on the relationship between the national government and the States, or
on the distribution of power and responsibilities among the various
levels of government. Section 514 of ERISA provides, with certain
exceptions specifically enumerated, that the provisions of titles I and
IV of ERISA supersede any and all laws of the States as they relate to
any employee benefit plan covered under ERISA. The requirements that
would be implemented in the final rule do not alter the fundamental
reporting and disclosure requirements of the statute with respect to
employee benefit plans, and as such have no implications for the States
or the relationship or distribution of power between the national
government and the States.
List of Subjects in 29 CFR Part 2520
Accounting, Employee benefit plans, Employee Retirement Income
Security Act, Pensions, Reporting and recordkeeping requirements.
For the reasons set forth in the preamble, the Department of Labor
amends 29 CFR part 2520 as follows:
PART 2520--RULES AND REGULATIONS FOR REPORTING AND DISCLOSURE
0
1. The Authority citation for part 2520 is revised to read as follows:
Authority: 29 U.S.C. 1021-1025, 1027, 1029-31, 1059, 1134 and
1135; and Secretary of Labor's Order 1-2011 77 FR 1088 (Jan. 9,
2012). Sec. 2520.101-2 also issued under 29 U.S.C. 1132, 1181-1183,
1181 note, 1185, 1185a-b, 1191, and 1191a-c. Secs. 2520.102-3,
2520.104b-1 and 2520.104b-3 also issued under 29 U.S.C. 1003, 1181-
1183, 1181 note, 1185, 1185a-b, 1191, and 1191a-c. Secs. 2520.104b-1
and 2520.107 also issued under 26 U.S.C. 401 note, 111 Stat. 788.
Sec. 2520.101-5 also issued under sec. 501 of Pub. L. 109-280, 120
Stat. 780 and sec. 105(a), Pub. L. 110-458, 122 Stat. 5092.
Sec. 2520.101-4 [Removed and Reserved]
0
2. Remove and reserve Sec. 2520.101-4.
0
3. Add Sec. 2520.101-5 to subpart A to read as follows:
Sec. 2520.101-5 Annual funding notice for defined benefit pension
plans.
(a) In general. (1) Except as provided in paragraphs (a)(2) and (3)
of this section, pursuant to section 101(f) of the Act, the
administrator of a defined benefit plan to which title IV of the Act
applies shall furnish annually to each person specified in paragraph
(f) of this section a funding notice that conforms to the requirements
of this section.
(2) A plan administrator shall not be required to furnish a funding
notice--
(i) In the case of a multiemployer plan, for a plan year if the due
date for such notice is on or after the earlier of:
(A) The date the plan complies with the insolvency notice
requirements of section 4245(e) or 4281(d)(3) of the Act and
regulations thereunder; or
(B) The date the plan has distributed assets in satisfaction of all
nonforfeitable benefits under the plan pursuant to section 4041A of the
Act and the regulations thereunder.
(ii) In the case of a single-employer plan, for a plan year if the
due date for the funding notice is on or after the date:
(A) The Pension Benefit Guaranty Corporation is appointed as
trustee of the plan pursuant to section 4042 of the Act;
(B) The plan has distributed assets in satisfaction of all benefit
liabilities in a distress termination pursuant to section
4041(c)(3)(B)(i) of the Act or of all guaranteed benefits in a distress
termination pursuant to section 4041(c)(3)(B)(ii) of the Act; or
(C) The plan administrator filed a standard termination notice with
the Pension Benefit Guaranty Corporation pursuant to 29 CFR 4041.25,
provided that the proposed termination date is on or before the due
date of the funding notice and a final distribution of assets in
satisfaction of all benefit liabilities proceeds in accordance with
section 4041(b) of the Act.
(3) In the case of a merger or consolidation of two or more plans--
(i) The plan administrator of a non-successor plan shall not be
required to furnish a funding notice for the plan year in which the
merger or consolidation occurred; and
(ii) The funding notice of the successor plan, for the plan year in
which the merger or consolidation occurred, must, in addition to the
requirements of paragraph (b) of this section, contain a general
explanation, including the effective date, of the merger or
consolidation and an identification of each plan (e.g., name and plan
number) involved in the merger or consolidation.
