Spinning Off Separate DB Plan During Plan Year Will Not Reduce Premiums

The Pension Benefit Guaranty Corporation (PBGC) has established a web page, Staff Responses to Practitioner Questions.

“The interpretations presented below reflect the views of the staff of PBGC. They are not rules, regulations, or statements of the Corporation,” the page says.

Questions addressed relate to 430(k) liens, bankruptcy claims, premiums, distress terminations, guaranteed benefits, reportable events, valuations and others.

One interesting question addressed is whether spinning off a separate plan during the plan year is a way to reduce PBGC premiums. According to the PBGC, “Some plans are considering a strategy to avoid paying a significant portion of the statutory VRP [variable rate premium] by doing a two-step transaction under which (1) most plan participants are spun off late in the year into a new plan that is virtually identical to the old plan, but with a new name, EIN, and plan number, leaving only a small group of retirees in the original plan and (2) what’s left of the original plan is terminated (i.e., annuities are purchased for the remaining retirees). If the premium rules noted above apply to plans doing these transactions, the aggregate premium would be significantly lower than the premium that would have been owed had the plan remained intact and simply purchased annuities for that group of retirees.”

The agency notes that PBGC’s premium regulations (29 CFR Part 4006) provide that: A single-employer plan exiting the defined benefit system (via a standard termination) is exempt from the VRP in its final year, and premiums are pro-rated for new plans created as the result of a spinoff from another plan if the new plan’s initial plan year is a short plan year (i.e., less than 12 months). The question is, “Do these special premium rules apply in this situation?”

The PBGC’s short answer is with the strategy noted above, the benefits of the vast majority of the participants who were in the plan at the beginning of the year have not been fully funded or paid in full, and PBGC coverage is still in effect for these participants.

“The federal common law under ERISA and cases that look to the substance and not the form of a transaction suggest that this two-step transaction, and similar types of transactions, should be disregarded and premiums assessed as if such transaction had not occurred.  We are especially skeptical of this strategy because it seems plausible that some plans could engage in this sort of two-step transaction year after year,” the agency says.