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Rule2022-14349

Special Financial Assistance by PBGC

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Published

July 8, 2022

Effective

August 8, 2022

Issuing agencies

Pension Benefit Guaranty Corporation

Abstract

On July 9, 2021, PBGC issued an interim final rule setting forth the requirements for special financial assistance applications and related restrictions and conditions pursuant to the American Rescue Plan Act of 2021. PBGC is making changes to its regulation in response to public comments received on the interim final rule, with an additional opportunity for comment solely on the condition requiring a phased recognition of special financial assistance in a plan's determination of withdrawal liability.

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<title>Federal Register, Volume 87 Issue 130 (Friday, July 8, 2022)</title>
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[Federal Register Volume 87, Number 130 (Friday, July 8, 2022)]
[Rules and Regulations]
[Pages 40968-41024]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-14349]

[[Page 40967]]

Vol. 87

Friday,

No. 130

July 8, 2022

Part III

Pension Benefit Guaranty Corporation

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29 CFR Part 4262

Special Financial Assistance by PBGC; Final Rule

Federal Register / Vol. 87 , No. 130 / Friday, July 8, 2022 / Rules
and Regulations

[[Page 40968]]

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PENSION BENEFIT GUARANTY CORPORATION

29 CFR Part 4262

RIN 1212-AB53

Special Financial Assistance by PBGC

AGENCY: Pension Benefit Guaranty Corporation.

ACTION: Final rule with request for comment.

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SUMMARY: On July 9, 2021, PBGC issued an interim final rule setting
forth the requirements for special financial assistance applications
and related restrictions and conditions pursuant to the American Rescue
Plan Act of 2021. PBGC is making changes to its regulation in response
to public comments received on the interim final rule, with an
additional opportunity for comment solely on the condition requiring a
phased recognition of special financial assistance in a plan's
determination of withdrawal liability.

DATES:
Effective date: This final rule is effective on August 8, 2022.
Applicability dates: This final rule is applicable to plans that
apply or have applied for special financial assistance.
For a plan that received special financial assistance under part
4262 in effect before August 8, 2022, Sec. 4262.14 will not apply
unless and until the plan files a supplemented application under this
part. Before the date that the plan files a supplemented application
under this part, the rules under Sec. 4262.14 in effect before August
8, 2022 apply to the plan.
For a plan that received special financial assistance under part
4262 in effect before August 8, 2022, Sec. 4262.16(g)(2) will not
apply unless the plan files a supplemented application under this final
rule. If the plan files a supplemented application, Sec. 4262.16(g)(2)
applies to the plan in determining withdrawal liability for withdrawals
occurring on or after the date the plan files the supplemented
application.
Comment date for withdrawal liability condition in Sec.
4262.16(g)(2): Comments, which should address only the withdrawal
liability condition in Sec. 4262.16(g)(2), must be received on or
before August 8, 2022 to be assured of consideration.

ADDRESSES: Comments on Sec. 4262.16(g)(2) of this final rule may be
submitted by any of the following methods:
<bullet> Federal eRulemaking Portal: <a href="https://www.regulations.gov">https://www.regulations.gov</a>.
Follow the online instructions for submitting comments.
<bullet> Email: <a href="/cdn-cgi/l/email-protection#a0d2c5c78ec3cfcdcdc5ced4d3e0d0c2c7c38ec7cfd6">[email&#160;protected]</a>.
<bullet> Mail or Hand Delivery: Regulatory Affairs Division, Office
of the General Counsel, Pension Benefit Guaranty Corporation, 1200 K
Street NW, Washington, DC 20005-4026.
Commenters are strongly encouraged to submit public comments
electronically. PBGC expects to have limited personnel available to
process public comments that are submitted on paper through mail. Until
further notice, any comments submitted on paper will be considered to
the extent practicable.
All submissions must include the agency's name (Pension Benefit
Guaranty Corporation, or PBGC) and title for this rulemaking (Special
Financial Assistance by PBGC) and the Regulation Identifier Number for
this rulemaking (RIN 1212-AB53). Comments received will be posted
without change to PBGC's website, <a href="http://www.pbgc.gov">www.pbgc.gov</a>, including any personal
information provided. Do not submit comments that include any
personally identifiable information or confidential business
information.
Copies of comments may also be obtained by writing to Disclosure
Division, Office of the General Counsel, Pension Benefit Guaranty
Corporation, 1200 K Street NW, Washington, DC 20005-4026 or calling
202-229-4040 during normal business hours. If you are deaf, hard of
hearing, or have a speech disability, please dial 7-1-1 to access
telecommunications relay services.

FOR FURTHER INFORMATION CONTACT: Daniel S. Liebman
(<a href="/cdn-cgi/l/email-protection#ed8184888f808c83c3898c83848881ad9d8f8a8ec38a829b">[email&#160;protected]</a>; 202-229-6510), Deputy General Counsel,
Program Law and Policy Department, Hilary Duke (<a href="/cdn-cgi/l/email-protection#2440514f410a4c4d4845565d64544643470a434b52">[email&#160;protected]</a>;
202-229-3839), Assistant General Counsel for Regulatory Affairs, or
Stephanie Cibinic (<a href="/cdn-cgi/l/email-protection#ff9c969d9691969cd18c8b9a8f979e91969abf8f9d989cd1989089">[email&#160;protected]</a>; 202-229-6352), Deputy
Assistant General Counsel for Regulatory Affairs, Office of the General
Counsel, Pension Benefit Guaranty Corporation, 1200 K Street NW,
Washington, DC 20005-4026. If you are deaf, hard of hearing, or have a
speech disability, please dial 7-1-1 to access telecommunications relay
services.

SUPPLEMENTARY INFORMATION:

Executive Summary

Purpose and Authority

On July 9, 2021, the Pension Benefit Guaranty Corporation (PBGC)
issued an interim final rule adding to its regulations a new part 4262
to implement the requirements under section 9704 of the American Rescue
Plan Act of 2021, ``Special Financial Assistance Program for
Financially Troubled Multiemployer Plans.'' \1\ This program enhances
retirement security for millions of Americans by providing eligible
multiemployer defined benefit pension plans with special financial
assistance (SFA) in the amounts required for the plans to pay all
benefits due during the period beginning on the date of payment of SFA
through the plan year ending in 2051. In consultation with, and with
the approval of, PBGC's board of directors (Board of Directors or
Board), PBGC is making changes to part 4262 of its regulations in
response to public comments received on the interim final rule,
including changes to the methodology to calculate SFA, permissible
investments for SFA funds (SFA received and any earnings thereon), the
application of conditions on a plan that merges with a plan that
receives SFA, and the withdrawal liability conditions that apply to a
plan that receives SFA.\2\
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\1\ The rule was published in the Federal Register on July 12,
2021, at 86 FR 36598.
\2\ Under section 4002(a) of ERISA, PBGC is administered in
accordance with policies established by the Board of Directors,
which is made up of the Secretaries of the Department of Labor, the
Department of the Treasury, and the Department of Commerce.
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PBGC's legal authority for this rulemaking comes from section 4262
of the Employee Retirement Income Security Act of 1974 (ERISA) (Special
Financial Assistance by the Corporation), which requires PBGC to issue
regulations or guidance setting forth requirements for SFA
applications, permits PBGC to provide for how SFA and earnings thereon
are to be invested, and permits PBGC, in consultation with the
Secretary of the Treasury, to impose reasonable conditions by
regulation or other guidance on an eligible multiemployer plan that
receives SFA. PBGC's legal authority also comes from section 4002(b)(3)
of ERISA, which authorizes PBGC to issue regulations to carry out the
purposes of title IV of ERISA, and from section 4003(a) of ERISA, which
authorizes PBGC to conduct investigations and audits.

Major Provisions of the Regulatory Action

Part 4262 sets forth what information a plan is required to file to
demonstrate eligibility for SFA and the amount of SFA to be paid by
PBGC to the plan. The regulation identifies which plans will be given
priority to file applications before March 11, 2023, and provides for a
processing system to accommodate the filing and review of many
applications

[[Page 40969]]

in a limited amount of time. This part also establishes permissible
investments of SFA funds and other restrictions and conditions on plans
that receive SFA.
PBGC is making changes in this final rule that revise part 4262,
including changes to the SFA measurement date, the methodology to
calculate SFA, permissible investments of SFA funds, the application of
conditions on a plan that merges with a plan that receives SFA, and the
withdrawal liability conditions that apply to a plan that receives SFA.

Background

PBGC and the Multiemployer Insurance Program

PBGC administers two insurance programs for private-sector defined
benefit pension plans under title IV of ERISA: one for single-employer
defined benefit pension plans and one for multiemployer defined benefit
pensions plans (multiemployer plans). In general, a multiemployer plan
is a plan which is maintained pursuant to one or more collective
bargaining agreements involving two or more unrelated employers. The
multiemployer insurance program protects the benefits of approximately
10.9 million workers and retirees in approximately 1,400 plans. This
final rule deals with multiemployer plans.
The multiemployer insurance program provides PBGC with tools to
help plans that are insolvent or approaching insolvency to be able to
pay guaranteed benefits.\3\ This help is primarily in the form of
financial assistance loans under section 4261(a) of ERISA. Under that
provision, when a multiemployer plan becomes insolvent, PBGC provides
periodic financial assistance payments to the insolvent plan in amounts
that, together with existing plan assets and any other plan income, are
sufficient to pay guaranteed benefit amounts to participants and
beneficiaries. In general terms, a plan is insolvent if it cannot pay
benefits under the plan when due during the current plan year.
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\3\ Multiemployer plan guaranteed benefits are primarily
nonforfeitable benefits and the maximum guarantee is set by law
under section 4022A of ERISA.
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The Multiemployer Pension Reform Act of 2014 (MPRA) created
pathways under ERISA to enable certain distressed plans to avoid
insolvency. Plans that are in critical and declining status \4\ may
apply to the U.S. Department of the Treasury (Treasury Department) for
a suspension of benefits under section 305(e)(9) of ERISA, which
requires plans to show that the proposed suspension would enable them
to avoid insolvency. Without such a showing, the Treasury Department
cannot approve the application for a suspension of benefits. Generally,
under this process, plans may propose a reduction of benefits to no
less than 110 percent of PBGC's guaranteed benefit amount. A plan that
has taken all reasonable measures, including applying for a suspension
of benefits, may also request partition assistance from PBGC (under
section 4233 of ERISA). A partition allows the plan to transfer
responsibility for paying monthly guaranteed benefits for a portion of
the plan's participants and beneficiaries to a newly created successor
plan that receives financial assistance from PBGC. When a partition is
approved, the original plan has an ongoing obligation to pay and
preserve benefits for all participants at levels above PBGC's
guaranteed amounts. All plans approved for benefit suspensions under
MPRA as of March 11, 2021, certified--and Treasury confirmed through
review of plan applications--that the proposed suspensions (in
combination with any partition) would enable the plans to avoid
insolvency indefinitely, as set forth in the Treasury Department's
implementing regulations.
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\4\ Amultiemployer plan is incritical and declining status if
the plansatisfies the criteria for critical statusunder section
305(b)(2) of ERISA and is projectedto become insolvent within the
meaningof section 4245 during the current planyear or any of the 14
succeeding planyears (or 19succeeding plan years if theplan has a
ratio of inactive participantsto active participants thatexceeds 2
to 1 or if the funded percentage of theplan is less than 80
percent).
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MPRA also allows critical and declining plans to request financial
assistance from PBGC upon merging with another multiemployer plan
(``facilitated mergers'' under section 4231(e) of ERISA) if such
financial assistance is necessary for the multiemployer plan to become
or remain solvent. Financial assistance to the merged plan may promote
mergers with more viable plans and eliminate the need for benefit
reductions.
In recent years, Congress considered a range of proposals to
address the funding crisis in the multiemployer pension system,
including proposals to expand PBGC's partition authority, loan
programs, and broader reforms to stabilize multiemployer plans and
extend the solvency of PBGC's multiemployer insurance program. Many of
the prominent efforts to address issues facing the multiemployer
pension system included ideas to effectively reverse MPRA benefit
suspensions and provide for reinstatement of the suspended benefits. On
March 11, 2021, the President signed into law the American Rescue Plan
(ARP) Act of 2021 (Pub. L. 117-2), which amended title IV of ERISA to
address the immediate crisis facing severely underfunded multiemployer
plans and the solvency of PBGC, and to assist plans by providing funds
to reinstate suspended benefits.

American Rescue Plan Act of 2021--Special Financial Assistance Program
for Financially Troubled Multiemployer Plans

Section 4262 of ERISA creates a program to enhance retirement
security for millions of Americans by providing SFA to financially
troubled multiemployer plans. Under current conditions, the SFA program
is expected to assist about 200 financially troubled plans. The SFA
provided to these plans will forestall their insolvency for many years
into the future and includes funds to reinstate suspended monthly
benefits going forward, and for make-up payments to restore previously
suspended benefits. In addition, the SFA program improves the financial
outlook for PBGC's multiemployer insurance program.
Section 9704 of ARP amends section 4005 of ERISA to establish an
eighth fund for SFA from which PBGC will provide SFA to multiemployer
plans pursuant to section 4262 of ERISA. The eighth fund will be
credited with amounts from time to time as the Secretary of the
Treasury, in conjunction with the Director of PBGC, determines
appropriate, from the general fund of the Treasury Department.
Transfers from the general fund to the eighth fund cannot occur after
September 30, 2030.
Section 4262 of ERISA sets forth the provisions for SFA, including
which plans are eligible to apply, the cutoff date for applications,
rules relating to actuarial assumptions and PBGC's determinations on
applications, restrictions on the use of SFA, and that certain plans
with suspended benefits \5\ must reinstate those benefits prospectively
and provide make-up payments to restore previously suspended benefits.
Unlike the financial assistance provided under section 4261 of ERISA,
which is in the form of a loan, a plan receiving SFA under section 4262
has no obligation to repay SFA.
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\5\ Plans with suspended benefits pursuant to section 305(e)(9)
or 4245(a) of ERISA.
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Section 4262 of ERISA requires PBGC to prescribe in regulations or
other guidance the requirements for SFA applications, including an
alternate application for plans with an approved

[[Page 40970]]

partition under section 4233 of ERISA. In addition, PBGC may prioritize
applications during the first 2 years after March 11, 2021, prescribe
how SFA funds are to be invested, and impose reasonable conditions on
plans that receive SFA.
Although PBGC's rulemakings generally involve coordination and
consultation with two other agencies that have jurisdiction over
pension plans (the Treasury Department and the U.S. Department of Labor
(Department of Labor or Department)), section 4262 of ERISA
specifically provides for coordination and consultation with the
Treasury Department, particularly on SFA applications involving a
plan's reinstatement of benefits suspended under section 305(e)(9) of
ERISA.\6\ The statute also provides for consultation with the Treasury
Department with respect to a plan that proposes in its application to
change certain assumptions, with respect to a plan that files an
application under PBGC regulations or guidance prioritizing certain
applications, and on the conditions imposed on plans that receive
SFA.\7\ This final rule is a result of that coordination and
consultation, which will continue during the SFA program's operation as
plans apply for SFA.
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\6\ See section 4262(n) of ERISA.
\7\ See sections 4262(m) and 4262(n) of ERISA.
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Interim Final Rule

On July 9, 2021, PBGC issued an interim final rule on Special
Financial Assistance by PBGC. Before the interim final rule was issued,
PBGC held listening sessions with interested parties at their request.
Representatives of PBGC's Board of Directors (the Secretaries of the
Department of Labor, the Treasury Department, and the Department of
Commerce) also participated in these listening sessions. Most of the
requesters provided letters or agendas outlining their concerns. In
addition, other interested parties sent PBGC letters communicating
their views. PBGC considered the views and concerns expressed, which
helped to inform the interim final rule.
PBGC provided a 30-day comment period \8\ for the interim final
rule and received over 100 comment letters from multiemployer plans and
associations representing multiemployer plans, contributing employers
and associations representing employers, labor organizations, actuarial
consulting firms and practitioners, financial services firms, other
plan professionals, participants, members of Congress, and other
individuals. The comments, PBGC's responses to the comments, and a
summary of changes made to the interim final rule are discussed in the
next section.
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\8\ PBGC considered comments received up to 1 week after the 30-
day comment period as timely received during the comment period.
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Section-by-Section Discussion of Public Comments

Overview and Purpose

The final rule amends part 4262, including changes from the interim
final rule regarding the SFA measurement date, the determination of
eligibility and the amount ofSFA (including interest rate assumptions
and the calculation of SFA for plans with an approved MPRA benefit
suspension as of March 11, 2021), the content of an application for
SFA, the process of applying, PBGC's review of applications,and
restrictions (including permissible investment of SFA funds) and
conditions on plans receiving SFA. The final rule also makes other
clarifying and editorial changes to part 4262.
In this document, PBGC is providing for a 30-day comment period
solely on the condition requiring a phased recognition of SFA in a
plan's determination of withdrawal liability in Sec. 4262.16(g)(2),
because it is an area of complexity that may benefit from additional
public comment. This will provide an opportunity for additional public
comment on the condition and will allow PBGC to assess the
effectiveness of this withdrawal liability condition, consider
adjustments or changes, and determine whether more clarification is
needed regarding the condition or the mechanics of implementation. To
the extent PBGC determines that adjustments or changes to this
withdrawal liability condition are appropriate and authorized, or that
further clarification is needed, PBGC may revise the condition
accordingly.
Broadly, PBGC is interested in hearing from commenters about
whether the condition requiring a phased recognition of SFA in a plan's
determination of withdrawal liability strikes the correct balance among
stakeholders, or if a different condition might work better.
Additionally, PBGC is interested in hearing from stakeholders about
what the expected impact of such a condition is likely to be, and
whether additional clarification or guidance would be useful.
PBGC also requests comments about whether the phased recognition of
SFA, which reflects projected rather than actual market earnings and
losses, expenses, and benefit payments, strikes the correct balance. If
commenters disagree with this condition, PBGC is interested in comments
that articulate the rationale supporting such disagreement. PBGC
requests comments on whether the determination of the timeline under
the final rule appropriately balances the interests of various
stakeholders, or whether a shorter (or longer) phase-in period might
protect the financial security of plan participants and beneficiaries
without placing an undue burden on withdrawing employers. PBGC is also
interested in comments about a partial phase-in condition, including
how such a condition might work, and whether a partial phase-in
condition has any benefits or drawbacks as compared to the phase-in
condition in this rule. Finally, should there be a different phase-in
rule for plans that will receive a large amount of SFA compared to
their non-SFA assets than for plans that will receive a relatively
small amount of SFA compared to their non-SFA assets (so that the SFA
account is projected to be exhausted after a relatively short period)?