(b) Content of notice. A funding notice shall include the following
information:
(1) Identifying information. The name of the plan, the name,
address, and phone number of the plan administrator and the plan's
principal administrative officer (if different than the plan
administrator), each plan sponsor's name and employer identification
number, and the plan number.
(2) Funding percentage--(i) Single-employer plans. For single-
employer plans, a statement as to whether the plan's funding target
attainment percentage (as defined in section 303(d)(2) of the Act) for
the notice year, and for each of the two preceding plan years, is at
least 100 percent (and, if not, the actual percentages).
(ii) Multiemployer plans. For multiemployer plans, a statement as
to whether the plan's funded percentage (as defined in section 305(i)
of the Act) for the notice year, and for each of the two preceding plan
years, is at least 100
[[Page 5646]]
percent (and, if not, the actual percentages).
(3) Assets and liabilities--(i) Single-employer plans. For single-
employer plans--
(A) A statement of the total assets (separately stating the
prefunding balance and the funding standard carryover balance) and
liabilities of the plan, determined in the same manner as under section
303 of the Act, as of the valuation date of the notice year and for
each of the two preceding plan years, as reported in the annual report
filed under section 104 of the Act for each such preceding plan year,
and
(B) A statement of the value of the plan's assets and liabilities
determined as of the last day of the notice year. For purposes of this
statement, the value of the plan's assets is the fair market value of
plan assets. Plan liabilities are equal to the present value of
benefits accrued through the last day of the notice year determined in
the same manner as liabilities are calculated under section 303 of the
Act (including actuarial assumptions and methods), but using the
interest rate under section 4006(a)(3)(E)(iv) of the Act in effect for
the last month of the notice year.
(ii) Multiemployer plans. For multiemployer plans--
(A) A statement of the value of the plan's assets (determined in
the same manner as under section 304(c)(2) of the Act) and liabilities
(determined in the same manner as under section 305(i)(8) of the Act,
using reasonable actuarial assumptions as required under section
304(c)(3) of the Act) as of the valuation date of the notice year and
each of the two preceding plan years, and
(B) A statement of the fair market value of plan assets as of the
last day of the notice year, and as of the last day of each of the two
preceding plan years as reported in the annual report filed under
section 104(a) of the Act for each such preceding plan year.
(iii) Contributions receivable. For purposes of determining the
fair market value of plan assets as of the last day of the notice year
under paragraphs (b)(3)(i)(B) and (b)(3)(ii)(B) of this section, the
plan administrator may, but is not required to, include contributions
made after the notice year and before the notice is furnished to
recipients, but only to the extent such contributions are treated for
funding purposes as having been made on account of the notice year
under section 303(g)(4) of the Act, in the case of a single-employer
plan, or under section 304(c)(8) of the Act, in the case of a
multiemployer plan.
(4) Demographic information. A statement of the number of
participants and beneficiaries who, as of the valuation date of the
notice year, are: Retired or separated from service and receiving
benefits; retired or separated from service and entitled to future
benefits (but currently not receiving benefits); or active participants
under the plan. The statement shall indicate the number of participants
and beneficiaries in each category and the sum of all such participants
and beneficiaries. The terms ``active'' and ``retired or separated''
shall have the same meaning given to those terms in instructions to the
annual report filed under section 104(a) of the Act.
(5) Funding policy. A statement setting forth--
(i) The funding policy of the plan;
(ii) The asset allocation of investments under the plan (expressed
as percentages of total assets) as of the end of the notice year; and
(iii) A general description of any investment policy of the plan as
it relates to the funding policy in paragraph (b)(5)(i) of this section
and the asset allocation of investments under paragraph (b)(5)(ii) of
this section.
(6) Endangered, critical, or critical and declining status. In the
case of a multiemployer plan, a statement whether the plan was in
endangered, critical, or critical and declining status under section
305 of the Act for the notice year and, if so--
(i) A statement describing how a person may obtain a copy of the
plan's funding improvement plan or rehabilitation plan, as appropriate,
adopted under section 305 of the Act and the actuarial and financial
data that demonstrate any action taken by the plan toward fiscal
improvement;
(ii) A summary of the plan's funding improvement plan or
rehabilitation plan, including any update or modification of such
funding improvement or rehabilitation plan adopted under section 305 of
the Act during the notice year; and
(iii) In the case of a multiemployer plan in critical and declining
status:
(A) The projected date of insolvency;
(B) A clear statement that such insolvency may result in benefit
reductions; and
(C) A statement describing whether the plan sponsor has taken
legally permitted actions to prevent insolvency.
