2002-1 §4041 §4042 §4047 §4261 26 C.F.R. §1.412(c)(1)-3 [PBGC Letterhead] MEMORANDUM December 10, 2002 TO: Steven A. Kandarian Executive Director FROM: James J. Keig htley / s / General Counsel SUBJECT: Leg al author ity f or PBGC to terminat e a pensi on plan, th en immedia tely restore it, in order to provide more len ient fund ing req uiremen ts

You have asked us to analy ze whether PBGC has legal authority to terminate and then restore a pension plan in order to implement more lenient funding r equirements for the plan sponsor (assuming there are defe nsible grounds for termination in the first instance). I n our view, PBGC has no legal authority to take such an unprecedented course of action. Discussion Section 4047 of ERISA is the basis for PBGC’s authority to restore a terminated pension plan. It has two sentences. The first addresses a situation where a plan “is to be terminated” or “is in the process of being terminated.” I n such a case, PBGC is authorized to “cease” termination activities and restore the plan to its prior status if PBGC determines that the plan should not be terminated "as a result of such circumstance s as [PBGC] determines to be

1 The legislative history of section 4047 confirms this understanding. The 1974 Conference Report noted that this provision would allow PBGC to abandon termination procee dings “i f the emp loy er and pl an enjoy ed a fav orable r eversa l of busine ss trends , or if some other factor made termination no longer a dvisable.” H.R. Conf. Rep. No. 1280, 93d Cong., 2d Sess. 378, reprinte d in 1974 U .S. C ode Co ng. & Adm in. Ne ws 503 8, 515 7-58. This langua ge clearly a nticipates some change, occurring during termination proceedings or af ter termination, that would make termination “no longer” advisable. Tha t concept is inconsistent with a “pre- packaged” termination-restora tion. 2 releva nt." This sentenc e has no a pplicatio n to a plan as to whic h no termin ation ac tivity is occurring; there is nothing to “ce ase.” Even if it could somehow apply , such a “cessation” of termination activities would not help a plan sponsor seeking funding re lief because the special funding rules for restored plans, discussed below, do not a pply in such a case . See 26 C.F.R. § 1.412(c )(1)-3 (a)(1) (the re storation funding method ap plies “in t he case of cert ain plans that are or have been terminated and are later restored” by PBGC) (emphasis added). The second sentence of section 4047 addre sses the situation where a plan “has been terminat ed” unde r section 4041 or 40 42 of ERI SA. It empower s PBGC "i n any such cas e in which [PBGC] determines such action to be appropriate and consistent with its duties under [Title IV], to take such action as may be necessary to restore the plan to its pre-termination status." As an initi al matter , it seems c lear tha t Congre ss envisio ned that PB GC would e xercise th is au th or it y, a s i t d id in th e LT V c as e, on ly after a pension plan has already terminated and PBGC decides, for some reason, that the termination should be undone. 1 Thus, it seems doubtful that this provision grants PBGC authority to de termine, while a plan is still ongoing, that the plan should be terminated and in the next instant restored. Even if this obstacle could be overcome, we think that PBGC’s restora tion authority, as broad as it is, is not broad enough to justify restoration solely for the purpose of giving an

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PBGC formed an interdepartmental group in 1991 to ana lyze what gr ounds might justify restoration. Although no de finitive list was ever finalized, the group gener ally ag reed that the following grounds were among those that could warrant restoration: abuse of the insuranc e progra m, factu al mistake , analy tical mista ke, cha nged f inancia l circums tances, and cha nges in other circumstances such that the factors that led to termination no long er exist. Memorandum from David Lindeman to Diane B urkley et al. ( June 10, 1991). 3 employer a liber alized funding schedule. While section 4047 broadly authorizes restoration of a terminat ed plan w heneve r PBGC de termines that rest oration is "appro priate a nd consist ent" wit h its Title IV duties, we do not believe it would be appropria te and consistent with PBGC’s duties to use restoration in this manner. 2 It is Congress, and to a limited extent the I RS, that determine the minimum funding rules, no t PBGC. Tho se statuto ry rules, wh ich Cong ress has progre ssively tighten ed over t he y ears, de termine t he leng th of time o ver whic h an emplo ye r must fund its pension liabilities. Moreover, the funding rules authorize the I RS, under specified circumstances of busine ss hardsh ip, to gr ant an em ploy er a wa iver of th e funding require ments for the y ear in question. A termination-restoration transaction would run counter to that entire structur e and would ar rogate to PBGC the authority to deter mine minimu m funding require ments. The prov isions go verning the fundi ng of re stored pl ans wer e impleme nted in or der to address the unique problems that arise when a plan is restore d, not to authorize PBGC to grant funding relief. When a pension plan is restored, its funding r equirements are established under companion regulations that PBGC and the I RS adopted in 1990 in connection with the LTV restora tion. I n its reg ulation, th e IRS u sed its au thority to "ada pt the stan dards of section 4 12 to the extent n ecessa ry to provide rules fo r a spec ial gro up of plan s," and a uthorized PBGC to establish the funding schedule for restored pe nsion plans, subject to important restrictions. 55 Fed. Reg. 42,705 (Oct. 23, 1990). This reg ulation (codified at 26 C.F.R. § 1.412(c)(1)-3) cre ates

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Restoration creates unique problems with respect to plan funding . The plan's funding standard account is closed out at the time of termination, and must be reestablished a t restoration. 55 Fed. Reg. 42,704. A plan ordinarily is underfunded upon termination, and the sponsor makes no contributions during the time it is terminated, resulting in even gre ater underfunding. As the IRS noted, "[t]his underfunding will be significantly increased if the plan has been administered as a terminated plan for an extended period of time." 55 F ed. Reg. 42,705.