Definitions--SFA Measurement Date

The SFA measurement date used in calculating the amount of SFA
under Sec. 4262.4 was defined in Sec. 4262.2 of the interim final
rule as the last day of the calendar quarter immediately preceding the
date the plan's application was filed. This date was established by the
filing of the plan's initial application for SFA.
A few commenters raised general concerns about the uncertainty of
the plan's SFA measurement date and having to change the SFA
measurement date immediately after the end of the calendar quarter
because of PBGC's metering system described in Sec. 4262.10. One of
the commenters recommended that PBGC consider adjusting the SFA
measurement date to allow plans intending to file, but unable to file
during a temporary closure of the filing window, to use the plan's
original intended SFA measurement date. A suggestion was made to allow
plans to submit a notice of intent to file. Another commenter
recommended that non-priority group plans be given the option to freeze
the SFA measurement date as of the earliest date a plan in priority
group 6 could apply or the end of the calendar quarter before the date
PBGC begins to accept applications for non-priority group plans. The
commenters stated this would save plans the burden and expense of
having to re-do their applications if the applications cannot be filed
until the following calendar quarter.
PBGC understands that some commenters would like greater certainty

[[Page 40971]]

about when an initial application may be filed to establish the plan's
SFA measurement date. To address timing concerns related to preparing a
plan's application, in the final rule, PBGC is changing the definition
of the SFA measurement date in Sec. 4262.2 from ``the last day of the
calendar quarter immediately preceding the date the plan's application
was filed'' to ``the last day of the third calendar month immediately
preceding the date the plan's initial application for special financial
assistance was filed.'' For example, if the plan's initial application
was filed on March 15, 2023, its SFA measurement date would be December
31, 2022; if the plan's initial application was filed on July 1, 2023,
its SFA measurement date would be April 30, 2023.
In addition, based on a commenter suggestion, PBGC is adding a
provision in Sec. 4262.10 to provide a mechanism for plans to file a
``lock-in application.'' If a plan files a lock-in application, it will
be considered the plan's initial application for SFA, establishing the
filing date for a plan's initial application and the plan's base data
(SFA measurement date, census data, non-SFA interest rate assumption,
and SFA interest rate assumption). This provision is described in more
detail later in the preamble under the subheading Lock-in Application.

Eligible Multiemployer Plans

There are four types of multiemployer plans identified in section
4262(b)(1) of ERISA that are eligible to apply for SFA under Sec.
4262.3 of PBGC's regulation. This list is in section 4262(b)(1)(A)
through (D) of ERISA and consists of:
(1) A plan in critical and declining status (within the meaning of
section 305(b)(6) of ERISA) in any plan year beginning in 2020, 2021,
or 2022.
(2) A plan with a suspension of benefits approved under section
305(e)(9) of ERISA as of the date ARP became law (March 11, 2021).
(3) A plan certified to be in critical status (within the meaning
of section 305(b)(2) of ERISA) that has a modified funded percentage of
less than 40 percent and a ratio of active to inactive participants
which is less than 2 to 3, in any plan year beginning in 2020, 2021, or
2022.
(4) A plan that became in solvent \9\ for purposes of section 418E
of the Internal Revenue Code (the Code) after December 16, 2014 (the
date MPRA became law) and has remained insolvent and has not terminated
under section 4041A of ERISA as of March 11, 2021.
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\9\ A multiemployer plan is regarded as insolvent as of the
first day of the plan year in which it is projected to have
insufficient resources to pay all benefits under the plan when due
during the plan year.
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In its interim final rule, PBGC noted that a plan that terminated
by mass withdrawal in a plan year that ended before January 1, 2020, is
not eligible for SFA under section 4262(b)(1)(A) of ERISA and Sec.
4262.3(a)(1) (plans that are in critical and declining status in any
plan year beginning in 2020, 2021, or 2022). This is because the rules
under section 432 of the Code, for plans in endangered, critical, and
critical and declining status, do not apply to such a plan in any of
those plan years.\10\ The interim final rule provided as an example
that, if a plan that was in critical and declining status in 2019
terminated by mass withdrawal in that year, the plan would not be
eligible for SFA under Sec. 4262.3(a)(1) because it was not in
critical and declining status in 2020, 2021, or 2022. To provide
further clarification, PBGC notes that for the same reason, a plan that
terminated by mass withdrawal in a plan year beginning before 2020
cannot be eligible for SFA under section 4262(b)(1)(C) of ERISA or
under Sec. 4262.3(a)(3) (plans that are in critical status in any plan
year beginning in 2020, 2021, or 2022).
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\10\ Section 412(a)(1) of the Code requires a pension plan to
satisfy the minimum funding standard applicable to the plan for each
plan year. In the case of a multiemployer plan, section 412(a)(2)(C)
provides that participating employers must make contributions under
the plan for a plan year that, in the aggregate, are sufficient to
ensure that the plan does not have an accumulated funding deficiency
under section 431 as of the end of the plan year. Section 412(e)(4)
provides that the minimum funding rules under section 412 apply to a
multiemployer plan until the last day of the plan year in which a
plan terminates within the meaning of section 4041A(a)(2) of ERISA
(that is, termination by mass withdrawal or a cessation of the
obligation of all employers to contribute under the plan).
Accordingly, the rules of section 431 of the Code do not apply to
such a plan for periods after the plan year of termination.
The Internal Revenue Service (IRS) has informed PBGC that
section 432 of the Code, which provides rules for multiemployer
plans in endangered status or critical status, likewise does not
apply to a multiemployer plan for periods after the plan year of
termination within the meaning of section 4041A(a)(2) of ERISA. This
is consistent with section 301(c) of ERISA (over which the Secretary
of the Treasury has interpretive jurisdiction pursuant to section
101 of Reorganization Plan No. 4 of 1978 (5 U.S.C. App.)), which
provides that part 3 of title I of ERISA, including the minimum
funding rules parallel to sections 412, 431, and 432 of the Code,
applies until the last day of the plan year in which the plan
terminates within the meaning of section 4041A(a)(2) of ERISA.
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Two commenters stated that plans terminated by mass withdrawal
should be eligible to apply for SFA. In particular, one commenter
suggested that if a plan terminated by mass withdrawal, but is not
currently insolvent, it should be eligible to apply for SFA, arguing
that section 4262 of ERISA does not state that any plan terminated
before 2020 through mass withdrawal is not eligible for relief. Section
4262(b)(1) of ERISA provides a list of four types of plans that are
eligible to apply for SFA, and PBGC cannot extend eligibility for SFA
through its regulation to a plan that is not included in that list. As
noted above, a plan that is terminated by mass withdrawal in a plan
year beginning before 2020 does not meet the eligibility requirements
under section 4262(b)(1)(A) or (C) of ERISA or Sec. 4262.3(a)(1) or
(3).
Section 4262.3(c)(1) of the regulation provides that aplan that has
elected to be in critical status under section 305(b)(4) of ERISA, but
is not certified to be in critical status under section 305(b)(2), is
not an eligible multiemployer plan. In response to a commenter, PBGC is
further clarifying that a plan is an eligible multiemployer plan if it
is certified to be in critical status under section 305(b)(2) of ERISA
during the 2020, 2021, or 2022 plan years (and otherwise meets the
other criteria for an eligible critical status plan under Sec.
4262.3(a)(3)), regardless of whether the plan made an election under
section 305(b)(4) of ERISA to be in critical status in a previous year.
In addition, a commenter requested clarification as to how an
election under section 9701(a) of ARP affects SFA eligibility. Section
9701(a) of ARP permits a multiemployer plan sponsor to make an election
relating to the plan's status under section 432(b) of the Code and
section 305(b) of ERISA (section 432 status) for certain plan years. If
the plan sponsor makes the election under section 9701(a) of ARP for a
plan year, then, notwithstanding the actuarial certification of the
plan's status for the plan year, the plan will have the same status as
it had for the preceding plan year. IRS Notice 2021-57, 2021-44 IRB
706, refers to an election under section 9701(a)(1) of ARP as a
``freeze election,'' and a multiemployer plan sponsor may make a freeze
election for the first plan year beginning on or after March 1, 2020,
or the next succeeding plan year. That guidance also provides that if a
freeze election applies for a plan year, then the plan has an elected
section 432 status, which may be different than the plan's section 432
status as certified by the plan's actuary under section 432(b)(3) of
the Code for that plan year. Accordingly, if a plan is certified to be
in critical status (within the meaning of section 305(b)(2) of ERISA)
in any plan year beginning in 2020 through 2022 and meets the other
criteria for an

[[Page 40972]]

eligible critical status plan under Sec. 4262.3(a)(3), the plan would
be eligible to apply for SFA regardless of whether the plan has made a
freeze election.
To ensure uniformity for applications and clarify what data to use
to satisfy eligibility requirements for critical status plans under
section 4262(b)(1)(C) of ERISA, Sec. 4262.3(a)(3) and (c)(2) of the
final rule specify the data that is used for this purpose on the Form
5500 Schedule MB to determine the ``modified funded percentage,'' and
the data on either the Form 5500 or the Form 5500 Schedule MB to
determine the ratio of active to inactive participants.
Section 4262(b)(2) of ERISA defines ``modified funded percentage''
to mean the percentage equal to a fraction the numerator of which is
the current value of plan assets (as defined in section 3(26) of ERISA)
and the denominator of which is current liabilities (as defined in
section 431(c)(6)(D) of the Code).
The numerator for the plan's funded percentage under Sec.
4262.3(c)(2) is calculated using the current value of assets on line 2a
of Form 5500 Schedule MB,\11\ which is also required to be reported on
line 1l, column (a) of the Schedule H,\12\ and adding to it the current
value of withdrawal liability payments due to be received by the plan
on an accrual basis reflecting a reasonable allowance for amounts
considered uncollectible \13\ (if not already included in the current
value of net assets reported on line 2a). The value calculated for the
numerator is consistent with the meaning of current value of assets
under section 3(26) of ERISA.\14\ The current value of assets includes
total cash contributions due to be received on an accrual basis. One
commenter suggested that the inclusion of withdrawal liability
receivables in the asset value may cause some plans to be ineligible
and that, due to the uncertain nature of future withdrawal liability
payments, PBGC should consider excluding these payments from the
determination of the plan's eligibility for SFA. PBGC considered the
comment but is not making the suggested change. The inclusion of
withdrawal liability payments due to be received by the plan is
consistent with the meaning of current value of assets under section
3(26) of ERISA, and the provision, as drafted, recognizes the uncertain
nature of future withdrawal liability payments by providing for an
allowance for amounts of withdrawal liability considered uncollectible.
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\11\ All line references in this section are to the 2021 Form
5500 and schedules.
\12\ The 2021 Form 5500 instructions provide that, with certain
exceptions, assets reported on line 2a of Form 5500 Schedule MB
should be the same as reported on line 1l, (column (a)) of the
Schedule H.
\13\ PBGC notes that Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC) 960, Plan Accounting--
Defined Benefit Pension Plans 960-310-25-3A states: ``A
multiemployer plan may also have a receivable for a withdrawing
employer's share of the plan's unfunded liability. The plan should
record the receivable, net of any allowance for an amount deemed
uncollectible, when entitlement has been determined.''
\14\ The withdrawal liability payments due to be received by the
plan are not included in the actuarial value of assets or the fair
market value of assets for purposes of sections 431 and 432 of the
Code and the corresponding sections 304 and 305 of ERISA.
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As explained earlier in this section of the preamble, section
4262(b)(1)(C) of ERISA requires, as one of the conditions of
eligibility, that critical status plans have a ratio of active to
inactive participants that is less than 2 to 3. The statute does not
specify what participant count to use. To fill in this gap, the interim
final rule referred to end-of-year participant counts on the Form 5500.
On the 2021 Form 5500, these are the number of participants identified
on line 6a(2) (for total number of active participants) and the sum of
lines 6b, 6c, and 6e (for inactive participants: retired or separated
participants receiving benefits, other retired or separated
participants entitled to future benefits, and deceased participants
whose beneficiaries are receiving or are entitled to receive benefits).
One commenter suggested that plans be permitted to use either the
participant counts from the Form 5500 or the participant counts
reported on the Form 5500 Schedule MB, which the commenter noted may be
different for a variety of reasons from the counts reported on the Form
5500. PBGC considered the comment and decided to permit plans to use
either the participant counts from the Form 5500, as described above,
or the beginning-of-the-year participant counts on the Form 5500
Schedule MB. On the Form 5500 Schedule MB, these are the number of
participants identified on line 2b(3)(c) (for total number of active
participants) and the sum of lines 2b(1) and 2b(2) (for inactive
participants: retired participants and beneficiaries receiving payment
and terminated vested participants).
In the final rule, PBGC makes changes to Sec. 4262.3(a)(4) to
clarify that an eligible insolvent plan must have become insolvent
after December 16, 2014, and remained insolvent and not terminated as
of March 11, 2021. In order to have remained insolvent as of March 11,
2021, the plan must have become insolvent before that date.

Summary of Changes Affecting the Amount of Special Financial Assistance

The calculation of the amount of SFA under section 4262 of ERISA
has multiple interacting and technical components, including factors
that the statute does not define and leaves to PBGC's reasonable
interpretation. Congress' instruction to PBGC under section 4262(c) of
ERISA to ``issue regulations or guidance setting forth requirements for
special financial assistance applications'' therefore requires PBGC, in
coordination with its Board agencies,\15\ to apply its expertise in,
and responsibility for, the administration of title IV of ERISA to
promulgate regulations and application instructions that comport with
the statutory requirements.
---------------------------------------------------------------------------

\15\ The Departments of Labor, the Treasury, and Commerce.
---------------------------------------------------------------------------

Many commenters argued that PBGC should exercise its discretion to
interpret various components of the calculation of the amount of SFA
differently than in the interim final rule. PBGC has considered these
comments and assessed whether any proposed changes to the interim final
rule would better achieve the statutory purpose evidenced by the text
of the statute, which is discussed later in the preamble. Following
extensive analysis, including projections of various proposed changes
on long-term plan solvency and funded status through 2051, as well as
implementing the statutory instruction that PBGC consult with the
Treasury Department regarding considerations specific to the
calculation of the amount of SFA for plans with approved suspensions of
benefits under section 305(e)(9) of ERISA as of March 11, 2021 (MPRA
plans), PBGC has decided to adjust some of the interpretive choices set
forth in the interim final rule on which PBGC received comments. Among
the adjustments in this final rule are the expected rate of return on
SFA assets to be used in determining the amount of SFA and the
calculation of the amount of SFA for MPRA plans.
1. Pay All Benefits Due Through 2051
Section 4262(j) of ERISA sets certain requirements for how much SFA
an eligible plan is to receive. Section 4262(j)(1) provides that
``[t]he amount of financial assistance provided to a multiemployer plan
eligible for financial assistance under this section shall be such
amount required for the plan to pay all benefits due during the period
beginning on the date of payment of the special financial assistance
payment . . . and ending on the last day

[[Page 40973]]

of the plan year ending in 2051, with no reduction in'' benefits.
Section 4262(j)(2) provides that ``the funding projections for purposes
of this section shall be performed on a deterministic basis.''
Many commenters argued that the mandatory language of section
4262(j)(1) of ERISA, which states that the amount of SFA ``shall'' be
such amount ``required for the plan to pay all benefits due'' through
the end of 2051, means that if an eligible plan does not receive SFA
sufficient to project solvency through 2051, taking into account the
amount that SFA assets can reasonably be expected to earn given the
statutory investment restrictions imposed by section 4262(l), then the
statute has not been implemented properly. Section 4262(j)(1) clearly
requires an eligible plan's SFA to be the amount necessary for the plan
to pay all benefits through 2051. In addition to the use of the term
``shall'' in section 4262(j)(1) itself, other provisions of section
4262 refer to section 4262(j) as ``required'' or a ``requirement.''
\16\
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\16\ Sections 4262(i)(1) and 4262(n)(1)(B) of ERISA.
---------------------------------------------------------------------------

2. Interest Rates for SFA and Non-SFA Assets
Plans will necessarily invest--and pay benefits out of--two
separate pools of assets between the date of SFA payment and the end of
2051. This is because section 4262(l) of ERISA requires plans to
``segregate'' SFA assets from ``other plan assets'' and circumscribes
investment of SFA assets. For a plan to project accurately how much SFA
is ``required'' for the plan ``to pay all benefits due'' through the
end of the plan year ending in 2051, it must project the SFA assets,
adjusted for earnings, needed to cover each year's benefit payments and
expenses until exhausted, and the non-SFA ``other plan assets,''
adjusted for contributions and earnings, needed to cover each year's
benefit payments and expenses after the SFA assets are exhausted
through the end of the SFA coverage period. Thus, an amount of SFA that
accounts for existing plan assets under section 4262(j), and the
segregation and separate investment of those assets from SFA assets
under section 4262(l), requires two asset projections: one for a plan's
SFA assets, and one for a plan's non-SFA assets.
To make these two projections, plans must make assumptions about
future events--including expected returns on investments--for each pool
of assets to calculate that pool's projected value. Differences in
expected investment returns for each pool of assets affect the amount
of SFA needed to meet projected liabilities through 2051. Using an
accurate projected rate of return for each pool is critical for
determining whether SFA paid now is in the amount projected to ``pay
all benefits due'' through the end of 2051, as required by section
4262(j)(1) of ERISA.
In the interim final rule, PBGC concluded that the same investment-
return assumption should be used to project both pools of assets. In
reaching this conclusion, PBGC gave substantial weight to section
4262(e)(2) of ERISA which, as noted in the preamble to the interim
final rule, requires a plan to use an interest rate that is based on
the rate used in the plan's most recent certification of plan status
before January 1, 2021, subject to an interest rate limit. PBGC also
gave substantial weight to section 4262(e)(4), which provides that if a
``prior assumption is unreasonable,'' a plan may propose to change that
assumption if it explains why the assumption ``is no longer
reasonable,'' except that the plan ``may not propose a change to the
interest rate otherwise required under this subsection.''
Many commenters raised concerns with PBGC's approach. If the
interest rate in section 4262(e) of ERISA (which, for many plans would
be close to 5.3 percent based on pension funding segment rates in
December 2021), were used to project the value of both SFA and non-SFA
assets, but SFA investments are limited to investment grade bonds under
section 4262(l) (which would likely result in an actual rate of return
close to 2 percent as of December 2021, assuming that PBGC permitted no
investments other than investment grade bonds and that current yields
on such bonds continued through 2051), the SFA amount would be
insufficient to meet the requirement of section 4262(j)(1) that it be
the ``amount required for the plan to pay all benefits due'' through
the end of 2051. There is thus, asserted the commenters, an
inconsistency between these two provisions of the statute. Providing a
separate investment-return assumption for SFA assets that reflects the
investment restrictions under section 4262(l) of ERISA would avoid this
inconsistency. PBGC recognizes that the interim final rule, without
giving more weight to the requirement of section 4262(j)(1), did not
sufficiently address this inconsistency. PBGC agrees with commenters
that this concern would be alleviated by giving more weight to the
language of section 4262(j) than was given in the interim final rule.
PBGC is therefore adjusting the rules set forth in the interim
final rule to account for the fact that section 4262(l) of ERISA
requires plans receiving SFA to have two separate pools of assets and
expressly contemplates that they will be invested separately--with
different expected rates of return. PBGC also believes that this
approach better harmonizes sections 4262(e), (j), and (l) with each
other. The statute must be read as a whole, and each section construed
in a manner that renders them compatible, not contradictory.
3. SFA for MPRA Plans
As described earlier in the preamble, the interim final rule
provided a method for eligible multiemployer plans to calculate the
amount of SFA based on the ``amount required for the plan to pay all
benefits due during the period beginning on the date of payment of the
special financial assistance payment . . . and ending on the last day
of the plan year ending in 2051 . . .'' under section 4262(j)(1) of
ERISA. The interim final rule provided only one way to calculate the
``amount required'' for both MPRA plans and plans that are not MPRA
plans.\17\ PBGC received several comments that raised issues with how
this calculation would work for MPRA plans. The commenters stated that
the final rule should treat MPRA plans differently when calculating the
amount of SFA.
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\17\ For purposes of determining the amount of SFA under Sec.
4262.4, the final rule defines a MPRA plan under Sec.
4262.4(a)(3)(ii) as a plan that is eligible for SFA under Sec.
4262.3(a)(2).
---------------------------------------------------------------------------