(7) Events having a material effect on liabilities or assets.
Subject to paragraph (g) of this section, in the case of any plan
amendment, scheduled benefit increase or reduction, or other known
event taking effect in the current plan year and having a material
effect on plan liabilities or assets for the year, an explanation of
the amendment, scheduled benefit increase or reduction, or event, and a
projection to the end of such plan year of the effect of the amendment,
scheduled benefit increase or reduction, or event on plan liabilities.
(8) Rules on termination or insolvency--(i) Single-employer plans.
In the case of a single-employer plan, a summary of the rules governing
termination of single-employer plans under subtitle C of title IV of
the Act.
(ii) Multiemployer plans. In the case of a multiemployer plan, a
summary of the rules governing insolvency, including the limitations on
benefit payments.
(9) PBGC guarantees. A general description of the benefits under
the plan which are eligible to be guaranteed by the Pension Benefit
Guaranty Corporation, along with an explanation of the limitations on
the guarantee and the circumstances under which such limitations apply.
(10) Annual report information. A statement that a person entitled
to notice under paragraph (f) of this section may obtain a copy of the
annual report of the plan filed under section 104(a) of the Act upon
request, through the Internet Web site of the Department of Labor, or
through any Intranet Web site maintained by the applicable plan sponsor
(or plan administrator on behalf of the plan sponsor).
(11) Information disclosed to PBGC. In the case of a single-
employer plan, if applicable, a statement that the contributing sponsor
of the plan or a member of the contributing sponsor's controlled group
was required to provide information under section 4010 of the Act for
the information year ending in the notice year (see 29 CFR 4010.5).
(12) Additional information. Any additional information that the
plan administrator elects to include, provided that such information is
necessary or helpful to understanding the mandatory information in the
notice, or is otherwise permitted by law.
(c) Style and format of notice. Funding notices shall be written in
a manner that is consistent with the style and format requirements of
Sec. 2520.102-2 of this chapter.
(d) When to furnish notice. (1) Except as provided in paragraph
(d)(2) of this section, a funding notice shall be provided not later
than 120 days after the end of the notice year.
(2) In the case of a small plan, a funding notice shall be provided
not later than the earlier of the date on which the annual report is
filed under section 104(a) of the Act or the latest date the annual
report must be filed under that section (including extensions). For
this purpose, a single-
[[Page 5647]]
employer plan is a small plan if it meets the exception in section
303(g)(2)(B) of the Act, and a multiemployer plan is a small plan if it
had 100 or fewer participants on each day during the plan year
preceding the notice year.
(e) Manner of furnishing notice. (1) [Reserved.]
(2) A funding notice must be furnished to the Pension Benefit
Guaranty Corporation in a manner consistent with the requirements of
part 4000 of title IV of the Act. The date that the notice is furnished
to the Pension Benefit Guaranty Corporation is determined consistent
with that part.
(f) Persons entitled to notice. Persons entitled to a funding
notice under this section are:
(1) Each participant covered under the plan on the last day of the
notice year;
(2) Each beneficiary receiving benefits under the plan on the last
day of the notice year;
(3) Each alternate payee under the plan on the last day of the
notice year;
(4) Each labor organization representing participants under the
plan on the last day of the notice year;
(5) In the case of a multiemployer plan, each employer that, as of
the last day of the notice year, is a party to the collective
bargaining agreement(s) pursuant to which the plan is maintained or who
otherwise may be subject to withdrawal liability pursuant to section
4203 of the Act; and
(6) The Pension Benefit Guaranty Corporation.
(g) Special rules and definitions for material effect disclosures.
(1) The term ``current plan year'' means the plan year after the notice
year. Thus, for example, if the notice year is January 1, 2017 through
December 31, 2017, then the current plan year would be January 1, 2018
through December 31, 2018.
