Under the Pension Protection Act of 2006, the Employee Retirement Income Security Act of 1974 (ERISA) was amended to provide that the date a plan sponsor files a bankruptcy petition will be treated as the termination date when a defined benefit plan is terminated in bankruptcy. The Pension Benefit Guaranty Corporation (PBGC) has finalized regulations implementing this provision and expects that, in many cases, the change in the law, as reflected in the final regulations, will reduce the amount of guaranteed benefits under the plan payable by the PBGC and the amount of benefits in priority category three in determining benefits payable under the PBGC insurance program. Some highlights of the effects of this final regulation are:

  • The benefit guaranteed by the PBGC will be based on the amounts of service and the amount of compensation as of the bankruptcy filing date.
  • The ERISA Title IV limit on the amount of guaranteed benefits will be determined as of the bankruptcy filing date.
  • Nonforfeitable benefits will be determined as of the filing date. Early retirement subsidies and disability benefits to which a participant becomes entitled to after the bankruptcy filing date will not be guaranteed. Individuals who receive their subsidized early retirement benefits to which they first become entitled after the bankruptcy filing date will continue to receive payments, but the amount of the benefits will be reduced to reflect that the subsidy or benefit is not guaranteed.
  • If the plan has more than one contributing employer and the employers did not file for bankruptcy on the same date, the PBGC will use facts and circumstances to determine the date of termination.  

These regulations are applicable to bankruptcy proceedings filed on or after September 16, 2006. (76 Fed. Reg. 34590)