Commenters raised several issues that were unique to MPRA plans.
For example, as part of the MPRA process, all MPRA plans now eligible
for SFA were required statutorily to demonstrate that a proposed
benefit suspension would improve their funded status such that the plan
would avoid insolvency ``indefinitely.'' To accept SFA, MPRA plans must
permanently reinstate those suspended benefits. Under the interim final
rule, however, MPRA plans would not receive more SFA than an amount
necessary to avoid insolvency through 2051. Thus, commenters described
MPRA plan trustees as facing an unenviable choice between retaining the
existing benefit suspensions (enabling the plan to avoid insolvency
indefinitely at the cost of forgoing SFA) or applying for and receiving
SFA and reinstating the suspended benefits (potentially jeopardizing
the long-term financial health of the plan which MPRA was originally
intended to promote). Either choice would involve favoring one set of
participants over

[[Page 40974]]

another.\18\ A discussion of the comments on determining the amount of
SFA, including for plans that implemented MPRA benefit suspensions, is
presented later in this preamble under the subheading Comments on
Amount of Special Financial Assistance.
---------------------------------------------------------------------------

\18\ In July of 2021, the Department of Labor issued the
``Statement on PBGC `Special Financial Assistance' Interim Final
Rule for Eligible Multiemployer Plans.'' In that Statement, the
Department said that in its ``view, ARP's inclusion of plans that
suspended benefits under MPRA and the prohibition against a future
MPRA suspension for a plan receiving SFA reflects a clear
legislative objective to allow plan fiduciaries to restore benefits
that were previously suspended and to encourage all eligible plans
to apply for SFA without raising potential fiduciary liability
concerns about undoing current or precluding future MPRA
suspensions.'' The Department has advised PBGC that in its view the
approach of the final rule removes the risk that receipt of SFA will
harm the projected status of a MPRA plan at the end of 2051 more
than not applying for and receiving SFA. Accordingly, the Department
takes the view that a plan sponsor's decision to apply for SFA would
not violate section 404 of ERISA and the Department will bring no
enforcement action with respect to such decision. The implementation
of such decision, however, will be subject to the fiduciary and
other requirements of title I of ERISA.
---------------------------------------------------------------------------

Section 4262(n) of ERISA requires PBGC to coordinate with the
Secretary of Treasury in prescribing the application process for
eligible multiemployer plans, and the amount of SFA needed by a plan
that has suspended benefits under section 305(e)(9) of ERISA that takes
into account the projected funded status of the plan at the end of
2051, the payment of previously suspended benefits, and other relevant
factors. Following consideration of the issues raised by commenters,
and as determined after consultation with the Treasury Department, the
final rule provides a methodology for determining an amount of SFA for
MPRA plans that considers these factors. PBGC's consultation with the
Treasury Department and the methodology for MPRA plans are discussed
later in the preamble under the subheading Calculating the Amount of
SFA.
4. Permissible Investments
One explicit avenue under the statute that could assist plans in
being able to pay all benefits due through 2051 is through PBGC's
authority under section 4262(l) of ERISA to allow SFA assets to be
invested in types of investments other than investment grade bonds.
Such other investments, for example, could have both a higher potential
for reward and a higher risk than investment grade bonds, though the
higher risk of these investments may raise different concerns about a
plan's likelihood of paying all benefits due through 2051.
As noted in the interim final rule, PBGC shares the concerns
expressed by some commenters that overly conservative limits on
investment of SFA could adversely impact plans' financial health.
Permitting a wider range of investments could help plans be able to pay
all benefits due through 2051. But the language of section 4262(l) of
ERISA also evinces an intent that SFA investments be relatively safe.
Allowing SFA assets to be invested predominantly in return-seeking
assets risks plans not being able to pay all benefits due through 2051
given the potential for severely adverse market events. It could also
put taxpayer-funded assistance at significant risk of loss.
As discussed later in the preamble, in consideration of comments
received in response to PBGC's specific request, PBGC has amended in
the final rule the investment limitations set forth in the interim
final rule. Given PBGC's intention that the investment choices provided
under the interim final rule were always only a starting point for
discussion to find a more appropriate balance between certainty and
safety of investments on the one hand, and the opportunity for plans to
have flexibility to decide appropriate overall investment policies on
the other, PBGC examined how to adjust permissible investments in light
of the feedback from commenters. In the final rule, PBGC is allowing
plans that have received SFA to invest a percentage of SFA assets and
earnings thereon in certain ``return-seeking assets,'' with the
remainder invested in investment grade fixed income securities to help
ensure that risk of investment losses is mitigated.
While expanding the range of permissible investments to include a
percentage of return-seeking assets eases the path for the plans to be
able to pay all benefits due through 2051, PBGC's modeling showed that
it alone is unlikely to close the gap between the interest rate
assumption to calculate the amount of SFA and the expected rate of
return on investment of SFA. Thus, PBGC and its Board examined other
approaches that, in combination with greater flexibility in
investments, could fulfill the expectation of being able to pay all
benefits due through 2051 for all eligible plans. Alternatives are
described in the Regulatory Impact Analysis section later in this
preamble.
PBGC and its Board have considered the commenters' views and the
alternative approaches for assisting plans to be able to pay all
benefits due through 2051. As noted earlier in the preamble, the final
rule allows plans to use a separate, specified interest rate assumption
for projecting SFA assets that is more closely aligned with the rate of
return estimated to be achievable on the permitted investments of SFA
assets. PBGC determined that this change, together with the change in
permitted investments, was necessary to help enable eligible plans to
pay all benefits due through 2051, while limiting the risk that plans
would incur significant losses through the investment of SFA dollars.
This is supported by PBGC modeling and analysis. The changes to the
interest rate assumption and to permissible investments are discussed
later in this preamble under the subheadings Interest Rates for SFA and
Non-SFA Assets and Permissible Investments, respectively.

Comments on Amount of Special Financial Assistance

Under section 4262(a)(1) of ERISA, PBGC is to provide SFA to an
eligible multiemployer plan upon application. As discussed earlier in
the preamble, under section 4262(j)(1) the amount of SFA to be provided
is the ``amount required for the plan to pay all benefits due during
the period beginning on the date of payment of the special financial
assistance payment . . . and ending on the last day of the plan year
ending in 2051. . . .'' This is referred to in section 4262(i)(1) as
``the amount necessary as demonstrated by the plan sponsor.'' Section
4262.4(a) of the interim final rule implemented section 4262(j)(1) by
providing that the amount of SFA for a plan is the amount (if any), by
which the value of all plan obligations exceeds the value of all plan
resources, determined as of the plan's SFA measurement date and limited
to the SFA coverage period (the period ending on the last day of the
last plan year ending in 2051).
PBGC received numerous comments on this section of the rule, as
noted earlier in the preamble. Many of the commenters on the interim
final rule argued that PBGC's implementation of section 4262(j)(1) was
contrary to Congressional intent and the statutory direction for plans
to receive SFA in an amount required for the plan to pay all benefits
due through 2051.
Many commenters disagreed with PBGC that the statute should be
interpreted to require all plan assets and future income (together, a
plan's resources) to be considered when determining the amount of SFA.
Several commenters raised the concern that some critical status
plans that meet statutory eligibility

[[Page 40975]]

requirements and that may apply under Sec. 4262.3 will not receive SFA
or will receive only minimal SFA under Sec. 4262.4 of the interim
final rule. Commenters said this is because many of these plans will
have assets and other resources that equal or exceed the present value
of benefit obligations through 2051, although insolvency may be
projected after that date. Some commenters also noted that the outcome
of some eligible plans receiving zero or minimal SFA is inequitable and
will penalize plans whose trustees and associated bargaining parties
have been proactive under collective bargaining agreements or
rehabilitation plans to improve plan finances. Commenters suggested
this outcome would be contrary to Congress' intent in including these
plans as eligible for SFA. Without SFA, these critical status plans
will remain ``financially vulnerable'' according to the commenters.
One commenter described SFA as an important tool to address the
current crisis, but the commenter said that it does not address the
structural issues that created the need for SFA. Another commenter
expressed support for the interim final rule's implementation of the
amount of SFA. The commenter said to exclude current assets and future
contributions from the calculation of SFA would be irresponsible.
Some commenters suggested there is support in the statute for
alternatives to Sec. 4262.4(a) of the interim final rule. Suggested
alternatives include disregarding certain plan resources, such as
future contributions and future accruals, or carving out a portion of
current assets or future contributions to fund benefits after 2051.
Others suggested that the interim final rule's standard based on a
projection of sufficiency to the last day of the plan year ending in
2051 should be replaced with one consistent with MPRA's standard to
avoid insolvency indefinitely. One commenter suggested this can be
accomplished by interpreting section 4262(j)(1) of ERISA as providing
SFA in an amount required for a deterministic projection of plan assets
to be increasing during the last plan year ending in 2051. Under one
suggested approach, the present value of plan resources needed to
increase plan funding post-2051 would not be included in SFA-eligible
plan resources. Other commenters suggested disregarding all plan
resources in determining the amount of SFA.
Some MPRA plans commented that the receipt of SFA in the amount
provided for under the interim final rule will put their long-term
solvency projections at risk. They noted that the interim final rule
would result in these plans receiving less in SFA than the present
value of the benefits the plans would be required to restore. Some of
these commenters suggested excluding from the calculation of SFA that
portion of existing assets or future contributions to fund post-2051
benefit obligations. Others suggested providing an amount of SFA
sufficient to pay the reinstated benefits beyond the plan year ending
in 2051. Commenters said the rule should allow MPRA plans to receive
SFA and continue to meet the MPRA solvency standard.
As explained in the preamble to the interim final rule, the heart
of the matter is found in the requirement that SFA be ``the amount
necessary'' or ``required for the plan to pay all benefits due.'' The
statutory text provides not merely that the amount of SFA be what is
``required'' in the abstract to pay benefits due through the end of
2051, but specifies that SFA be in the amount required ``for the plan''
to pay all benefits due during this period. PBGC believes that
Congress' choice to modify the term ``required'' with ``for the plan''
indicates that the amount of SFA should take into account what
resources the plan already has to pay benefits through the end of 2051.
Moreover, since the statute requires deterministic projections to
be made through the end of the last plan year ending in 2051, the
resources to be considered must include plan assets and income. If
Congress had contemplated a different approach from accepted actuarial
practice, Congress would have explicitly excluded the resources that it
did not intend to be included in the determination of the amount of SFA
``required for the plan.'' Accordingly, the additional funding
necessary for the plan to pay benefits depends on what funding--plan
assets, contributions, investment returns, etc.--the plan already has
available to pay those benefits. To the extent that a plan has other
means available to pay benefits, it does not require or need SFA for
that purpose.
According to PBGC's modeling, not accounting for plan's non-SFA
assets would easily enable all eligible plans to pay all benefits due
through 2051, as SFA would cover the entirety of plans' projected
liabilities from ``benefits due'' over the next 3 decades. However,
PBGC's modeling also shows that this approach could potentially triple
the cost of the SFA program.
One exception added to the final rule in Sec. 4262.4(c)(3) permits
plans to exclude from plan resources certain contribution rate
increases agreed to on or after July 9, 2021. This change is being made
in response to comments PBGC received on assumptions guidance it issued
on July 9, 2021--specifically, on the acceptable changes to a plan's
contribution rate assumption. An example provided in the assumptions
guidance showed contribution rate increases negotiated before March 11,
2021, being included in the plan's contribution rate assumption.
Practitioners asked whether the example meant that contribution rate
increases negotiated after March 11, 2021, could be excluded. PBGC is
providing in the final rule that contribution rate increases agreed to
on or after July 9, 2021, the date PBGC's interim final rule and
initial assumptions guidance were issued, are excluded from employer
contributions paid and expected to be paid to the plan during the SFA
coverage period (and, if applicable, any benefit increases that result
from the contribution increases are excluded from plan obligations
under Sec. 4262.4(b)(1) and (c)(1)). PBGC does not expect that
excluding these negotiated contribution rate increases will result in
an increase in the amount of SFA that a plan would receive without the
new provision. This is because, without the provision, PBGC expects
that bargaining parties would wait until after the plan applies for SFA
to negotiate contribution rate increases (so as to exclude the
contribution increases from plan resources in the calculation of SFA).
However, this practice would be detrimental to the plan's financial
health. PBGC expects that the new provision will eliminate this reason
for delaying negotiation of contribution rate increases.
Except for excluding the contribution rate increases described
directly above, the final rule does not adopt the suggestions from
commenters to exclude some or all of a plan's resources. However, the
final rule changes the methodology for calculating the amount of SFA in
Sec. 4262.4, by specifying the interest rate assumption used to
project returns on SFA assets and by providing a methodology for
determining SFA for MPRA plans that are eligible for SFA under Sec.
4262.3(a)(2), and changes Sec. 4262.14 to allow more flexibility in
permissible investments of SFA. PBGC's modeling shows that these
provisions are expected to enable plans to pay benefits due through the
plan year ending in 2051 if future experience is in line with plan
assumptions. The provisions are discussed in detail in the preamble
under the subheadings Calculating the Amount of SFA, Interest Rates for
SFA and Non-SFA Assets, and Permissible Investments.

[[Page 40976]]

Calculating the Amount of SFA

Section 4262.4(a) of the interim final rule provided that the
amount of SFA for a plan is the amount (if any), subject to adjustment
for the date of payment as described in Sec. 4262.12, by which the
value of all plan obligations exceeds the value of all plan resources,
determined as of the plan's SFA measurement date and limited to the SFA
coverage period (the period ending on the last day of the last plan
year ending in 2051). Under the interim final rule, the value of plan
obligations was the sum of the present value of specified benefit
payments and administrative expenses. The value of plan resources was
the total of the fair market value of assets on the SFA measurement
date and the present value of future contributions, withdrawal
liability payments, and other payments expected to be made to the plan
(excluding the amount of financial assistance under section 4261 of
ERISA and the amount of SFA to be received by the plan) during the SFA
coverage period.
Two commenters stated that the present value approach to determine
the amount of SFA in the interim final rule does not properly take into
account the timing of cash flows. The commenters were concerned that
under the present value approach, plans with positive cash flow toward
the end of the projection period could receive an amount of SFA that
results in a projected plan asset value below zero before the end of
the SFA coverage period. However, the commenters acknowledged that
plans eligible for SFA are not expected to have a positive cash flow
during the projection period. In addition, as described in detail in
other sections of the preamble, PBGC received many comments related to
the interest rate assumption a plan was required to use under the
interim final rule to calculate the amount of SFA in the plan's
application. To address these comments and to meet the statutory
requirements of section 4262(j) of ERISA, in the final rule, PBGC is
changing the methodology that a plan must use to determine the amount
of SFA from a present value approach to a projection approach that
ensures that plan assets cannot go below zero before the end of the SFA
coverage period.
In addition, the final rule, in Sec. 4262.4(a)(1) and (2),
prescribes methodologies to determine SFA for plans that are not MPRA
plans and for plans that are MPRA plans. Section 4262(n) of ERISA
requires PBGC to coordinate with the Secretary of Treasury in
prescribing the application process for eligible multiemployer plans
and the amount of SFA needed by a plan that has suspended benefits
under section 305(e)(9) of ERISA. To determine the amount of SFA under
Sec. 4262.4, the final rule defines a MPRA plan under Sec.
4262.4(a)(3) as a plan that is eligible for SFA under Sec.
4262.3(a)(2) (a plan with an approved MPRA benefit suspension as of
March 11, 2021). Thus, a plan that is eligible for SFA under Sec.
4262.3(a)(1), (3), or (4) and has implemented a suspension of benefits
that has been approved under section 305(e)(9) of ERISA after March 11,
2021, is not eligible for the amount of SFA determined under Sec.
4262.4(a)(2) for a MPRA plan.
1. Calculation of SFA for MPRA Plans
Following consideration of the issues raised by commenters
described earlier in the preamble and of the harmonization of the
statutory text and structure, and after consultation with the Treasury
Department regarding the administration of the MPRA program, this final
rule provides a different methodology for the calculation of SFA for
MPRA plans than was provided in the interim final rule. Section
4262(n)(1)(B) of ERISA requires PBGC to consult with the Treasury
Department regarding the amount of SFA needed for a MPRA plan based on
the projected funded status of the plan at the end of 2051, the payment
of previously suspended benefits, and other relevant factors. These
factors are distinct from the generally applicable provision in section
4262(j)(1) of ERISA and reflect that Congress sought to ensure that
PBGC accounts for MPRA plans' unique circumstances.
As described earlier in the preamble, under the interim final rule,
MPRA plans faced the predicament where either accepting or not
accepting SFA could raise fiduciary concerns. In deciding whether to
apply for and accept SFA, MPRA plans must consider not only the
positive impact of reinstated benefits on participants and
beneficiaries currently receiving benefits, particularly current
retirees receiving benefits, but also consider whether the plan may put
the future benefits of active participants at risk if it cannot project
to avoid insolvency indefinitely.
Under the final rule, a MPRA plan can apply for the greatest of:
(1) the amount of SFA calculated for a plan that is not a MPRA plan;
(2) the lowest amount of SFA that is sufficient to ensure that the plan
will project rising assets at the end of the 2051 plan year; and (3) an
amount of SFA equal to the present value of reinstated benefits
(accounting for both make-up payments needed, as well as payments of
the reinstated portion of benefits through 2051, and any restoration of
benefits under 26 CFR 1.432(e)(9)-1(e)(3)). These additional SFA
calculations in (2) and (3), set forth in the final rule, accord with
requirements and considerations that are unique to MPRA plans.
Under the second calculation, the amount of SFA is the lowest
amount necessary for actuarial projections to show the plan's assets
are increasing as of the last day of the plan year ending in 2051. In
calculating the amount of SFA for plans that are not MPRA plans, the
statute requires that the amount of SFA ``shall be such amount required
for the plan to pay all benefits'' due through the end of the coverage
period.\19\ The statutory text in section 4262(n)(1)(B) of ERISA, which
applies specifically and only to MPRA plans, adds a further
consideration--the plan's ``projected funded status.'' The final rule
draws upon the demonstrations of ``projected funded status'' that
current MPRA plans made as part of the MPRA process, which
distinguishes them from other SFA-eligible plans. As discussed earlier,
all SFA-eligible MPRA plans demonstrated to the Treasury Department
that their proposed suspensions of benefits under MPRA would be
sufficient for the plan to avoid insolvency indefinitely. Thus, the
methodology under the final rule provides the amount of SFA projected
to be necessary to ensure that a MPRA plan's projected funded status at
the end of the plan year ending in 2051 continues to correspond to
avoiding insolvency indefinitely, which the plan demonstrated as a
requirement of suspending benefits under MPRA. In particular, MPRA
plans will be able to accept SFA without harming their projected funded
status at the end of the 2051 plan year.
---------------------------------------------------------------------------

\19\ 29 U.S.C. 1432(j)(1).
---------------------------------------------------------------------------

PBGC has consulted with the Treasury Department as required by
section 4262(n)(1)(B) of ERISA. The final rule aligns with the standard
for avoiding insolvency indefinitely in the Treasury Department's final
regulations on the suspension of benefits under MPRA. This requirement
generally is satisfied under the Treasury Department's MPRA regulations
if the value of plan assets is projected to increase at the end of the
relevant measurement period.\20\ This approach in the final rule, based
on the Treasury Department's MPRA regulations, takes into account
Congress' direction in section 4262(n)(1)(B) of ERISA that PBGC consult
with the Treasury

[[Page 40977]]