(2) An event described in paragraph (b)(7) of this section is
recognized as ``taking effect'' in the current plan year if the effect
of the event is taken into account for the first time for funding under
section 430 or 431 of the Internal Revenue Code, as applicable, in such
year.
(3) An event described in paragraph (b)(7) of this section has a
``material effect'' if it results, or is projected to result, in an
increase or decrease of five percent or more in the value of assets or
liabilities from the valuation date of the notice year. For this
measurement, calculate assets and liabilities in the same manner as
under paragraph (b)(2) of this section.
(4) An event described in paragraph (b)(7) of this section has a
``material effect'' if, in the judgment of the plan's enrolled actuary,
the effect of the event is considered material for purposes of the
plan's funding status under section 430 or 431, as applicable, of the
Internal Revenue Code, without regard to paragraph (g)(3) of this
section.
(5) An event described in paragraph (b)(7) of this section is
``known'' only if it is known by the plan administrator prior to 120
days before the due date of the notice. Thus, if an event otherwise
described in paragraph (b)(7) first becomes known to a plan
administrator 120 days or less before the due date of a notice, the
plan administrator is not required to explain, or project the effect
of, the event in that notice.
(6) The term ``other known event'' includes, but is not limited to,
an extension of coverage under the existing terms of the plan to a new
group of employees; a plan merger, consolidation, or spinoff pursuant
to regulations under section 414(l) of the Internal Revenue Code; or, a
shutdown of any facility, plant, store, or such other similar corporate
event that creates immediate eligibility for benefits that would not
otherwise be immediately payable for participants separating from
service. The term does not include market fluctuations.
(7) With respect to events described in paragraph (g)(4) of this
section, the plan administrator may, instead of projecting the effect
on plan liabilities to the end of the current plan year, include an
explanation why the event is considered material by the enrolled
actuary.
(8)
Example. The following example illustrates the special rules
and definitions of paragraph (g) of this section: Plan Y is a
single-employer calendar year plan. Company X, the sponsor of Plan
Y, adopts an amendment on June 1, 2017, offering a subsidized early
retirement benefit to participants age 50 or older who retire on or
after September 1, 2017 and before March 1, 2018. The amendment
increases the liabilities of Plan Y by an amount greater than 5% of
the value of Plan Y's liabilities on January 1, 2017. Company X does
not make an election under Code section 412(d)(2) to accelerate
recognition of the event for funding. The amendment is taken into
account for the first time under section 430 of the Code as of the
January 1, 2018 valuation date. Therefore, the amendment is
recognized as taking effect under the final rule in 2018. Since the
amendment adopted on June 1, 2017, is known more than 120 days prior
to the April 30, 2018 due date of the 2017 funding notice, the
amendment must be disclosed in the 2017 funding notice under
paragraph (b)(7) of the final regulations as a material effect event
taking effect in 2018 (i.e., the current plan year).
(h) Model notices. (1) The appendices to this section contain a
model notice for single-employer plans and a model notice for
multiemployer plans. These models are intended to assist plan
administrators in discharging their notice obligations under this
section. Use of a model notice is not mandatory. However, subject to
paragraph (h)(2) of this section, use of a model notice will be deemed
to satisfy the requirements of paragraphs (b)(1) through (b)(11) and
paragraph (c) of this section.
(2) To the extent a plan administrator elects to include in a model
notice information described in paragraph (b)(12) of this section, such
additional information must be consistent with the style and format
requirements in paragraph (c) of this section.
(i) Notice year. For purposes of this section, the term ``notice
year'' means the plan year to which the notice relates. For example,
for a calendar year plan that must furnish its 2010 funding notice no
later than the 120th day of 2011, the ``notice year'' is the 2010 plan
year.
(j) Alternative method of compliance for furnishing notice to PBGC
for certain single-employer plans. Notwithstanding any other provision
of this section, the plan administrator of a single-employer plan is
not required to furnish a notice to the Pension Benefit Guaranty
Corporation annually if, based on the data described in paragraph
(b)(3)(i)(A) of this section for the notice year, plan liabilities do
not exceed total plan assets by more than $50 million, provided that
the plan administrator furnishes the latest available funding notice to
the Pension Benefit Guaranty Corporation within 30 days of a written
request.