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The initial restoration amortization base must be fully amortized over not more than 30 y ears. § 1 .412(c) (1)-3( c)(2). PBGC may grant a deferr al of an a nnual pay ment only if it determines that deferral is in the best interests of the participa nts and the insurance program, and that the plan sponsor and its controlled group members are una ble to make the scheduled payments without experiencing temporary substantial business har dship. § 1.412(c)(1)-3(c)(4). PBGC may g rant no more than five deferrals during the RPSO period, and may g rant no more than three of these deferrals during the first ten yea rs. Id . No defe rral may extend the overall restora tion pay ment per iod bey ond 30 y ears. A ny o ther PBG C modifica tion of the RPSO must comply with the r equirem ents of th e regu lation, inc luding th e minimum pa yme nt requir ements 4 a "restoration method" that adapts the plan' s underlying funding method to the "special circumstances that exist when a plan is restored." 55 Fe d. Reg. 42,706. 3 The reg ulation c reates a special "initial restoration amortization base," which consists of the unfunded liabilities of the plan as of its restoration, and provides that this base must be amortized pursuant to a "restora tion payment schedule order," or "RPSO," issued by PBGC (PBGC's regulation is codified at 29 C.F.R. pt. 4047). In authorizing PBGC to establish the funding sc hedule for restored plans, the I RS stressed the importance Congress placed on the tighte ned contribution requirements implemented in 1974 and 1987, and emphasized that the funding requirements of sec tion 412 were not to be circumvented through issuance of a RPSO: It is also appropriate and esse ntial to the effective administration of section 412 that the Secretary prescribe certain limits with respect to the restoration funding schedule in order to ensure that the sc hedule is consiste nt with and in furtherance of the cong ressional purposes underly ing section 412. 55 Fed. R eg. 42, 706-07. A variety of restr ictions in t he reg ulation se rve to fu rther thi s goal. 4

and the 30-ye ar restriction. § 1.412(c)(1)-3(c)( 3). And PBGC must conduct a funding review of the plan at least annually , and PBGC's Executive Director must certify to the Board of Directors and to the IRS that it is in the best interest of the plan's participa nts and beneficiaries and the insurance program that the restore d plan not be reterminated. § 1.412(c)(1)-3(i). 5 Nor is there any thing in section 4047 (or elsewhere in ERI SA or the Code) that authorize s PBGC to pr ovide fin ancial a ssistance to ongoin g sing le-emplo ye r plans or to assist plans in a voiding t he norma l funding waiver a pplicatio n proces s. In deed, a lthough C ongre ss explicitly amended ERI SA to provide for financial assistance to multiemploy er plans in 1980 (ERISA § 4261, 29 U.S.C. § 1431), it never authorized such assistance to sing le-employer plans. In its 28 y ears of existence , PBGC has exercise d its secti on 4047 re storation authority only once. I n the LTV case, PBG C ordered restoration of three plans that had terminate d nine months ea rlier af ter L TV crea ted new “ follow-o n” pensio n plans tha t made up f or the be nefits not gua rantee d by PBGC. This follow-o n scheme , if not ch alleng ed, would have re sulted in PBGC’s e ffectiv ely subsidizing an ongo ing empl oye r’s pens ion prog ram. Fa ced with t his serious abuse of the pension insurance progr am, PBGC took the unprecedented step of restoring the previously terminated plans to LTV under sec tion 4047. Three ye ars of litigation ensued, with PBGC’ s restora tion deci sion fina lly v indicate d in the U. S. Supreme Court, followed by a nother th ree y ears of negotia tions. The funding schedule s that PBG C ultimatel y provided LTV took account of tha t extraordinary cha in of events. In no way was the LTV restora tion part o f some ter mination- restora tion pack age c ontrived to give L TV a bre ak on its minimum fun ding obli gations . In su m, while PB GC has bro ad discr etion to de termine w hether r estoring a plan wo uld

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The form er Gene ral Counse l reiter ated this c oncern, stating : "[PBGC]' s actions would be governed by an arbitrary and capricious/abuse of discretion standard, and we could easily run afoul of those standards if it were shown that we terminated ( and restored) simply to a llow the sponsor a way to e vade the normal minimum funding rules." 6 be appro priate a nd consist ent with its duties und er Title I V of ERI SA, we be lieve tha t a purposeful effort to achieve an objective not pe rmitted by the ag ency' s governing statute – granting funding relief – would be overturned as exceeding our statutory authority. I ndeed, PBGC's internal deliberations about what grounds mig ht justify restoration produce d strong concerns that the agency "could be criticized for using termination followed by a restoration with a RPSO as a way to dilute the minimum funding standar ds or to avoid the waiver process." Memorandum from David L indeman to Diane Burkley et al. (June 10, 1991) at 7. Although there may be situations in which PBGC "could defensibly take into account the availability of a RPSO in deciding w hether to restore," restoration "simply to permit a sponsor to evade the normal funding rules" would be indefensible. Id . 5