Department regarding the amount of SFA needed ``based on the projected
funded status of the plan as of the last day of the plan year ending in
2051.''
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\20\ 26 CFR 1.432(e)(9)-1(d)(5)(ii).
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Under the third calculation, the amount of SFA is the amount equal
to the present value of reinstated benefits, including make-up payments
and the reinstated portion of future benefits through 2051. Section
4262(n)(1)(B) of ERISA requires PBGC to consult with the Treasury
Department to consider the ``projected funded status'' of MPRA plans
and ``any other relevant factors'' and that ``the amount of assistance
. . . is sufficient to pay benefits as required in subsection (j)(1).''
The determination of the amount of SFA under section 4262(j)(1) of
ERISA must take into account ``the reinstatement of benefits required
under subsection (k).'' The ``benefits required under subsection (k)''
include both make-up payments to account for previously suspended past
benefits, i.e., those benefits described in section 4262(k)(2), and the
reinstated portion of future payments effective as of the month SFA is
paid to the plan, i.e., those benefits described in section 4262(k)(1).
Thus, the statute requires MPRA plans that receive SFA to reinstate
benefits and requires the amount of SFA to take into account the
``reinstatement of benefits'' by MPRA plans. This present value
approach does that by providing MPRA plans an amount of SFA that is
sufficient to pay reinstated benefits. The ``amount of assistance'' is
sufficient only if a MPRA plan takes into account the reinstatement of
suspended benefits under both section 4262(k)(1) and (k)(2) of ERISA.
The present value approach is consistent with Congress' direction that
PBGC should consult with the Treasury Department regarding the amount
of SFA needed ``to ensure the amount of assistance is sufficient . . .
to pay benefits as required in subsection (j)(1).'' \21\
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\21\ Section 4262(n)(1)(B) of ERISA.
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Following PBGC's consultation with the Treasury Department, this
final rule provides a MPRA plan the amount of SFA that is the greatest
of these three calculations, which take into account the enumerated
considerations the statute sets forth in section 4262(n)(1)(B).
2. Calculation of SFA for a Plan That Is Not a MPRA Plan
The amount of SFA for a plan that is a not a MPRA plan is
calculated under Sec. 4262.4(a)(1) of the final rule as the lowest
whole dollar amount (not less than $0) for which, as of the last day of
each plan year during the SFA coverage period, projected SFA assets and
projected non-SFA assets are both greater than or equal to zero.
The projected SFA assets for a plan are determined by projecting
SFA forward annually until fully exhausted, using the annual cash flows
specified in Sec. 4262.4(b) of the final rule, including benefits and
administrative expenses paid and expected to be paid by the plan during
the SFA coverage period (excluding benefit increases resulting from
certain contribution increases and excluding the amount owed to PBGC
under section 4261 of ERISA), and investment returns expected to be
earned on the SFA assets (calculated using the SFA interest rate
described in new Sec. 4262.4(e)(2)).
The projected non-SFA assets for a plan are determined by
projecting the fair market value of plan assets on the SFA measurement
date forward annually, using the annual cash flows specified in Sec.
4262.4(c) of the final rule, including: the benefits and administrative
expenses paid and expected to be paid by the plan during the SFA
coverage period (excluding benefit increases resulting from certain
contribution increases and excluding the amount owed to PBGC under
section 4261 of ERISA) after the projected SFA assets are fully
exhausted; employer contributions (excluding certain contribution rate
increases), withdrawal liability payments reflecting a reasonable
allowance for amounts considered uncollectible, and other payments
expected to be made to the plan (excluding the amount of financial
assistance under section 4261 of ERISA and SFA) during the SFA coverage
period; and investment returns expected to be earned on the non-SFA
assets (calculated using the non-SFA interest rate described in new
Sec. 4262.4(e)(1)).
Under Sec. 4262.4, the deterministic projections must be based on
recent participant census data. Section 4262.4(d) of the interim final
rule provided that participant census data must be as of the first day
of the plan year in which the plan's initial application is filed, or,
if the date on which the plan's initial application is filed is less
than 270 days after the beginning of the current plan year and the
actuarial valuation for the current plan year is not complete, the
projections may instead be based on the participant census data as of
the first day of the plan year preceding the year in which the plan's
initial application is filed. PBGC received one comment stating that
some plans may be unable to complete the actuarial valuation report
within 270 days due to reporting delays and plan complexity. The
commenter recommended extending the 270 days to 1 year to enable these
plans to apply without having to wait until the current valuation is
completed. PBGC considered this comment and has concluded that a
simpler rule will provide for data that are adequately up to date.
Under Sec. 4262.4(d), as revised by the final rule, projections must
be based on participant census data used to prepare the plan's
actuarial valuation report for the plan year that includes the plan's
SFA measurement date, or, if there is no such report for that plan
year, for the preceding plan year.
If a plan experiences a significant change in plan experience
between the date of the plan's participant census data used to prepare
the SFA projections and the plan's SFA filing date, PBGC's assumptions
guidance (issued on PBGC's website at <a href="http://www.pbgc.gov/guidance">www.pbgc.gov/guidance</a>) provides
guidelines on how to reflect that significant change. Plans may, but
are not required to, use the guidelines if they are reasonable for the
plan.

Interest Rates for SFA and Non-SFA Assets

As discussed earlier in the preamble, PBGC interprets the
requirement in section 4262(j)(1) of ERISA that SFA be provided in the
``amount required for the plan to pay all benefits due'' through the
end of 2051 to mean the amount required in addition to the plan's non-
SFA assets. This means that plans will pay benefits from two separate
pools of assets which, under the statute, must be segregated and
invested separately. Therefore, to calculate the amount of SFA
``necessary for the plan to pay all benefits due'' through the end of
2051, plans must perform separate calculations to project the value of
each pool of assets, each of which requires the use of an interest rate
assumption to reflect expected returns on that pool of assets.
Section 4262(e)(2)(A) of ERISA provides an interest rate that plans
must use as part of the determination of the amount of SFA under
section 4262(j)(1). This rate is based on the rate used in the plan's
most recently completed certification of plan status before January 1,
2021, subject to an interest rate limit. The interest rate limit
specified in section 4262(e)(3) is the rate that is 200 basis points
higher than the rate specified in section 303(h)(2)(C)(iii) of ERISA
(disregarding modifications made under clause (iv) of such section)
``for the month in which the plan's application for SFA is filed or the
3 preceding months.'' This provision places a ``cap'' on the interest
rate, which is any permissible rate for a

[[Page 40978]]

month during the 4-month period ending with the month in which the
plan's initial application was filed.
The interim final rule provided that a plan must use this interest
rate as an assumption for the expected rate of return for both the SFA
and the non-SFA assets. Under Sec. 4262.4(e)(1) of the interim final
rule, the ``assumed interest rate'' was the interest rate that is the
lesser of the rate used by the plan for funding standard account
projections in the plan's most recently completed certification of plan
status before January 1, 2021, or the rate that is 200 basis points
higher than the rate specified in section 303(h)(2)(C)(iii) of ERISA
(disregarding modifications made under clause (iv) of such section) for
any month selected by the plan in the 4-month period ending with the
month in which the plan's application was filed (or the month in which
the initial application was filed if there was more than one filing
date).
Many commenters discussed the difference between the interest rate
assumption used to calculate SFA under Sec. 4262.4(e)(1) of the
interim final rule, and the expected lower return on SFA assets
invested in permissible investments under Sec. 4262.14. These
commenters argued that the approach of applying a single interest rate
to each pool of plan assets would be at odds with the statutory
language in section 4262(j) of ERISA that the amount of SFA ``shall be
such amount required for the plan to pay all benefits due during the
period beginning on the date of payment of [SFA] and ending on the last
day of the plan year ending in 2051'' (emphasis added). As noted
earlier, commenters argued that, under the interim final rule approach,
many, if not most, SFA-eligible plans would not receive the SFA amount
``required'' to enable the plans to pay benefits through the 2051 plan
year. These commenters suggested that an interest rate assumption
required to be used to calculate the amount of SFA under section
4262(e) and the expected rate of return on permissible investments
under section 4262(l), which were limited in the interim final rule
primarily to investment grade bonds, would make it impossible for plans
to receive the amount of SFA required to pay benefits through 2051.
Some commenters illustrated this point by noting that their modeling
showed that their plans would run out of money before 2051, a
conclusion that PBGC has confirmed through its own additional, more
detailed modeling performed since issuance of the interim final rule.
Commenters argued that plans therefore should not be required to use
the rate in section 4262(e) to project both SFA and non-SFA assets,
given their different expected rates of return, and that allowing plans
to apply a different reasonable rate to SFA assets would be a
permissible exercise of PBGC's discretion that would better achieve the
statute's requirements.
In contrast, a few commenters stated that the interest rate set
forth in section 4262(e) of ERISA and the investment restrictions in
section 4262(l) are plain directives of the statute. These commenters
instead asked PBGC to reinterpret section 4262(j)(1) to change the
determination of the amount of SFA by, for example, disregarding
certain categories of plan resources (or all plan resources) in
determining the amount of SFA required by a plan.
Other commenters provided a number of suggestions regarding what
interest rate assumptions plans should be permitted to use for SFA and
non-SFA assets. The most common suggestion was that the interest rate
required under section 4262(e) of ERISA should apply only to non-SFA
assets and that PBGC should allow a separate rate to apply to SFA
assets. Many commenters contended that the statute did not specify an
interest rate for SFA assets, providing several arguments in support of
these contentions. Some pointed out that although section 4262(e)
requires plans to use the rate identified in that section in
calculating the amount of SFA, the statute does not specify how it is
to be used, nor require that such rate be used for all purposes.
Commenters also argued that using the rate under section 4262(e) to
project returns on SFA assets would not make sense given that section
4262(l) provides that SFA assets will be invested separately and likely
at lower rates of return than non-SFA assets, and because section
4262(j)(1) cannot be satisfied without SFA assets being projected--for
most plans--using an investment-return assumption lower than the
interest rate in section 4262(e). Thus, many commenters argued that
PBGC should allow plans to use a different interest rate for SFA assets
so that plans will receive sufficient SFA to pay full benefits through
2051, as required by section 4262(j)(1). These commenters argued that
PBGC has the authority and the mandate to harmonize the various
provisions of section 4262 in this manner.
Some commenters further argued that, because the 2020
certifications of plan status did not include an interest rate
assumption for projecting investment returns on SFA assets, the
interest rate should be a newly established assumption and reflect
expected returns on SFA assets. A few other commenters suggested that
PBGC should provide a rate equal to the IRS' third segment rate,
without adding the 200 basis points. One commenter requested allowing
plans to submit two calculations, with one calculation based on the
interest rate assumption in the interim final rule and a second
calculation using interest rate assumptions that would more reasonably
project actual returns for SFA and non-SFA assets. PBGC would then
provide the plan an amount of SFA to make up any discrepancy between
the two calculations.
In the interim final rule, PBGC explained that to determine
eligibility for SFA, for certifications of plan status completed after
December 31, 2020, section 4262(e)(1) of ERISA requires a plan to use
assumptions from its most recently completed certification of plan
status before January 1, 2021, unless such assumptions (excluding the
plan's interest rate) are unreasonable. To determine the amount of SFA,
the interim final rule noted that section 4262(e)(2) provides that a
plan must ``use the interest rate used by the plan in its most recently
completed certification of plan status before January 1, 2021, provided
that such interest rate may not exceed the interest rate limit.'' Under
section 4262(e)(4), if a plan determines that use of one or more prior
assumptions is unreasonable, the plan may propose to change such
assumption. Section 4262(e)(4) also provides that, notwithstanding this
language, plans cannot propose a change to the interest assumption. In
the interim final rule, PBGC interpreted these subsections of 4262(e),
read together, to mean that plans should use the section 4262(e)
interest rate to determine the amount of SFA, without a separate
interest rate assumption for projecting SFA assets. In interpreting
section 4262(e), PBGC, in the interim final rule, stated that it does
not have authority to provide a different rate or bifurcate the
statutorily mandated interest rate.
After further review of the statute, PBGC observes that section
4262(e) of ERISA is general in its language regarding the determination
of the amount of SFA and does not speak directly to the precise
question of the use of an interest rate to project returns on SFA
assets. Thus, PBGC has, after this further review of the statute,
additional consultation with its Board agencies, consideration of
comments, and extensive actuarial modeling, determined that an
alternative interpretation of section 4262(e) that addresses the
limitations imposed by the statute and PBGC on permissible investments,
is reasonable and more

[[Page 40979]]

likely to result in the SFA an eligible plan receives being sufficient
for the plan to pay full benefits through 2051, as provided under
section 4262(j)(1) of ERISA, than the interpretation adopted in the
interim final rule. This result would not be possible solely by the
increased flexibility in the investment of SFA assets under revised
Sec. 4262.14. Therefore, after considering section 4262(e) together
with sections 4262(j)(1) and 4262(l) of ERISA, and in order to
harmonize these provisions of the statute more effectively than in the
interim final rule, PBGC is providing for two interest rate assumptions
in the final rule.
PBGC has considered, but does not agree with, comments that argued
that PBGC has discretion to permit plans to not use in any manner the
interest rate identified in section 4262(e) of ERISA when calculating
the amount of SFA. The text of section 4262(e)(2) states that ``[i]n
determining the amount of special financial assistance in its
application, an eligible multiemployer plan shall use the interest rate
used by the plan in its most recently completed certification of plan
status before January 1, 2021, provided that such interest rate may not
exceed the interest rate limit'' (emphasis added). Because the statute
speaks directly to whether plans must use this rate, PBGC does not have
discretion to allow plans not to use the interest rate in section
4262(e)(2) at all. Although plans may be able to forgo using other
assumptions from their most recently completed certification of plan
status before January 1, 2021, if they demonstrate to PBGC that those
assumptions ``are no longer reasonable,'' section 4262(e)(4) makes
clear that plans cannot propose to change the requirement to use the
interest rate in section 4262(e)(2). This final rule therefore
maintains the requirement that plans use the section 4262(e) rate when
calculating the amount of SFA. Under the final rule, plans must use
this rate as the assumed rate of return on non-SFA plan assets.
PBGC has considered arguments from commenters that the statute does
not expressly speak to whether the section 4262(e) rate must also be
used as the assumed rate of return on SFA assets, which did not exist
at the time of a plan's most recent certification of plan status before
January 1, 2021, and which will be invested separately, and under
different statutory restrictions, from non-SFA assets. As explained
earlier in the preamble, the final rule maintains that at least one of
the components of this overall calculation must be projected using the
rate specified in section 4262(e)(2) of ERISA because of the statute's
instruction that plans ``shall'' use that rate in determining the
amount of SFA.\22\
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\22\ See section 4262(e)(2) of ERISA.
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However, after further statutory analysis and consideration of
comments, PBGC recognizes that the statute does not specify the pool of
assets for which that rate must be used as the assumed rate of return.
In light of this statutory silence, PBGC is exercising discretion to
make a reasonable choice, consistent with section 4262(j)(1), about the
pool of assets for which the interest rate assumption in section
4262(e)(2) shall be used. As discussed earlier in the preamble, PBGC
has interpreted the requirement in section 4262(j) that SFA shall be
the amount ``required for the plan'' to pay all benefits due through
the end of the plan year 2051 to mean that plans must consider existing
assets in calculation of the SFA amount. Plans receiving SFA will
therefore pay these benefits from two pools of assets: SFA assets and
non-SFA assets. Section 4262(l) expressly contemplates that the SFA
assets may have a different expected rate of return than non-SFA
assets. In addition, as many commenters noted, a mismatch between the
investment restrictions in section 4262(l) and the interest rate
identified in section 4262(e)(2) also supports the reasonableness of
allowing plans to apply a different and more realistic rate to SFA
assets, including to meet the requirements of section 4262(j)(1). Given
the investment restrictions under section 4262(l), if the section
4262(e)(2) interest rate assumption were required to be used in
projecting SFA assets, PBGC would not be providing the amount of SFA
reasonably projected to be ``required for the plan to pay all benefits
due'' through the plan year ending in 2051.
Requiring plans to use the section 4262(e) rate for projecting the
value of non-SFA assets, while providing for a different rate for
projecting the value of SFA assets, is a reasonable interpretation of
the statute that harmonizes sections 4262(e), (j), and (l).
Accordingly, to calculate the amount of SFA for a plan under Sec.
4262.4, the plan must use two interest rate assumptions: (1) the plan's
non-SFA interest rate used for calculating investment returns expected
to be earned on the plan's non-SFA assets, and (2) the plan's SFA
interest rate used for calculating the investment return expected to be
earned on the plan's SFA assets.
The first interest rate, defined in Sec. 4262.4(e)(1) of the final
rule, is the plan's ``non-SFA interest rate.'' This rate replaces the
``assumed interest rate'' under the interim final rule. The ``assumed
interest rate'' was defined as the interest rate that is the lesser of
the rate used by the plan for funding standard account projections in
the plan's most recently completed certification of plan status before
January 1, 2021, or the interest rate ``cap'' selected by the plan in
the 4-month period ending with the month in which the plan's
application was filed (or the month in which the initial application
was filed if there was more than one filing date). PBGC recognizes that
it is always to a plan's advantage to use the rate for the month in
which the rate is lowest. For simplicity, therefore, in the final rule
PBGC is revising Sec. 4262.4(e)(1)(ii) by specifying that the non-SFA
interest rate ``cap'' is the interest rate that is 200 basis points
higher than the rate specified in section 303(h)(2)(C)(iii) of ERISA
(disregarding modifications made under clause (iv) of such section) for
the month in which that rate is the lowest among the 4 calendar months
ending with the month in which the plan's initial application for
special financial assistance is filed, taking into account only rates
that have been issued by the Internal Revenue Service as of the day
that is the day before the date the plan's initial application is
filed.
The second interest rate, defined in Sec. 4262.4(e)(2) of the
final rule, is the plan's ``SFA interest rate.'' The SFA interest rate
is the lesser of the rate used by the plan for funding standard account
projections in the plan's most recently completed certification of plan
status before January 1, 2021, and an interest rate cap that is lower
than the non-SFA interest rate cap. This lower cap reflects the
restrictions on investment of SFA funds and the investment returns
plans can reasonably expect to earn on SFA funds.\23\ The SFA

[[Page 40980]]

interest rate cap is the interest rate that is 67 basis points higher
than the average of the rates specified in section 303(h)(2)(C)(i),
(ii), and (iii) of ERISA (disregarding modifications made under clause
(iv) of such section) for the month in which such average is the lowest
among the 4 calendar months ending with the month in which the plan's
initial application for special financial assistance is filed, taking
into account only rates that have been issued by the Internal Revenue
Service as of the day that is the day before the date the plan's
initial application is filed.
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\23\ PBGC determined that the average of the first and second
segment rates specified in sections 303(h)(2)(C)(i) and (ii) of
ERISA (disregarding modifications made under clause (iv) of such
section) is likely to reasonably represent the yield and therefore
the expected return at any point in time on the portion of the SFA
required to be invested in investment grade fixed income. As
discussed later in the preamble under the subheading Permissible
Investments, up to 33 percent of SFA may be invested in return-
seeking assets and the expected return on SFA assets is the weighted
average of the expected returns for the component parts. Using the
interest rate cap applicable to plan assets that are not subject to
an investment limitation (200 basis points above the third segment
rate) as a cap for return-seeking assets and an allocation of 33
percent of SFA to those assets, the cap on the SFA interest rate--
the weighted average of the caps for the component parts--is the
average of the three segment rates plus 67 basis points.
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Section 4262(f) of ERISA suggests that a plan may have multiple
filing dates by providing two application deadlines: One for initial
applications and one for revised applications. Until an application is
approved, there is no limit to the number of times that a plan sponsor
may file a revised application as long as the last revised application
is filed by the statutory deadline of December 31, 2026. Once PBGC has
accepted an application for processing, PBGC believes that it is in the
best interest of all parties to avoid the duplicative work and delays
that would result if a revised application were to use different
interest rate assumptions. To prevent multiple filings for purposes of
changing the interest rate assumptions, if a plan's application is
revised as provided under Sec. 4262.11, the non-SFA interest rate and
SFA interest rate used for any revised application must be the same as
the non-SFA interest rate and SFA interest rate required to be used for
the plan's initial application for SFA.