(k) Alternative method of compliance for multiemployer plans
terminated by mass withdrawal. (1) Notwithstanding any other provision
of this section, for plan years beginning after the date specified in
section 4041A(b)(2) of the Act, an alternative method of compliance is
available in the case of a multiemployer plan that terminates as a
result of the withdrawal of every employer from the plan or the
cessation of the obligation of all employers to contribute under the
plan, as described in section 4041A(a)(2) of the Act. Under this
alternative method, the plan administrator shall furnish annually to
each person described in paragraph (f)(1) through (3) of this section a
notice that complies with paragraphs (c), (d), (e), and (k)(2) of this
section.
(2) The notice includes:
(i) A statement of the fair market value of the plan's assets as of
the last day of the notice year, and as of the last day of each of the
two preceding plan years as reported in the annual report filed under
section 104(a) of the Act for each such preceding plan year;
[[Page 5648]]
(ii) A statement of the amount of benefit payments made during the
notice year and each of the two preceding plan years;
(iii) If a notice has not already been furnished pursuant to 29 CFR
4281.32, a statement that benefits may be reduced pursuant to section
4281(c) of the Act and a summary of the rules governing such
reductions;
(iv) A summary of the rules governing insolvency, including the
limitations on benefit payments, pursuant to paragraph (b)(8)(ii) of
this section;
(v) The information described in paragraphs (b)(1), (b)(9), and
(b)(10) of this section; and
(vi) Any additional information that the plan administrator elects
to include, subject to the requirements of paragraph (b)(12) of this
section.
(l) Alternative method of compliance for Internal Revenue Code
section 412(e)(3) plans. (1) Notwithstanding any other provision of
this section, an alternative method of compliance is available in the
case of an insurance contract plan described in section 412(e)(3) of
the Internal Revenue Code of 1986. Under this alternative method, the
plan administrator shall furnish annually to each person described in
paragraph (f) of this section a notice that complies with paragraphs
(c), (d), (e), and (l)(2) of this section.
(2) The notice includes:
(i) An explanation that the plan is funded exclusively by an
insurance contract or contracts, that such contract or contracts
provide for the benefit payments to participants and beneficiaries,
that such benefit payments are guaranteed by a licensed insurance
company or companies, and the name of the insurance company or
companies;
(ii) A statement whether, as of the last day of the notice year,
there were any delinquent premiums and, if so, the amount and date of
the delinquency and the effect on the plan and on participants and
beneficiaries in the event of a policy lapse;
(iii) The information described in paragraph (b)(1), (b)(9), and
(b)(10) of this section; and
(iv) Any additional information that the plan administrator elects
to include, provided that such information meets the standard in
paragraph (b)(12) of this section.
(m) CSEC plans. [Reserved].
Appendix A to Sec. 2520.101-5--Single-Employer Plan Model Annual
Funding Notice
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Appendix B to Sec. 2520.101-5--Multiemployer Plan Model Annual Funding
Notice
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0
4. Amend Sec. 2520.104-46 by revising paragraph (b)(1)(i)(B)
introductory text to read as follows:
Sec. 2520.104-46 Waiver of examination and report of an independent
qualified public accountant for employee benefit plans with fewer than
100 participants.
* * * * *
(b) * * *
(1) * * *
(i) * * *
(B) The summary annual report (described in Sec. 2520.104b-10) or,
in the case of plans subject to section 101(f) of the Act, the annual
funding notice (described in Sec. 2520.101-5), includes, in addition
to any other required information:
* * * * *
0
5. Amend Sec. 2520.104b-10, by revising paragraphs (g)(7) and (8) and
adding paragraph (g)(9) to read as follows:
Sec. 2520.104b-10 Summary Annual Report.
* * * * *
(g) * * *
(7) A dues financed welfare plan which meets the requirements of 29
CFR 2520.104-26;
(8) A dues financed pension plan which meets the requirements of 29
CFR 2520.104-27; and
(9) A plan to which title IV of the Act applies.
* * * * *
Signed this 23rd day of January, 2015.
Phyllis C. Borzi,
Assistant Secretary, Employee Benefits Security Administration, U.S.
Department of Labor.
[FR Doc. 2015-01884 Filed 1-30-15; 8:45 am]
BILLING CODE 4510-29-P