Calculating the Amount of SFA With Respect to Certain Events

Section 4262.4(f) of the regulation addresses the possibility that
a plan may implement certain changes to obtain more SFA than was
intended by section 4262 of ERISA. In these situations, the amount of
SFA that would apply to a plan is limited to the amount of SFA
determined as if the events described in Sec. 4262.4(f) had not
occurred. These events include mergers, transfers of assets or
liabilities (including spinoffs), certain increases in accrued or
projected benefits, and certain reductions in contribution rates. The
limitation applies to events that occur between July 9, 2021, and the
SFA measurement date. To accommodate the possibility of multiple
events, the limitation does not apply on an event-by-event basis but is
based on comparing the amount of SFA a plan applies for with the amount
of SFA a plan (or all plans in the case of a merger) would have
received had the events not occurred. PBGC included these provisions in
the interim final rule in consultation with the Treasury Department.
With respect to mergers, Sec. 4262.4(f)(1)(ii) of the regulation
provides that if two or more plans are merged, then the SFA is limited
so that it does not exceed the sum of the SFA that would have been
calculated for all of the plans involved in the merger had the plans
applied separately for SFA. Thus, a plan that would not have been
entitled to any SFA if not for a merger that occurs on or after July 9,
2021, cannot become entitled to SFA by merging with a plan that also
would not otherwise be entitled to any SFA. A plan eligible for SFA may
remain eligible after the merger; however, a plan may not increase the
amount of SFA to which it is entitled by merging with another plan or
plans on or after July 9, 2021.
PBGC considered two comments it received related to these
provisions and decided not to make any changes to Sec. 4262.4(f) in
the final rule. One commenter stated generally that PBGC should not
limit SFA or access to SFA because the protections already in place
under the Pension Protection Act of 2006, MPRA, and ARP are sufficient
to avoid abuse. A second commenter suggested that the amount of SFA
available to merged plans should not be limited to the amount each plan
would have been separately eligible to receive. The commenter argued
that PBGC does not have authority to make rules limiting SFA for two or
more plans that are merged, that a prohibition is not a reasonable
condition regarding diversion of contributions, and that the rule
denies needed assistance to plans that are facing insolvency.
PBGC disagrees with the commenter's assertion that PBGC does not
have authority to address possible abuse of the SFA program or to limit
SFA, in the case of a merger, to the amount each plan would have been
separately eligible to receive. As explained in the interim final rule,
section 4262(b)(1) of ERISA establishes criteria for eligibility of a
multiemployer plan for SFA, and section 4262(j) provides for
determining the amount of the SFA. It is appropriate for PBGC, with its
responsibility for carrying out the purposes of the title IV insurance
program,\24\ to impose conditions on plans receiving SFA designed to
ensure that plans do not receive more than the amount of SFA to which
they are entitled. As provided in the interim final rule, PBGC
concludes that, to achieve that end, it is reasonable not to give
effect to changes made to a plan's structure or terms on or after July
9, 2021, if such changes would either artificially inflate the amount
of SFA to which a plan is entitled or convert an ineligible plan into
an eligible plan.
---------------------------------------------------------------------------

\24\ PBGC's inherent authority under section 4002(b)(3) of ERISA
allows PBGC to adopt regulations to carry out the purposes of the
title IV insurance program.
---------------------------------------------------------------------------

Informing this conclusion, section 4262(e)(2)(B) of ERISA provides,
as a general rule, that the actuarial assumptions to be used by a plan
are the assumptions used in the plan's actuarial certification for the
most recently completed certification of plan status before January 1,
2021 (unless those assumptions are unreasonable), indicating that the
plan applying for SFA must have been in existence and had an actuarial
certification as to its status before January 1, 2021. The provisions
regarding interest rate assumptions under section 4262(e)(2)(A) are
specific to the plan in its most recent certification of plan status
completed before January 1, 2021, and, under section 4262(e)(4), those
assumptions may not be changed. A manipulation of those rates via a
merger would not be consistent with that prohibition. Although the
statute does not directly address plan mergers, in the case of merged
plans, each plan's assumptions from the most recently completed pre-
2021 certification of plan status must be maintained in order for
section 4262(e) to be given effect with respect to the plans that
merged. PBGC's rule fills the gap left in the statute for the
calculation of SFA for plans that have been involved in a merger
occurring on or after July 9, 2021.
In addition, section 4262(m)(1) of ERISA expressly authorizes PBGC,
in consultation with the Secretary of the Treasury, to impose
reasonable conditions ``on an eligible multiemployer plan that receives
special financial assistance'' relating to certain aspects of plan
terms or operations. Such conditions include those relating to the
diversion of contributions to and allocation of expenses to other
benefit plans, increases in future accrual rates, retroactive benefit
improvements, and reductions in employer contribution rates. PBGC's
authority to impose reasonable conditions under section 4262(m)(1) is
not limited to restrictions on a plan following its receipt of SFA.
PBGC is authorized to impose conditions on a plan that ``receives''
SFA. PBGC's authority is not limited to imposing conditions on a plan
that has received SFA. That understanding of

[[Page 40981]]

section 4262(m)(1) finds further support in section 4262(m)(2), which
restricts the conditions that PBGC can impose not only ``following
receipt of'' SFA, but also ``as a condition of'' SFA. That broad
prohibition would be unnecessary if PBGC's authority under section
4262(m)(1) were limited to imposing only post-receipt conditions.
The condition respecting mergers is consistent with PBGC's
authority under section 4262(m)(1) of ERISA to impose reasonable
conditions relating to the ``diversion of contributions to, and
allocation of expenses to, other benefit plans.'' When two or more
plans merge, each predecessor plan has diverted its contributions and
allocated its expenses to the merged plan and thereby to each other
merging plan. A merged plan, which combines assets and liabilities of
two or more plans, each with its own set of participants and
beneficiaries, to all of whom all the assets (and, thus, all the
contributions) must be available following the merger, is, in effect,
diverting contributions intended to benefit one set of participants
(the participants in the plan that received SFA) to another (the
participants in each other merging benefit plan).
Accordingly, under section 4262(m) of ERISA, in conjunction with
section 4002(b)(3), PBGC is authorized to impose reasonable conditions
that ensure that SFA is provided to plans in an amount that is not
artificially inflated by plan mergers. Conditions regarding events
other than mergers are discussed in the preamble of the interim final
rule and examples illustrating the provisions are included in Sec.
4262.4(f)(6).

Calculating the Amount of SFA for Plans That Applied for SFA Under the
Interim Final Rule

Pursuant to its authority under section 4262(c) of ERISA, PBGC in
the final rule adds new Sec. 4262.4(g) to provide guidance on the
requirements for SFA applications for plans that applied for SFA under
the interim final rule.
If a plan's application for SFA was approved under the regulation
as in effect before August 8, 2022 (meaning under the interim final
rule), the plan should look to the rules set forth under Sec.
4262.4(g)(1) for ``approved applications.'' Those rules provide that
the plan may supplement its application after SFA is paid under the
terms of the interim final rule. When a plan files a supplemented
application, the amendments in this final rule to permissible
investments in Sec. 4262.14 and to the withdrawal liability condition
in Sec. 4262.16(g)(2) become applicable upon the date the supplemented
application is filed even if the supplemented application is not
approved. A supplemented application may be filed even if a plan would
not receive additional SFA as the result of the filing. If the plan
chooses to supplement, the plan will file a supplemented application
with the changes and information specified in the SFA supplemented
application instructions on PBGC's website at <a href="http://www.pbgc.gov">www.pbgc.gov</a> to implement
the provisions of the final rule for determining the amount of the
plan's SFA, including the interest rate assumptions under Sec.
4262.4(e). A supplemented application, like a revised application, must
be filed by December 31, 2026, and in accordance with the processing
system (including priority groups) described in Sec. 4262.10. PBGC
must review a supplemented application within 120 days of the filing
date. The plan cannot change the plan's SFA measurement date, fair
market value of assets, or participant census data used in the plan's
application approved under the interim final rule. The plan also cannot
propose a change in assumptions, except to propose a change to the
plan's employer contribution assumption to exclude contribution rate
increases agreed to on or after July 9, 2021, as permitted under Sec.
4262.4(c)(3) (in which case, the plan must exclude any benefit
increases resulting from those contribution increases). A plan may
withdraw the plan's supplemented application and file a new
supplemented application at any time before the supplemented
application is denied or approved. If PBGC denies a plan's supplemented
application, the plan may file a new supplemented application. Any new
supplemented application filed by the plan must address the reasons
cited by PBGC for the denial. Any SFA paid to the plan under the
provisions of the final rule will be adjusted as described in Sec.
4262.12, including to reflect the prior receipt of SFA.
If a plan applied for SFA under the interim final rule and the
plan's application was not approved, withdrawn, or denied, and was
pending, as of August 8, 2022, the plan should look to the rules set
forth under Sec. 4262.4(g)(2) for ``pending applications.'' They
provide that the plan's pending application may be withdrawn (as
described in Sec. 4262.11(d)) and a revised application filed, or not
withdrawn and determined under terms of the interim final rule. Any
revised application must use the plan's base data defined in Sec.
4262.4(g)(5). Base data include the plan's SFA measurement date,
determined under the interim final rule as the last day of the calendar
quarter immediately preceding the date the plan's initial application
for SFA was filed; the plan's participant census data required to be
used in the plan's initial application for SFA under the interim final
rule; and the plan's non-SFA interest rate and SFA interest rate
determined under Sec. 4262.4(e)(1) and (2) of the final rule. Any SFA
paid to the plan under the provisions of the final rule will be
adjusted as described in Sec. 4262.12. A plan with a ``pending
application'' that chooses not to withdraw and revise its application
will be paid the amount of SFA as determined under the interim final
rule. The plan is not precluded from later filing a supplemented
application.
If a plan applied for SFA under the interim final rule and it was
not pending as of August 8, 2022, because the plan's application was
denied or the filer withdrew the plan's application in accordance with
Sec. 4262.11(d), the plan may file a revised application (see the
provisions for a ``withdrawn application'' and a ``denied application''
under Sec. 4262.4(g)(3) and (4) respectively). Any revised application
must use the plan's base data defined in Sec. 4262.4(g)(5). Base data
include the plan's SFA measurement date, determined under the interim
final rule as the last day of the calendar quarter immediately
preceding the date the plan's initial application for SFA was filed;
the plan's participant census data required to be used in the plan's
initial application for SFA under the interim final rule; and the
plan's non-SFA interest rate and SFA interest rate determined under
Sec. 4262.4(e)(1) and (2) of the final rule. Any SFA paid to the plan
under the provisions of the final rule will be adjusted as described in
Sec. 4262.12.

PBGC Review of Plan Assumptions

PBGC's review of an application for SFA focuses on the
reasonableness of the plan's demonstration regarding the amount of SFA
for the plan. Section 4262.5 sets forth how PBGC reviews plan
assumptions.
Section 4262 of ERISA generally looks to plan assumptions
previously selected by the plan actuary for determining eligibility for
and calculating the amount of SFA. A mechanism is provided for a plan
to propose changes to actuarial assumptions if it determines that the
use of one or more of its original assumptions (other than the interest
rate) is unreasonable.
Under section 4262 of ERISA, actuarial assumptions generally are

[[Page 40982]]

derived from a plan's certification of plan status under section 305 of
ERISA. In general, PBGC believes that a plan's actuarial assumptions
adopted for the certification of plan status (and not for entitlement
to SFA) represent a neutral view of circumstances, unbiased by the
prospect of receiving a substantial sum of money. Accordingly, as
provided in the interim final rule, PBGC expects to give less intensive
scrutiny to ``original'' assumptions than to changed assumptions.
Section 4262(e)(1) of ERISA requires PBGC to accept actuarial
assumptions incorporated in a plan's certification of plan status
completed before 2021 for purposes of eligibility unless PBGC
determines that such assumptions are ``clearly erroneous.'' For all
other purposes (including determining the amount of SFA), the statute
requires PBGC to accept the assumptions used unless PBGC determines
that they are unreasonable.
Several commenters recommended that PBGC take a deferential
approach when reviewing assumptions used by a plan's actuary in the
most recent certification of plan status completed before 2021. These
commenters argued that if a plan sponsor does not propose a change,
PBGC should refrain from challenging the plan's assumptions because the
intent of the statute is to allow those assumptions to serve as default
assumptions. They argue that this would allow SFA applications, in
comparison to MPRA applications, to be expeditiously reviewed by
avoiding the level of scrutiny that was imposed when reviewing
actuarial assumptions for MPRA applications. These commenters requested
guidance from PBGC stating that the pre-2021 assumptions are deemed
acceptable. One commenter requested that PBGC accept the plan's
assumptions unless they are clearly erroneous or unreasonable. Another
suggested that PBGC not challenge pre-2021 assumptions unless clearly
unreasonable. Yet another commenter requested that PBGC clarify that
pre-2021 assumptions that were reasonable for purposes of the pre-2021
certification of plan status will not be deemed unreasonable for
purposes of the SFA application because of the passage of time,
subsequent events, or the different purpose of measurement.
PBGC agrees that, in comparison to a plan's changed assumptions,
for the reasons discussed earlier in the preamble, PBGC should take a
more deferential approach in reviewing a plan's use of pre-2021
assumptions. However, given the language in section 4262(e)(2)(B) of
ERISA that a plan shall use the pre-2021 assumptions ``unless such
assumptions are unreasonable,'' PBGC disagrees that a lesser standard,
such as clearly erroneous or clearly unreasonable, should be used by
PBGC when reviewing a plan's assumptions used to determine the amount
of SFA for the plan. In addition, PBGC disagrees with the one
commenter's assertion that the passage of time, subsequent events, or
the different purpose of the measurement should not be considered by
the plan's actuary. As described later in this section of the preamble,
the statute provides a mechanism for changing prior assumptions that
are no longer reasonable (excluding the interest rate assumption). This
indicates that the passage of time, subsequent events, and the purpose
of the measurement should be considered by the plan's actuary. If the
plan's actuary does not determine that one or more of the pre-2021
assumptions are unreasonable for the purpose of determining the amount
of SFA, PBGC will defer to the plan's use of those assumptions unless
PBGC finds the assumptions unreasonable. PBGC, however, may request
additional information from the plan to determine whether a pre-2021
assumption is unreasonable.
Each of the actuarial assumptions and methods used for the
actuarial projections (excluding the interest rate assumptions) must be
reasonable in accordance with generally accepted actuarial principles
and practices,\25\ taking into account the experience of the plan and
reasonable expectations. To be reasonable, an actuarial assumption or
method generally must, among other things, be appropriate for the
purpose of the measurement, reflect the actuary's professional
judgment, take into account current and historical data that is
relevant to selecting the assumption for the measurement date, reflect
the actuary's estimate of future experience, and reflect the actuary's
observation of the estimates inherent in market data (if any). In
addition, an actuarial assumption or method must be expected to have no
significant bias (i.e., it is not significantly overly optimistic or
pessimistic).
---------------------------------------------------------------------------

\25\ Actuarial Standards of Practice (ASOPs) are issued by the
Actuarial Standards Board and are available at <a href="http://www.actuarialstandardsboard.org/standards-of-practice">http://www.actuarialstandardsboard.org/standards-of-practice</a>. Certain
ASOPs, including ASOPs Nos. 4, 23, 27, 35, 41, and 56 may be
relevant to the actuary's work related to special financial
assistance, including the assessment of the reasonableness of the
actuary's assumptions and methods.
---------------------------------------------------------------------------

The statute provides a mechanism for changing prior assumptions
(other than the interest rate assumption) that are no longer
reasonable. If a plan actuary determines that one or more original
assumptions are unreasonable and must be changed, Sec. 4262.5(c)
provides that the plan's application must describe why the original
assumption is no longer reasonable, propose to use a different
assumption (the changed assumption), and demonstrate that the changed
assumption is reasonable. If there is a change in assumptions, each of
the actuarial assumptions and methods (other than the interest rate
assumptions) must be reasonable, and the combination of actuarial
assumptions and methods (excluding the interest rate assumptions) also
must be reasonable. Plans are required to provide detailed information
about any changed assumptions, and PBGC will perform a less deferential
analysis of those assumptions than of the original pre-2021
assumptions.
Concurrent with the interim final rule, PBGC issued assumptions
guidance containing guidelines for changes to certain assumptions that
plans may use for purposes of determining eligibility for SFA and the
amount of SFA. Plans may, but are not required to, use the guidelines.
Plans that do not use the guidelines may demonstrate that the change is
reasonable by providing additional information beyond what would be
required under the guidelines. Guidelines are available for
contribution base units (CBUs), administrative expenses, mortality,
contribution rates, and new entrant profiles, and can be found in the
guidance issued on PBGC's website at <a href="http://www.pbgc.gov/guidance">www.pbgc.gov/guidance</a>. In
addition, for various reasons, a plan may have a gap in the assumption
for projected CBUs and administrative expenses used in the prior
certification of plan status such that the assumption cannot be used
``as is'' for determining SFA. To assist applicants and aid in the
review of a plan's CBU assumption and administrative expense
assumption, PBGC developed standard extensions that plans can use to
complete the assumption set for a plan that otherwise can use its
original assumptions. With respect to the Sec. 4262.5(c)(1)(iii)
requirement to demonstrate that the changed assumption is reasonable,
it is sufficient to include a statement to that effect in the
application instead of a detailed demonstration if the plan uses
standard extensions described in the assumptions guidance.
Two commenters suggested that PBGC could permit MPRA plans to use
projected CBUs consistent with their approved MPRA applications as a
safe-harbor assumption. One of these commenters also suggested a safe
harbor for MPRA plans to use other actuarial

[[Page 40983]]

assumptions from their approved MPRA application. If an assumption used
in a plan's approved MPRA application is the same as an assumption used
in the plan's last pre-2021 certification of plan status, and the
plan's actuary determines that the assumption is not unreasonable for
the purpose of determining the amount of SFA, PBGC will provide
deference to the actuary's determination unless PBGC finds the
assumption unreasonable. If an assumption used in a plan's approved
MPRA application is not the same as an assumption used in the plan's
last pre-2021 certification of plan status, the plan actuary may
propose to change the assumption to the assumption used in the plan's
approved MPRA application in accordance with Sec. 4262.5(c). PBGC is
amending its assumptions guidance to provide that PBGC will generally
accept a change in assumption to an assumption used in a plan's
approved MPRA application, including projected CBUs, if the plan
includes the information required by Sec. 4262.5(c) in the application
and the demonstration provided by the plan shows the assumption is
reasonable for the purpose of determining the amount of SFA.
Several commenters requested that PBGC's guidance provide more
flexibility in contribution assumptions or recommended specific
changes, such as eliminating the requirement that a change in CBU
assumption be adequately supported by historical data. The commenters
stated that historical data is not necessarily predictive of future
changes. One commenter explained that the historical data requirement
defies economic trends in many industries, is inconsistent with the
reasonableness standard in the statute, and may contravene actuarial
standards which require actuaries to consider factors that may affect
future experience, such as economic conditions for the industry and the
availability of alternative employment due to automation. Another
commenter asked for guidance, or clarifications of PBGC's guidance, on
various assumptions, including mortality, new entrant assumptions, and
employer withdrawals.
PBGC has updated its assumptions guidance to address some of the
comments received, provisions of this final rule, and to provide more
clarity and additional guidance based on experience in reviewing
applications. In addition to the change described earlier in the
preamble for plans with approved MPRA applications, PBGC added
guidelines on acceptable changes to a plan's disabled life mortality
assumption and on the acceptable adoption of or update to a plan's
mortality improvement projection scale. PBGC specified the information
needed to show that a plan's assumed new entrant profile and
administrative expenses assumption are based on the acceptable
methodology as indicated by the guidance. For a plan that reflects
significant plan experience between the participant census date and the
application filing date, PBGC added that the plan should provide a
rationale for how it determined that the plan experience was
significant, and made other updates to the related example. PBGC added
examples and other clarifications to acceptable assumption changes.
PBGC also added guidelines on projecting future receipt of employer
withdrawal liability payments, noting that the projection should
reflect the actuary's best estimate of future plan experience and that
the plan's actuary should consider reflecting a reasonable allowance
for amounts considered uncollectible. PBGC added guidelines for plans
where all the assumptions required to be used for projections in the
pre-2021 certification of plan status were not identified. The
assumptions guidance also provides guidelines on acceptable changes for
the exclusion of terminated vested participants over a certain age.
Finally, PBGC added information about how applicants can schedule an
informal pre-application conference with PBGC.
PBGC considered the comments on CBU assumptions and, except for
some clarifying changes, did not adopt the suggestion of commenters to
eliminate the guideline that a change in CBU assumption be adequately
supported by historical data. Instead, PBGC included examples in the
guidelines to illustrate how historical data and industry trends can be
used to project future changes in CBUs under the guidelines.
PBGC's guidance on CBUs and other assumptions may not be reasonable
for all plans and is not binding on plans. A plan should follow the
assumptions guidance only if it is reasonable for the plan to do so. As
explained earlier in the preamble, applicants may propose changes to
the plan's assumptions by following Sec. 4262.5(c), including
describing why the original assumption is no longer reasonable,
disclosing the changed assumption, and demonstrating that the changed
assumption is reasonable.

Information To Be Filed

Sections 4262.6 through 4262.8 of the interim final rule described
the information that must be included in a plan's SFA application.
Section 4262.6 summarized the requirements for an application to be
considered complete, including: plan information; actuarial and
financial information (including the amount of SFA requested); a
completed checklist (per the SFA instructions on PBGC's website at
<a href="http://www.pbgc.gov">www.pbgc.gov</a>); the signature of an authorized trustee who is a current
member of the board of trustees; a signed statement under penalty of
perjury; a copy of the executed plan amendment providing that,
beginning with the SFA measurement date, the plan must be administered
in accordance with the restrictions and conditions specified in section
4262 of ERISA and this regulation; if the plan suspended benefits under
sections 305(e)(9) or 4245(a) of ERISA, a copy of the proposed plan
amendment to reinstate suspended benefits and pay make-up payments and
a certification by the plan sponsor that the plan amendment will be
adopted timely; and any information required by PBGC to clarify or
verify the information in a filed application. If any of the
information required under the regulation and in the SFA instructions
is missing from the filed application, the application will not be
considered complete.
The SFA instructions (on PBGC's website at <a href="http://www.pbgc.gov">www.pbgc.gov</a>), including
templates, supplement the regulation and provide guidance to plan
sponsors and practitioners on how to prepare and file the required
application information. Sections 4262.6 through 4262.8 and the
instructions specify the minimum necessary plan, actuarial, and
financial information that PBGC requires to approve or deny an
application for SFA and to verify the amount of SFA within the short
120-day review period provided under section 4262(g) of ERISA.
PBGC in the final rule is amending the information required to be
filed as described in Sec. Sec. 4262.6 through 4262.8 to reflect the
new methodology in Sec. 4262.4 for determining the amount of a plan's
SFA and making other clarifying changes.
Based on its experience reviewing applications, in the final rule,
PBGC is amending Sec. 4262.6(a) to provide that, if information is not
accurately completed or not filed with the application, PBGC may, in
its discretion, either require the plan sponsor to file additional
information to correct the error or omission or consider the
application incomplete. If correction of any error or omission requires
a change to the amount of SFA requested, the application will be
considered incomplete. This provision is intended

[[Page 40984]]

to provide some flexibility in the application review process to enable
some errors to be corrected without plans having to file revised
applications.
In addition, PBGC is modifying the language of the required
statement under penalty of perjury in Sec. 4262.6(b) to make the
language more precise and is modifying the language of the required
amendments to the plan in Sec. 4262.6(e). In the final rule,
clarifying language, ``notwithstanding anything to the contrary in this
or in any other governing document'' is added to Sec. 4262.6(e)(1) so
that the required language for the amendment reads, ``Beginning with
the SFA measurement date selected by the plan in the plan's application
for special financial assistance, notwithstanding anything to the
contrary in this or any other governing document, the plan shall be
administered in accordance with the restrictions and conditions
specified in section 4262 of ERISA and 29 CFR part 4262. This amendment
is contingent upon approval by PBGC of the plan's application for
special financial assistance.'' PBGC is also providing model language
for the benefit reinstatement amendments under Sec. 4262.6(e)(2) to
assist filers in complying with the amendment requirements. In
addition, PBGC is amending Sec. 4262.7(e)(2) to require that the
certification by the plan sponsor that the benefit reinstatement
amendments will be timely adopted must be signed either by all members
of the plan's board of trustees or by one or more trustees duly
authorized to sign the certification on behalf of the entire board of
trustees.
As described in the Paperwork Reduction Act section of the interim
final rule, the application instructions and checklist were submitted
to the Office of Management and Budget (OMB) for review and approval
under the Paperwork Reduction Act. PBGC received approval for this
information collection on an emergency basis for a period of 180 days,
expiring on January 31, 2022, under control number 1212-0074.
Subsequently, OMB extended its approval for the information collection
for an additional 3 years, expiring on January 31, 2025.
With the final rule, PBGC is submitting this information
collection, with the described modifications, to OMB and its decision
will be available at <a href="http://www.Reginfo.gov">www.Reginfo.gov</a>.
Unless confidential under the Privacy Act, all information that is
filed with PBGC for an application for SFA may be made publicly
available, at PBGC's sole discretion, on PBGC's website at <a href="http://www.pbgc.gov">www.pbgc.gov</a>
or otherwise publicly disclosed. Except to the extent required by the
Privacy Act, PBGC provides no assurance of confidentiality in any
information or documentation included in an application for SFA.

Application for Plans With a Partition

Under section 4233 of ERISA, a plan may apply to PBGC for a
partition to fund a portion of the plan's benefits to avoid insolvency.
Upon PBGC's approval of an application for partition, PBGC issues a
partition order to provide: (1) for a transfer from the original plan
to the plan created by the partition order (the successor plan), the
minimum amount of benefit liabilities necessary for the original plan
to remain solvent, and (2) financial assistance from PBGC under section
4261 to pay those benefits. The successor plan is but a creature of
PBGC's partition order, terminated and insolvent from its inception.
The original and successor plans are required by section 4233(d)(2) to
have the same plan sponsor and administrator.
Section 4262(c)(3) of ERISA requires PBGC to provide an alternative
application for SFA that may be used for a plan approved for a
partition before March 11, 2021. Section 4262.9 of PBGC's regulation
describes this application.
Section 4262.9 does not provide eligibility for SFA. As explained
earlier in the preamble under the subheading Eligible Multiemployer
Plans, section 4262(b)(1) of ERISA lists four categories of plans that
are eligible for SFA, and PBGC cannot extend eligibility for SFA
through its regulation to a plan that is not included in any of those
categories. In the case of a partitioned plan, the original and
successor plans must each be separately eligible. Each must have been
approved for a suspension of benefits under section 305(e)(9) of ERISA
as of March 11, 2021, to be eligible for SFA under section
4262(b)(1)(B) of ERISA and Sec. 4262.3(a)(2). To avoid any confusion
about the eligibility of a partitioned plan, PBGC is clarifying this
requirement in Sec. 4262.9(a) of the final rule.
The plan sponsor of a partitioned plan where the original and
successor plans are each eligible to apply for SFA must apply for SFA
using the alternative application, which contemplates PBGC's rescission
of the partition order as prescribed under Sec. 4262.9(c) and other
conditions particular to a partitioned plan as described under Sec.
4262.9(b). One of these conditions is that the plan sponsor must file a
single application for SFA, consisting of information about the
original plan and the successor plan. The combined information must
reflect that, on the date SFA is transferred to the plan, PBGC will
rescind the order that created the successor plan, and the plan sponsor
will remove plan provisions and amendments that were required to be
adopted under the order.
Another condition is that the application must include a statement
that the plan was partitioned and a copy of the provisions or
amendments that the plan was required to adopt under the partition
order. A partitioned plan's application must include all the required
information described in Sec. Sec. 4262.6 through 4262.8 for
applications generally. However, if the plan sponsor of a partitioned
plan has already filed any of the required information with PBGC, the
sponsor is not required to include that information again with its SFA
application. Instead, the sponsor need only note on the checklist
described under Sec. 4262.6(a) that the information was already filed.
Partitioned plans also have benefit suspensions that must be
reinstated if the plan is approved for SFA. Under Sec. 4262.15, a plan
receiving SFA must reinstate benefits suspended under section 305(e)(9)
of ERISA and provide make-up payments to participants and beneficiaries
to restore previously suspended benefits in accordance with guidance
issued by the Treasury Department and the IRS in Notice 2021-38, 2021-
30 IRB 155. This requirement applies to both the original plan and the
successor plan created by a partition. Having the original and
successor plans apply as one will ensure coordinated benefit
reinstatements for all participants in the partitioned plan.
The filing of an application for a partitioned plan falls under
priority group 2 for purposes of Sec. 4262.10(d) (explained in this
preamble under the subheading Processing Applications), consistent with
other plans that are eligible for SFA because they have implemented a
suspension of benefits under section 305(e)(9) of ERISA as of March 11,
2021.
Successor plans created in a partition have also been receiving
financial assistance from PBGC with repayment obligations under section
4261 of ERISA. How financial assistance under section 4261 is repaid is
prescribed under Sec. 4262.12.

Processing Applications

Under section 4262(c) of ERISA, PBGC must issue regulations or
guidance setting forth requirements for SFA applications. Applications
are considered timely filed under section 4262(g) only if they are
filed in

[[Page 40985]]

accordance with PBGC's regulations. PBGC's inherent authority under
section 4002(b)(3) of ERISA allows PBGC to adopt regulations relating
to the conduct of its business and to carry out the purposes of the
title IV insurance program. Under section 4262(d) of ERISA, PBGC also
may limit the filing of SFA applications to filings for plans that are
in one or more of four ``priority'' categories during a period limited
to within the first 2 years after March 11, 2021.
Section 4262.10 of the regulation sets forth the system for
processing applications within 120 days, as required by section 4262(g)
of ERISA and Sec. 4262.11 of the regulation. The processing system
will provide every prospective submitter a fair opportunity to file its
application by December 31, 2025 (or December 31, 2026, for a revised
or supplemented application). This electronic filing system is based on
three mechanisms. The first mechanism permits PBGC to accept
applications in a manner that, in PBGC's estimation, allows for
sufficient review and processing within 120 days of filing. The second
mechanism is a priority system permitted by section 4262(d) of ERISA.
The third mechanism is a notification system on PBGC's website to keep
prospective applicants apprised of when a filing window opens or closes
and (if applicable) to what priority groups filing is limited. This
mechanism will enable applicants to know when the system is accepting
applications from plans in their priority group. The statutory
authority and rationale behind these mechanisms are fully explained in
the preamble to the interim final rule.
PBGC received several comment letters on this section of the
interim final rule. Most of these commenters focused on allowing more
plans to apply earlier during the 2-year priority-group period to speed
up the provision of SFA to eligible plans. These commenters wanted
plans eligible to file in a later priority group to be given the
opportunity to file in an earlier priority group--e.g., allow plans
projected to become insolvent within 1 year of filing an application
and designated to file in priority group 2 to file in priority group 1,
or allow plans that implemented benefit suspensions under MPRA and also
able to file in priority group 2 to file in priority group 1. Some of
these commenters explained that the plans in priority group 2 that are
projected to become insolvent in 2022 should be able to apply earlier
to avoid the complexity of preparing for insolvency or even becoming
insolvent before receiving SFA, and to avoid the disruption this would
cause plan participants. Commenters who are participants in MPRA plans
(i.e., plans that implemented benefit suspensions) described the
reduction in their benefits as a life-altering loss. They asked that
their plans be able to apply in priority group 1 along with insolvent
plans because the impact of benefit cuts on plan participants is the
same.
Other commenters wanted PBGC to move up the beginning date
identified in the interim final rule for a plan in a priority group to
file--e.g., priority group 6 plans should be permitted to file before
priority group 5.
The filing dates provided in the interim final rule are the latest
dates PBGC expects to begin accepting applications from plans in each
group. A plan in a priority group may file an application beginning on
that date, or an earlier date as processing capacity permits, as
updated on PBGC's website at <a href="http://www.pbgc.gov">www.pbgc.gov</a>. As priority groups open,
PBGC will continue to accept applications from plans in earlier
priority groups. While the priority mechanism may entail a relatively
short deferral of an application for a given plan until its respective
priority group opens, the amount of SFA ultimately awarded will reflect
the amount required to pay all benefits due pursuant to the statute.
The final rule does not make changes to the filing dates for plans
in a priority group under Sec. 4262.10(d)(2), but using its discretion
under the regulation, PBGC has updated its website at <a href="http://www.pbgc.gov">www.pbgc.gov</a> to
allow a plan in priority group 2 that is expected to become insolvent
within 1 year of the date the plan's application for SFA is filed, to
file an application earlier. PBGC agrees with comments that this would
lessen the disruption for plans and participants. In November 2021, the
earliest date of filing for these plans was changed from January 1,
2022, to December 27, 2021, enabling these plans to prepare and file
their applications earlier. PBGC will continue to monitor the flow of
applications to consider earlier filing dates as processing capacity
permits. PBGC will inform prospective applicants of any earlier dates
through updates on its website at <a href="http://www.pbgc.gov">www.pbgc.gov</a>.
Taking into account the previously described change, the following
table describes each priority group and the date that it is currently
scheduled to open:

------------------------------------------------------------------------
Description of priority Description of priority
Priority group group--date plans may group--date plans may
apply for SFA apply for SFA
------------------------------------------------------------------------
1..................... Plans already insolvent Beginning on July 9,
or projected to become 2021
insolvent before March
11, 2022.
2..................... Plans expected to be Beginning on December
insolvent within 1 27, 2021.
year of the date an
application for SFA is
filed.
Plans that implemented Beginning on January 1,
a benefit suspension 2022.
under ERISA section
305(e)(9) as of March
11, 2021.
3..................... Plans in critical and Beginning on April 1,
declining status that 2022.
had 350,000 or more
participants.
4..................... Plans projected to Beginning on July 1,
become insolvent 2022.
before March 11, 2023.
5..................... Plans projected to Date to be specified on
become insolvent PBGC's website at
before March 11, 2026. least 21 days in
advance of such date,
but no later than
February 11, 2023.
6..................... Plans for which PBGC Date to be specified on
computes the present PBGC's website at
value of financial least 21 days in
assistance under advance of such date,
section 4261 of ERISA but no later than
to be in excess of $1 February 11, 2023.
billion (in the
absence of SFA).
------------------------------------------------------------------------

Other commenters suggested expanding the priority categories to
include other similar plans or to expand the number of priority groups
by identifying plans for a priority group 7.
The final rule does not change the composition of priority groups
as commenters suggested, such as by including in priority group 2 plans
that had or still have a benefit suspension application under section
305(e)(9) of ERISA pending before the Treasury Department (and so had
not implemented a benefit suspension as of March 11, 2021) or plans
that had applied for a benefit suspension but had their application
withdrawn or denied.

[[Page 40986]]

A plan in any of the four priority categories identified in section
4262(d) of ERISA will have a fair opportunity to file an application
under Sec. 4262.10(d)(2) of the regulation during the 2-year priority
period ending on March 11, 2023. As noted in the interim final rule,
PBGC's objective is to accept and process as many applications in the
highest priority group as possible before opening the submission
process to the next priority group. Ultimately--and no later than March
11, 2023--the submission process will be opened to all eligible plans
(whether or not in a statutory priority category) to ensure that every
prospective applicant has a fair opportunity to file its application
during the statutory period.
Other commenters wanted more certainty about which plans fall into
the final priority group 6 under the interim final rule, or groups 6
and 7, and when the plans could begin applying. Commenters recommended
that PBGC identify and post as quickly as possible the names of the
plans it determines to be in priority group 6 to provide certainty to
plans expecting to apply in priority group 6. Under Sec.
4262.10(d)(2)(vi), a plan is in priority group 6 if the plan is
projected by PBGC to have a present value of financial assistance
payments under section 4261 of ERISA that exceeds $1 billion if SFA is
not ordered. PBGC will list the plans in priority group 6 on its
website at <a href="http://www.pbgc.gov">www.pbgc.gov</a> well in advance of the first date filings may
be accepted, but not later than the earlier of November 15, 2022, or 30
days before opening the filing period for priority group 6. The date a
plan in priority group 6 may file an application will be posted at
least 21 days in advance of such filing date, which will be no later
than February 11, 2023.
A commenter also recommended including plans with unfunded vested
benefits (UVBs) over $1 billion in a priority group 7, with UVBs
determined using current liability assumptions reported in the plan's
last Form 5500 Schedule MB filed before 2021. The commenter suggested
defining this group so that a plan with the expectation of being in
priority group 6, but not named to priority group 6, could know that it
could apply shortly thereafter and not have to significantly revise its
application.
Commenters also reasoned that providing SFA to these large plans
earlier (by allowing them to apply earlier) means the plans will have
expended less of their assets to meet obligations, and therefore need
less SFA, which in turn may result in less cost to the SFA program
overall. Another commenter argued that plans that do not meet the $1
billion threshold are likely plans that cover workers in lower wage
industries, and that these workers also are entitled to know when their
plans may apply for SFA.
PBGC considered commenter requests to define a new priority group
7. Section 4262.10(d)(2)(vii) of the interim final rule provides that
PBGC may add additional priority groups based on other circumstances
similar to those described for priority groups 1 through 6. While PBGC
has not made changes to Sec. 4262.10(d)(2) to add additional priority
groups, PBGC will continue monitoring its application processing to
determine whether additional priority groups should be added. Any
additional priority groups added and the date PBGC will begin accepting
applications for such groups will be posted in guidance on PBGC's
website at <a href="http://www.pbgc.gov">www.pbgc.gov</a>.
The final rule makes some clarifying changes in Sec. 4262.10(d),
including to clarify that an application filed by a plan to which
benefit liabilities were transferred (by merger or otherwise) from a
plan that filed an initial application for SFA will be treated as a
revised application and not an initial application.

Lock-in Application

Section 4262.10(d)(1) of the interim final rule provides that SFA
applications are processed based on capacity to allow for sufficient
review and processing by PBGC within the short period of time required
by the statute. Once the number of applications reaches that level, the
filing window will temporarily close until PBGC has capacity to process
more applications. An application will be considered filed on the date
it is submitted electronically to PBGC if the application meets
applicable filing requirements, including authorized signatures, and
can be accommodated in accordance with the processing system.
Otherwise, PBGC will not consider the application filed and will notify
the applicant that the application must be filed in accordance with the
processing system and instructions on PBGC's website. PBGC maintains a
dedicated web page for applications on its website at <a href="http://www.pbgc.gov">www.pbgc.gov</a> to
inform prospective applicants about the current status of the filing
window, as well as to provide advance notice of when PBGC expects to
open or temporarily close the filing window.
One commenter remarked that an effect of the ``metering system'' is
that a plan preparing its initial application for submission on a
particular date, with the plan's SFA measurement date and other base
data aligned with that date, may nonetheless be prevented from filing
on that date because the filing window has closed temporarily. If a
temporary closure extends into the next calendar quarter, a plan's
application may have to be significantly revised to include a new SFA
measurement date and possibly new census data. The commenter suggested
that PBGC could allow plans that were ready to file an application, but
that were unable to do so because the filing window closed temporarily,
to submit a ``notice of intent to file'' that would lock in the plan's
SFA measurement date and other base data. The suggested notice would
allow the plan to apply on a different date when the filing window re-
opened but with the same application.
PBGC considered the comment and, to address the problem described
by the commenter, has created in Sec. 4262.10(g) of the final rule a
simple process for ``locking in'' a plan's SFA measurement date and
other base data, which is available for all plans that file after March
11, 2023, and on or before December 31, 2025. The process also is
available for plans in priority groups 5, 6, and any additional
priority group PBGC may add before March 11, 2023, if PBGC temporarily
closes the filing window when it is otherwise accepting applications
for plans in those priority groups. A lock-in application is a pro
forma initial application submitted via email and containing the plan's
identifying information, priority group information (if applicable), a
statement of intent to lock in the plan's base data, a certification
signed by an authorized trustee, and other information as described in
the lock-in application instructions on PBGC's website at <a href="http://www.pbgc.gov">www.pbgc.gov</a>.
If the lock-in application satisfies the requirements for a lock-in
application, it will be considered filed and immediately denied for
incompleteness.
PBGC may learn, during its review of a plan's revised application,
that the plan is not eligible for SFA. In that situation, the lock-in
application will not establish the plan's base data. If the plan
subsequently becomes eligible for SFA, the plan may file a revised
application to demonstrate that the plan is eligible for SFA and
establish the plan's base data.

Emergency Filings

Section 4262.10(f) of the interim final rule provides for an
emergency filing process for priority applications from a plan that is
insolvent or expected to be insolvent under section 4245(a) of ERISA
within 1 year of filing an

[[Page 40987]]

application, or a plan that has implemented a suspension of benefits
under section 305(e)(9) of ERISA as of March 11, 2021. Beginning with
PBGC's acceptance of priority group 2 filings, PBGC is accepting
emergency filings from these plans during periods when PBGC would not
otherwise accept such applications because the filing window is closed.
A filer submitting an application under the emergency filing process
must substantiate the claim of emergency status and notify PBGC, in
accordance with the SFA instructions on PBGC's website at <a href="http://www.pbgc.gov">www.pbgc.gov</a>,
before submission of the impending application.
One commenter suggested that another option for advancing the date
that a plan in priority group 2 may apply would be to allow emergency
filings beginning with PBGC's acceptance of applications from plans in
priority group 1. PBGC has not made a change to the emergency filing
process, but as discussed earlier, has advanced to December 27, 2021,
the earliest filing date for a plan projected to be insolvent within 1
year of the date the plan's application is filed. Accordingly,
insolvent plans and any plan projected to be insolvent within 1 year of
the date the plan's application is filed are also eligible to submit
emergency applications beginning December 27, 2021. PBGC will continue
to monitor application processing and will continue to update its
website to advance filing dates as capacity permits.

PBGC Action on Applications

Section 4262(g) of ERISA provides that PBGC can either approve or
deny an application for SFA and establishes a 120-day review period
during which PBGC must act or an application is deemed approved. PBGC
is given authority to manage the application review process by issuing
regulations or guidance under section 4262(c) of ERISA setting forth
requirements for SFA applications. Pursuant to that authority, Sec.
4262.11 provides requirements for plan applications that are denied by
PBGC or withdrawn by a plan.
As described under Sec. 4262.11, PBGC must act on an application
within 120 days after the date an initial, revised, or supplemented
application is properly and timely filed. If PBGC approves an
application, it will notify the plan sponsor of the payment of SFA in
accordance with Sec. 4262.12.
If PBGC denies an application, it will notify the plan sponsor in
writing of the reasons for the denial. An application may be denied
because it is incomplete (it does not accurately include the
information required to be filed); because an assumption is
unreasonable, a proposed change in assumption is individually
unreasonable, or the proposed changed assumptions are unreasonable in
the aggregate; or because the plan is not an eligible multiemployer
plan. For example, pending approval of an application, if PBGC
determines that documentation supporting a certification of critical
and declining status is missing, or if the plan sponsor has not
responded to a PBGC request for information to clarify an item in that
documentation, PBGC's notice will identify the missing information or
documentation required to complete the application. If PBGC denies an
application, the plan sponsor may submit a revised application. If the
plan sponsor submits a revised application following a denial, the
revised application must address the reasons for denial stated in
PBGC's notification. PBGC is not requiring a plan sponsor to refile the
entire application. PBGC only needs the information that cures the
reasons specified in the denial notice. However, the plan sponsor may
address other matters provided that the revised application addresses
the reasons for the denial.
The plan sponsor may withdraw an application (in writing and in
accordance with the SFA instructions on PBGC's website at <a href="http://www.pbgc.gov">www.pbgc.gov</a>)
at any time before PBGC denies or approves the application. If an
application is withdrawn or denied, the plan sponsor may refile the
application as a revised application. As explained earlier in the
preamble, under section 4262(f) of ERISA, and until the plan's
application is approved, there is no limit to the number of times that
a plan sponsor may file a revised application (after the application is
withdrawn or denied) as long as the last revised application is filed
by the statutory deadline of December 31, 2026.
For any revised application, PBGC requires that the base data
remain the same as required to be used in the plan's initial
application to guard against multiple filings for purposes of changing
this data. In the final rule, PBGC clarifies that the base data defined
in Sec. 4262.11(c) for an eligible plan includes the plan's SFA
measurement date, participant census data, non-SFA interest rate
assumption, and SFA interest rate assumption. Once PBGC has accepted an
initial application for processing, it is in the best interest of all
parties to avoid the duplicative work and delays associated with
changes to the base data. Accordingly, if the application is denied or
the plan sponsor withdraws an application, and the plan sponsor submits
a revised application, it must use the base data required to be used in
its initial application, but it may make other changes. However, in the
final rule, PBGC clarifies that if the plan was not eligible for SFA on
the date the plan filed its initial application, the plan's base data
will not be fixed. Instead, if the plan is able to demonstrate
eligibility for SFA at a later date in a revised application, the
revised application will establish the plan's base data.
PBGC's decision on an application for SFA is a final agency action
for purposes of judicial review under the Administrative Procedure Act
(5 U.S.C. 701-706).

Payment of Special Financial Assistance

Section 4262(j) of ERISA provides that SFA is the amount required
for an eligible plan to pay all benefits due from the date PBGC pays
the SFA to the plan until the last day of the plan year ending in 2051.
However, because a plan sponsor does not know when SFA will be paid at
the time the sponsor prepares an application, the SFA amount supported
by an application and approved by PBGC will be the amount appropriate
as of a date in the past. The amount of SFA could be recomputed as of
the date of payment, yet the result would still be an estimate and the
burden of recomputing the amount of SFA would be significant. Instead,
Sec. 4262.12 provides that PBGC will pay a plan the amount
demonstrated under the plan's application, determined as of the SFA
measurement date, plus interest on that amount for the time between the
SFA measurement date and the date PBGC sends payment (not the bank
settlement date).
The final rule clarifies the interest rate applied on the amount of
SFA demonstrated under the plan's application from the time between the
SFA measurement date and the date PBGC sends payment. For initial or
revised applications filed on or after the effective date of the final
rule, the interest rate applied is the SFA rate under Sec.
4262.4(e)(2). For applications filed under the interim final rule where
the plan has not filed an initial or revised application on or after
the effective date of the final rule and there has not been any
previous payment of SFA, and where the plan's application is not
supplemented, the interest rate applied is the non-SFA rate under Sec.
4262.4(e)(1).
For a supplemented application, where the plan received a previous

[[Page 40988]]

payment of SFA, the interest rate applied is the SFA rate required
under Sec. 4262.4(e)(2) from the SFA measurement date to the payment
date of the additional SFA. Interest is applied on the excess of the
amount of SFA determined under Sec. 4262.4 of the final rule as of the
SFA measurement date (demonstrated on the plan's supplemented
application) over the SFA amount determined under Sec. 4262.4 of the
interim final rule as of the SFA measurement date.
Section 4262.12(g) otherwise remains unchanged in substance from
the interim final rule by providing that PBGC will pay SFA to a plan in
a lump sum or substantially so \26\ as soon as practicable upon
approval of the plan's SFA application. As stated in the interim final
rule, PBGC expects payment to be made usually within 60 days, and no
later than 90 days after the plan's SFA application is approved or
deemed approved (and in any event not later than September 30, 2030).
Payment will be made in accordance with payment instructions provided
by the plan in its application. Payment will be considered made when,
in accordance with the plan's payment instructions, PBGC no longer has
ownership of the amount being paid. Any adjustment for delay will be
borne by PBGC only to the extent that it arises while PBGC has
ownership of the funds.
---------------------------------------------------------------------------

\26\ For example, if a plan's SFA payment exceeds the statutory
limitation for a Federal wire of $10 billion, the plan will receive
multiple federal wire payments that will equal the approved lump sum
amount.
---------------------------------------------------------------------------

For a plan with an obligation to repay financial assistance under
section 4261 of ERISA, the process for that repayment is described in
Sec. 4262.12(e).
Unlike assistance under section 4261, section 4262(a)(2) of ERISA
provides that payment of SFA is not a loan subject to repayment.
However, under Sec. 4262.12(g)(1), SFA is subject to recalculation or
adjustment to correct any clerical or arithmetic error. PBGC will, and
plans must, make payments as needed to reflect any such changes in a
timely manner. SFA is also subject to debt collection if PBGC
determines that a payment for SFA to a plan exceeded the amount to
which the plan was entitled. Section 4262.12(g)(2) provides the rules
for payment of a debt owed to the Federal Government.

Restrictions on Special Financial Assistance

Section 4262(l) of ERISA places restrictions on the use of SFA.
These restrictions are described in Sec. 4262.13 of the regulation.
SFA received, and any earnings thereon, must be segregated from other
plan assets and may only be used to make benefit payments and pay plan
expenses (but SFA may be used before other plan assets are used for
these purposes). In addition, SFA (and earnings) must be invested by
plans in investment grade bonds or other investments as permitted by
PBGC in Sec. 4262.14. These limitations on the use of SFA reflect the
purpose of SFA. As provided for under section 4262(j)(1) of ERISA and
in Sec. 4262.4, SFA is the amount required for the plan to pay all
benefits due during the SFA coverage period taking into account all
plan resources and obligations. SFA should not be used in a manner that
would divert SFA funds to other purposes--for instance, reducing
sources of plan income, such as employer contributions or withdrawal
liability, or increasing plan obligations, such as to pay for
additional future increases in benefits (that are not exempted under
Sec. 4262.16).

Permissible Investments

Section 4262(l) of ERISA requires that SFA received, and any
earnings thereon, may be used to make benefit payments and pay plan
expenses, and such SFA and earnings (``SFA funds'' or ``amounts
attributable to special financial assistance'') must be held separately
from other plan assets. Section 4262(l) also requires that SFA funds be
invested in investment grade bonds or other investments permitted by
PBGC. Given the statutory constraints and the likelihood that SFA funds
will be paid out before non-SFA funds, PBGC believes that SFA funds
should be invested conservatively, in broad, liquid markets.
While the allowance under section 4262(l) for ``other investments
permitted by the corporation'' could provide some flexibility (and
limited exposure to other assets), in the interim final rule PBGC did
not allow for investments with fundamentally different characteristics
than investment grade bonds. Section 4262.14 of the interim final rule
permitted SFA funds to be invested only in fixed income securities that
are publicly traded, denominated in U.S. dollars, and that must be
considered investment grade except for a 5 percent allowance for a plan
to hold investments that were considered investment grade at the time
of purchase but are no longer of that credit quality. Recognizing that
the interim final rule took a conservative approach for permissible
investments, PBGC specifically requested comment from the public on how
to arrive at an appropriate balance between predictability of returns
and safety of investments on the one hand, and the flexibility to
pursue greater asset returns and the opportunity to extend plan
solvency on the other.
PBGC received many comments on Sec. 4262.14 of the interim final
rule and in response to its specific request for comment on the issue
of appropriate risk level. Commenters generally favored allowing plans
to have more flexibility in their options for investing SFA funds. They
stated that increased flexibility in investment decisions would not
necessarily create an excessive level of risk to plans and would enable
plans to remain solvent longer.
Other commenters expressed the view that the investment
restrictions in the interim final rule do not allow plans to invest SFA
funds in a diversified portfolio. They stated that not allowing for
diversification will increase overall risk to the plans. Commenters
also stated that other investments, some low-risk, likely would yield
higher returns and allow plans to remain solvent longer. These
commenters suggested various types of fixed income that have higher
yields.
As to which investments PBGC should permit, many commenters
suggested that PBGC allow plans to invest SFA funds in a manner that
targets a specific rate of return. Some commenters recommended
permitting plans to target a rate of return close to an interest rate
used to calculate the amount of SFA--e.g., the interest rate limit
under section 4262(e)(3) of ERISA or approximately 5.3 percent based on
pension funding segment rates in December 2021.
Other commenters recommended that PBGC allow specific investment
vehicles and approaches. Suggestions included the allowance for various
types of fixed income investments, real estate and infrastructure, and
risk transfer buy-in contracts offered by life insurers.
Some commenters suggested that PBGC set restrictions for plans
individually. They said that PBGC should consider the unique
circumstances of each plan and vary the permissible investment options
based on the assumptions applicable to the plan.
Some commenters recommended that PBGC allow a percentage of SFA
funds in investments other than fixed income. Suggestions ranged from
10 percent to 50 percent. Other commenters recommended having no
delineations between SFA and non-SFA assets, meaning that SFA funds
could be invested without restriction and would not need to be
segregated from non-SFA funds. One commenter suggested that

[[Page 40989]]

removing all restrictions would eliminate the incentive to assume added
risk in investing non-SFA funds. Another commenter said the
restrictions are cumbersome and that, to develop an appropriate
investment strategy for a plan, a fiduciary must consider all of the
plan's assets.
Finally, two commenters agreed with the investment restrictions on
SFA funds in the interim final rule. They stated that allowing
additional investment options would lead to an excessive level of risk-
taking for taxpayer funds.
PBGC stated in the interim final rule that it was reluctant to
allow for investment vehicles with fundamentally different
characteristics than investment grade bonds without public input.
Although public comments reflected both sides of this issue, the
comments largely suggested that the final rule should permit greater
flexibility in investments with the objective of extending potential
solvency. After considering the comments, and to support projected plan
solvency through the plan year ending in 2051 as provided in section
4262(j)(1) of ERISA, PBGC is making changes to Sec. 4262.14 to allow
for a wider range of investments for SFA assets.
As provided in Sec. 4262.14(i), the changes to permissible
investments in this final rule are applicable to a plan that applies or
has applied for SFA. However, for a plan that received SFA under the
terms of the interim final rule, the changes to permissible investments
under this final rule will not apply unless and until the plan files a
supplemented application. Until that date, the provisions of Sec.
4262.14 under the interim final rule apply to the plan.
The changes in the final rule permit plans to invest a specified
percentage--up to 33 percent--of their SFA funds in return-seeking
assets (RSA) as described in Sec. 4262.14(c) of the final rule. That
leaves 67 percent or more of SFA funds to be invested in investment
grade fixed income securities (IGFI). PBGC believes this ratio (67
percent IGFI to 33 percent RSA) appropriately considers the need to
protect SFA assets to pay projected benefits of the participants and
expenses of the plan. The 33 percent that may be invested in RSA as
defined in the final rule will enable plans to grow SFA funds and
increase the potential to pay benefits through 2051 while limiting the
total risk exposure of taxpayer-funded assistance.
The final rule provides that the permissible allocation in RSA of
SFA funds is no more than 33 percent measured each time RSA are
purchased (other than through the reinvestment of fund distributions)
and at least once in any rolling period of 12 consecutive months. A
purchase of RSA includes a fair market value exchange of investments
between a plan's SFA and non-SFA segregated accounts. Portfolio
allocations also naturally get out of balance due to cash flow and as
prices of investments fluctuate over time, so the percentage of SFA
funds in RSA could at times be greater than 33 percent. The rule
provides clear guidance to plans on when the percentage allocation in
RSA is determined, and that it does not mean, for example, no greater
than 33 percent in RSA on each and every day. Requiring the 33 percent
cap on RSA to be met at purchase and at least one day during any
rolling 12-month period reflects acceptable deviation from the basic
restriction. While there may be some drift during a year above the 33
percent, it would be very limited, and the burden of frequent
rebalancing or inopportune forced sales of assets is minimized. A plan
will be required to attest in the plan's annual statement of compliance
(under Sec. 4262.16(i)) that the plan has met the allocation
restriction on RSA at purchase and at least once in every rolling
period of 12 consecutive months beginning from the date the plan
receives SFA.
The final rule describes permissible RSA to include equity
securities limited to common stock that is denominated in U.S. dollars
and publicly traded (registered with the U.S. Securities and Exchange
Commission (SEC) under the Securities Exchange Act of 1934); as well as
in ``permissible fund vehicles'' described in Sec. 4262.14(g), which
include mutual funds and exchange-traded funds (ETFs) registered with
the SEC under the Investment Company Act of 1940 (including ETFs
organized as unit investment trusts), and collective trusts that
operate under a statutory exemption from registration. Permissible fund
vehicles abide by an investment policy that limits investment
predominantly to publicly traded equity securities (and short-term U.S.
Treasury securities, cash or cash equivalents, and investments in money
market funds). The permissible RSA funds are intended to include equity
funds that track broad-based U.S. indexes, such as the Standard &
Poor's 500 Index (S&P 500).
Permissible RSA also includes certain debt instruments (e.g.,
bonds) that are excluded from the definition of fixed income securities
under the final rule. These include debt instruments that pay a fixed
amount or fixed rate of interest, are denominated in U.S. dollars, are
investment grade, and have been resold in an offering pursuant to 17
CFR 230.144A (SEC Rule 144A under the Securities Act of 1933). However,
the final rule explicitly excludes such debt securities issued by a
foreign issuer.\27\ Permissible RSA also include high-yield (``junk'')
corporate bonds that were considered investment grade at the time of
purchase by the SFA segregated account for the IGFI portfolio but are
no longer of that credit quality. This list of permissible RSA
facilitates some diversification and eliminates the potential for
investment in aggressive or exotic investments that would clearly be at
odds with section 4262(l) of ERISA.
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\27\ The term ``foreign issuer'' is as defined in 17 CFR 240.3b-
4(b) (Rule 3b-4(b) under the Securities Exchange Act of 1934), i.e.,
any issuer which is a foreign government, a national of any foreign
country or a corporation or other organization incorporated or
organized under the laws of any foreign country.
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PBGC considered suggestions for expanding permissible investments
that are RSA to include real estate and infrastructure. Inclusion of
these assets would allow for more diversified portfolios of return-
seeking SFA funds with significant return potential, but most plans
will achieve this diversification through their non-SFA assets. Also,
the complexity of these investment categories and the lack of
recognized passive index funds that invest directly in real estate and
infrastructure make these assets less suitable as permissible
investments. Real estate investment trusts (REITs) that issue publicly
traded equity are included within the RSA that are allowed as
permissible investments and exposure to infrastructure is also
available through permissible equity investments.
PBGC also considered commenters' suggestions for expanding the
types of fixed income allowable as permissible IGFI to include various
fixed income securities that have higher yields. In general,
investments that do not share the low risk and relatively high
liquidity characteristics of IGFI are not considered appropriate to
meet the 67 percent floor for that type of investment. Bonds that were
rated investment grade at the time of purchase must be considered RSA
if they no longer meet the criteria for being considered investment
grade. As noted earlier, the final rule also allows for bonds resold in
an offering pursuant to Rule 144A under the Securities Act of 1933 to
be considered permissible RSA as long as they meet the investment grade
criterion.
PBGC views investments such as leveraged loans, collateralized loan
obligations, convertible bonds, preferred stock, and private credit as
not

[[Page 40990]]

appropriate to include as IGFI because they tend to trade in relatively
small, illiquid markets that generally require active management.
Collateralized loan obligations, collateralized mortgage obligations
and other collateralized debt obligations are complex instruments and
are only permitted as RSA to the extent they pay a fixed rate of
interest. Convertible bonds may have significant liquidity risk.
The final rule clarifies that permissible IGFI securities
considered to meet the 67 percent floor must be a bond or other debt
instrument that pays a fixed amount or fixed rate of interest,
denominated in U.S. dollars, sold in an offering registered under the
Securities Act of 1933, and investment grade, and includes such
securities held in permissible fund vehicles (defined in Sec.
4262.14(g)). These IGFI funds must abide by an investment policy that
limits investment primarily to securities that are denominated in U.S.
dollars and are investment grade. Permissible IGFI includes securities
issued or guaranteed by the U.S. government or its designated agencies,
such as U.S. Savings Bonds, Treasury Bonds, Treasury Bills, and GNMA
(``Ginnie Mae''), and government-sponsored enterprise (GSE)-issued debt
securities (e.g., by ``Fannie Mae,'' ``Freddie Mac,'' etc.), that are
reported on line 1c(2) of the Form 5500 Schedule H. It also includes
municipal bonds defined under the Securities Act of 1933 that are
investment grade. Dollar-denominated emerging market bonds that are
rated as investment grade are viewed as meeting the definition of IGFI.
The final rule clarifies that cash and cash equivalents required to
be reported on the Form 5500 Schedule H are permissible investments
within the 67 percent floor. These are noninterest-bearing cash on line
1a of Form 5500 Schedule H (total noninterest-bearing cash which
includes, among other things, cash on hand or cash in a noninterest-
bearing checking account), and interest-bearing cash equivalents on
line 1c(1) of Form 5500 Schedule H (all assets that earn interest in a
financial institution account such as interest-bearing checking
accounts, passbook savings accounts, or in money market accounts). Also
permissible are investments in money market funds regulated pursuant to
rule 2a-7 under the Investment Company Act of 1940.
PBGC determined not to include as permissible investments insurance
contracts, such as risk transfer buy-in contracts described by a
commenter. There may be an inherent inequity with this type of
investment unless it covers all the benefits for all participants, as
suggested by another commenter.
The substance of the definition of investment grade with respect to
fixed income securities in the interim final rule is unchanged in the
final rule except for removing the words ``publicly traded'' which is
evident in the final rule requirement that fixed income securities are
sold in an offering registered under the Securities Act of 1933. As
described in the interim final rule preamble, investment grade means
securities for which the issuer (or obligor) has at least adequate
capacity to meet the financial commitments under the security for the
projected life of the asset or exposure. Adequate capacity means that
the risk of default by the issuer (or obligor) is low and the full and
timely repayment of principal and interest on the security is expected.
These definitions are consistent with other Federal agency regulations
that refer to investment grade securities in compliance with Section
939A of the Dodd Frank Act of 2010. Further, the securities must be
considered investment grade by a fiduciary who is, or seeks the advice
of, an experienced investor.
Like the interim final rule, the final rule acknowledges that
securities (IGFI or RSA) held in permissible fund vehicles (ETFs,
mutual funds, or collective trusts), or directly through a portfolio of
individual securities, often are supplemented by derivatives that
replicate exposure to physical bonds or that implement hedging
strategies to protect against downside risk. The final rule permits
investment in vehicles allowing for such strategies so long as any
derivative or leveraging strategy does not increase the risk of the
investments beyond the risk in a similar portfolio of physical
securities (i.e., non-derivative securities) with the same market
value. Further, any notional derivative exposure on permissible
investments that are held in separate accounts (i.e., not through
permissible fund vehicles), must be supported by liquid assets that are
cash or cash equivalents denominated in U.S. dollars. This will ensure
that the plan or the investment manager will be able to cover the
derivative exposure with little risk to SFA funds. This provision
remains substantively unchanged from the interim final rule and applies
to investments in permissible IGFI and RSA.
Lastly, the final rule clarifies that the requirement in section
4262(l) of ERISA and Sec. 4262.13 that SFA funds ``shall be segregated
from other plan assets'' means that SFA funds must be held in an
account separate from the remaining assets of the plan and invested
consistent with the requirements in Sec. 4262.14. PBGC expects that if
there is any investment policy or investment management agreement
governing such account, that it would be consistent with such
investment requirements. Custody and accounting of SFA funds should be
clearly separated to properly track and account for SFA funds.

Reinstatement of Benefits Previously Suspended

Section 4262(k) of ERISA imposes two conditions on a plan that
receives SFA and had previously suspended benefits in accordance with
section 305(e)(9) or 4245(a) of ERISA.\28\ A plan must reinstate any
benefits that were suspended and must provide payments to certain
participants or beneficiaries to make up past amounts of benefits
previously suspended.
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\28\ Section 4262(k) of ERISA includes rules that are parallel
to section 432(k) of the Code. Under section 9704(d)(3) of ARP, the
Secretary of the Treasury has interpretive jurisdiction over the
rules for determining the benefit reinstatement and make-up payments
that must be made by a multiemployer plan receiving SFA, for
purposes of ERISA as well as the Code. Under section 4262(k), the
Secretary of Labor, in coordination with the Secretary of the
Treasury, must ensure benefits are reinstated and previously
suspended benefits are paid.
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As provided under section 4262(k) of ERISA, Sec. 4262.15 of the
interim final rule requires plans to reinstate these previously
suspended benefits as of the month in which SFA is paid, and to provide
make-up payments with respect to previously suspended benefits to
participants or beneficiaries in pay status as of the date that SFA is
paid, in accordance with guidance issued by the Secretary of the
Treasury. Section 4262(k) and Sec. 4262.15 give the plan sponsor
flexibility to design payment of make-up amounts as a single lump sum,
with no interest, within 3 months of the payment date of SFA, or in
equal monthly installments over a period of 5 years, commencing within
3 months of the payment date, with no installment payment adjusted for
interest. PBGC notes that IRS has advised that a late make-up payment
should be adjusted to account for the delay, and that the correction
method described in section 6.02(4)(d) of Revenue Procedure 2021-30,
2021-31 IRB 172 (which sets forth the current version of the IRS
Employee Plans Compliance Resolution System (EPCRS)), with respect to
correction of a late distribution from a defined benefit plan is a
reasonable method for computing the adjustment.
Several commenters expressed views on the payment of make-up
amounts to participants and beneficiaries in pay status. Some of those
commenters

[[Page 40991]]

preferred that make-up payments be made in a lump sum, while others
expressed concerns about the tax implications of lump sums and
suggested that retirees and beneficiaries should be able to choose the
form for their make-up payments. In addition, some commenters expressed
concern that, if a participant who had received reduced benefits
because of a suspension dies before the SFA is paid to the plan, then
the participant's estate or beneficiary would not receive make-up
payments for the benefits the participant lost because of suspension.
PBGC consulted with the IRS, which pursuant to section 432(k) of
the Code and section 4262(k) of ERISA provided guidance in Notice 2021-
38 on the make-up payments for benefits previously suspended and the
tax treatment of those payments. With respect to the form of payment,
the IRS advised PBGC that while section 432(k)(2)(A)(ii) of the Code
(which governs the repayment obligation) expressly provides for the
plan to determine whether make-up payments are paid as a lump sum or in
equal monthly installment payments over 5 years, there is no
requirement that the same form of payment must be used for all
recipients. With respect to the payment of make-up payments to deceased
participants, the IRS advised PBGC that section 432(k)(2)(A)(ii) of the
Code requires that make-up payments be made to participants and
beneficiaries who are in ``pay status'' on the effective date of the
SFA. Because a participant who died before the SFA is paid is not in
pay status as of the effective date of the SFA, no make-up payments are
made for reductions that applied to that participant and, accordingly,
make-up payments are limited to the total amount of benefits that would
have been paid to the beneficiary in the absence of the suspension but
that were not paid to the beneficiary because of the suspension.
However, if a participant dies after the SFA is paid to the plan but
before all of the make-up payments are paid to the participant, the
unpaid portion of the make-up payments must be made to the
participant's beneficiary.
Section 4262.15(c) of the interim final rule requires the plan
sponsor of a plan with benefits that were suspended under section
305(e)(9) or 4245(a) of ERISA to furnish a notice of reinstatement to
participants and beneficiaries whose benefits were previously suspended
and then reinstated in accordance with section 4262(k) of ERISA. The
requirements for the notice, including content requirements, are in the
notice of reinstatement instructions, in an addendum to the SFA
instructions, available on PBGC's website at <a href="http://www.pbgc.gov">www.pbgc.gov</a>. PBGC
received no comment on the requirement to provide notice and did not
make changes to Sec. 4262.15(c) in the final rule.
Section 4262(k) of ERISA states that ``the Secretary, in
coordination with the Secretary of the Treasury, shall ensure that an
eligible multiemployer plan that receives special financial
assistance'' reinstates suspended benefits and provides make-up
payments required by the statute. The Department of Labor notes that it
will need access to records, and, if requested, copies of records to
ensure that plans receiving SFA reinstate the suspended benefits of
participants and beneficiaries as required by section 4262(k). Plan
fiduciaries have an obligation under title I of ERISA to maintain
complete and accurate records, including information the Department may
need to ensure the timely reinstatement of suspended benefits and
payment of make-up payments under section 4262(k) of ERISA. The
Department is considering issuing guidance to address the records and
information that plans that receive SFA will need to maintain and
retain to comply with title I of ERISA.

Conditions for Special Financial Assistance

To ensure that SFA is used for the purpose of paying benefits and
the expenses related to those benefit payments, PBGC used its authority
under section 4262(m)(1) of ERISA, after consulting with the Secretary
of the Treasury, to impose reasonable conditions on an eligible
multiemployer plan that receives SFA. These conditions are described in
Sec. 4262.16 of the regulation and relate to increases in future
accrual rates and retroactive benefit improvements; allocation of plan
assets; reductions in employer contribution rates; diversion of
contributions to, and allocation of expenses to, other benefit plans;
and withdrawal liability.
Under certain circumstances, a plan sponsor may request approval
from PBGC for an exception from the conditions relating to reductions
in employer contribution rates, transfers or mergers, and settlement of
withdrawal liability. PBGC solicited public comment on whether there
are other circumstances relating to the conditions described under
Sec. 4262.16 where PBGC should consider providing approval for
exceptions. Commenters suggested adding exceptions to conditions on
retrospective benefit increases and mergers, which are discussed under
the sections on Benefit Increases and Transfers or Mergers.
(a) Benefit Increases
Section 4262(m) provides authority to impose conditions relating to
increases in future accrual rates (prospective benefit increases) and
any retroactive benefit improvements (retrospective benefit increases).
Section 4262.16(b) of the regulation imposes reasonable conditions on a
plan that receives SFA with respect to the types of benefits and
benefit increases described in section 4022A(b)(1) of ERISA, without
regard to the time the benefit or benefit increase has been in effect.
These conditions are intended to prevent excessive increases in
benefits that would result in a transfer of SFA to participants beyond
the payment of benefits at the level they had been promised as of the
date of enactment of section 4262, without being overly restrictive.
The condition does not apply to the required reinstatement of benefits
suspended under section 305(e)(9) or 4245(a) of ERISA or any
restoration of benefits under 26 CFR 1.432(e)(9)-1(e)(3).
The condition in Sec. 4262.16(b)(1) restricts retrospective
benefit increases (also referred to in this preamble as retroactive
benefit increases or retroactive benefit improvements) by providing
that a benefit or benefit increase must not be adopted during the SFA
coverage period (defined in Sec. 4262.2) if it is in whole or in part
attributable to service accrued or other events occurring before the
adoption date of the amendment. PBGC said in the interim final rule
that this condition is needed because retroactive increases in benefits
harm the funded position of the plan without improving expected future
plan income.
Commenters recommended that PBGC provide some flexibility for
retroactive benefit increases if they are paid for by additional
contributions without endangering the plan's ability to pay all
benefits. Some commenters said that PBGC was wrong in its assertion
that retroactive increases in benefits harm the funded position of the
plan, and that the prohibition is likely to be counterproductive and
reduce the likelihood of plans achieving their long-term contribution
assumptions. The prospect of benefit restorations, they stated, could
provide an incentive for active participants to remain in their plans
and to seek increased contribution rates. The commenters made various
suggestions, including permitting retroactive increases if the
financial condition of the plan improves, permitting de minimis
increases,

[[Page 40992]]

allowing an alternative pension arrangement for active workers, and
providing a procedure under which a plan may apply for an exception
from the condition restricting retrospective benefit increases.
PBGC considered whether to permit retroactive benefit increases,
similar to its condition on prospective benefit increases, but remains
concerned that retroactive benefit increases are more expensive and
riskier than prospective benefit increases. A plan amendment that
increases benefits for prior service has the effect of immediately
increasing the plan's liability. Its cost is amortized over a future
period of years and can significantly add to the employers' financial
obligation with respect to funding the plan. In this situation, if the
plan experiences actuarial losses in the future, the plan's funding
costs could become unsustainable. In contrast, the cost of a
prospective benefit increase, such as an increase in the benefit
accrual rate, generally is paid for in the year the service is rendered
and can be reduced or eliminated for future years if the plan's funding
costs become excessive.
In consideration of the comments, however, PBGC is adding Sec.
4262.16(b)(3) to provide a process by which a plan may request a
determination from PBGC for an exception from the condition relating to
retrospective benefit increases if future plan circumstances permit the
plan to provide benefit increases without endangering the plan's
ability to pay all benefits. This determination process will also apply
to an exception from the condition relating to prospective benefit
increases (discussed below). Under the new provision, beginning 10
years after the end of the plan year in which a plan receives payment
of SFA, the plan may apply for an exception by demonstrating to the
satisfaction of PBGC that, taking into account the value of any
proposed benefit increase, the plan will avoid insolvency. PBGC
considers the 10-year period necessary for the plan to demonstrate that
its actuarial assumptions for a favorable long-term outlook, such as
steadily solid projections of year-by-year contribution income, are
being realized. Moreover, the agency believes that limiting the use of
SFA initially to the protection of accrued benefits is essential to
sound fiscal stewardship. The final rule specifies the information that
a plan is required to file with its application for an exception.
The condition in Sec. 4262.16(b)(2) of the regulation restricts
prospective benefit increases by providing that a benefit or benefit
increase must not be adopted during the SFA coverage period unless the
plan actuary certifies that employer contribution increases projected
to be sufficient to pay for the benefit increase have been adopted or
agreed to, provided that these increased contributions were not
included in the determination of SFA. This condition is intended to
guard against plans implementing significant benefit increases that may
accelerate plan insolvencies and hasten an inability to pay plan-level
benefits. However, plans still have the flexibility to offer active
participants more attractive benefit accruals when the plans are able
to afford them.
One commenter requested clarification of the conditions on benefit
improvements stating that the interim final rule implies that
prospective increases are possible during the SFA coverage period while
the plan is deemed to be in critical status. The commenter stated that
section 305(f)(1)(B) of ERISA includes a requirement that no benefit
increase is permissible during a rehabilitation period unless the plan
is on track to emerge from critical status by the end of the
rehabilitation period, a date that may be decades earlier than the end
of the SFA coverage period. The conditions on benefit increases
provided under Sec. 4262.16(b) are in addition to the limitations
under section 305(f)(1)(B) of ERISA (and corresponding section
432(f)(1)(B) of the Code) applicable to plans in critical status. PBGC
is unable to opine on the requirements of section 305(f)(1)(B) of ERISA
as the funding rules are under the Treasury Department's interpretive
jurisdiction.
(b) Allocation of Plan Assets
Section 4262.16(c) of the regulation imposes a condition on a plan
that receives SFA relating to the allocation of plan assets. This
condition requires that, during the SFA coverage period, plan assets,
including SFA, must be invested in permissible investments as described
in Sec. 4262.14 sufficient to pay for at least 1 year (or until the
date the plan is projected to become insolvent, if earlier) of
projected benefit payments and administrative expenses. Under Sec.
4262.14 of the interim final rule, permissible investments were limited
to fixed income.
PBGC set the condition in Sec. 4262.16(c) under the authority
provided to it in sections 4262(l) and 4262(m) of ERISA, which PBGC
interprets as intending to prevent excessive risk-taking by plans that
receive SFA. PBGC views the gradual increase in the proportion of
assets allocated to fixed income as a plan approaches insolvency as a
sensible and prudent approach to investing over a gradually shortening
time horizon. Nonetheless, PBGC wanted feedback from the public on
whether this condition is seen as preventing plans from achieving
reasonable investment objectives. Accordingly, in the interim final
rule, PBGC requested responses, with supporting data, to the following
questions:
(1) Will the requirement to maintain 1 year (or until the date the
plan is projected to become insolvent, if earlier) of benefit payments
and administrative expenses in investment grade fixed income assets
result in an allocation that is significantly different from the
allocation that the plan's investment policy (after receiving SFA)
would otherwise attain?
(2) What are the advantages and disadvantages of PBGC not imposing
any conditions under section 4262(m) of ERISA on asset allocation
compared to the proposed condition requiring 1 year (or until the date
the plan is projected to become insolvent, if earlier) of benefit
payments and administrative expenses in investment grade fixed income?
(3) Could an alternative condition, or modification of the
condition under Sec. 4262.16(c), better achieve the objective of
preventing excessive risk-taking by plans while allowing plans to meet
their investment objectives?
Several commenters offered answers to these questions and provided
other comments about allocation of plan assets. Two commenters
generally agreed with the condition stating that it would impact
allocations only for a brief period of time and would not make a
significant difference in the overall investment allocation. Another
commenter recommended that PBGC base any restrictions on individual
plans' net cash flow positions taking contributions into account,
rather than just benefit payments. PBGC considered this comment but
determined that factoring in contributions would introduce more
administrative complexity. Other commenters disagreed with the
condition stating that it would cause plans to become insolvent earlier
than they would otherwise. After considering the comments, PBGC decided
to retain the condition in the final rule to prevent excessive risk
taking. PBGC concluded that the condition is unlikely to have a
significant impact on plans, except in years when they are approaching
insolvency.
Due to the expansion of permissible investments under Sec. 4262.14
of the final rule, as described earlier in the

[[Page 40993]]

preamble under the subheading Permissible Investments, PBGC has made
conforming changes to Sec. 4262.16(c) to reflect that the condition is
tied to fixed income. Accordingly, the final rule amends Sec.
4262.16(c) to provide that during the SFA coverage period, plan assets,
including SFA, must be invested in permissible investments that are
fixed income as described in Sec. 4262.14(d) sufficient to pay for at
least 1 year (or until the date the plan is projected to become
insolvent, if earlier) of projected benefit payments and administrative
expenses. Additionally, the investments used to meet this condition are
also subject to the limitations on derivatives and l

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