The Pension Benefit Guaranty Corporation (“PBGC”) recently requested Office of Management and Budget approval of a proposed form for plan sponsors (or administrators) to submit when requesting a determination from PBGC as to whether a plan is covered under Title IV of the Employee Retirement Income Security Act of 1974 (“ERISA”). 83 Fed. Reg. 62629 (Dec. 4, 2018). The form lists information that a plan sponsor must submit when seeking a coverage determination with respect to substantial owner plans, small professional service employer plans, church plans, and Puerto Rico-based plans.
As discussed more fully below, the proposed form is significant because it may signal a more streamlined process for coverage determinations with respect to church plans, which have been the subject of substantial litigation over the past several years. Unfortunately, the proposed form does not address governmental plans, for which PBGC has generally ceased making coverage determinations pending further development of a 2011 IRS advance notice of proposed rulemaking to clarify the definition of those plans. Public comments on the proposed form must be submitted by February 4, 2019.
Under section 4021 of ERISA, a defined benefit pension plan that meets the qualification requirements for such plans under section 401 of the Internal Revenue Code (“Code”), or has been determined by the IRS to be a qualified plan, generally is covered by Title IV of ERISA (i.e., the PBGC insurance program). However, ERISA section 4021(b) identifies categories of plans that are not covered by PBGC notwithstanding their tax qualification. The most common of these exclusions include:
- Governmental plans, or generally plans that are established and maintained by the federal government, or state government or political subdivision, or by any agency or instrumentality of any of the foregoing (ERISA section 4021(b)(2)),
- Church plans, or generally plans that are established and maintained by a church or by a tax-exempt organization controlled by or associated with a church (ERISA section 4021(b)(3)),
- Substantial owner plans, or plans established and maintained for a substantial owner (ERISA section 4021(b)(9)), and
- Professional service employer plans, or generally plans established and maintained by a professional service employer and that do not have more than 25 active participants (ERISA section 4021(b)(13)).
Furthermore, a plan with a trust that is not based in the United States, such as Puerto Rico plans, will not qualify under the Code (though Puerto Rico-based plans can make an irrevocable election under ERISA section 1022(i)(2) to be tax qualified), and, therefore is not covered by PBGC.
If a pension plan is not covered by PBGC, the sponsor does not need to pay costly PBGC insurance premiums. Additionally, these plans are generally not subject to other ERISA requirements, such as funding, vesting, and reporting and disclosure requirements, as well as the fiduciary responsibility rules.
II. PBGC Coverage Determinations – Background
A plan sponsor or administrator typically seeks a determination from PBGC that a plan is not covered to confirm the sponsor has no obligation to pay PBGC premiums or comply with other PBGC rules. Plan sponsors are often reluctant to not pay (or stop paying) PBGC premiums in the absence of a formal determination because, if PBGC concludes the plan is covered, PBGC will seek to recover unpaid premiums, interest, and penalties. Alternatively, some sponsors have, for various reasons, sought an affirmative determination from the PBGC that a plan is covered. A sponsor’s request for refund of premiums on the basis that the plan is not covered is treated by PBGC as a coverage determination request.
In the past, plan sponsors typically submitted a written request to PBGC for a coverage determination outlining the facts and the sponsor’s reasoning for why the plan is not covered. PBGC would then request that the sponsor provide information PBGC deems necessary to make the coverage determination.
The proposed form, if approved, would streamline the process by requiring the sponsor to submit the necessary information in the initial request for the coverage determination. The information PBGC proposes to request depends on the type of plan at issue and includes participant information, sponsor owner and ownership information, corporate organizational documents, and information regarding corporate activities.
III. Church Plan Coverage
Notably, the proposed form addresses information needed for a church plan coverage determination (i.e., a copy of an IRS determination letter that the plan is a church plan and an election by the sponsor that the plan is covered by ERISA, if applicable). (We note that plan sponsors may also seek a Private Letter Ruling from the IRS or an Advisory Opinion from the Department of Labor regarding whether a pension plan is subject to ERISA.) This is significant because PBGC has issued few coverage determinations for church plans in recent years likely due, in part, to numerous lawsuits challenging the church plan status of several religiously-affiliated hospital-sponsored pension plans. The plaintiffs in these suits argued that only churches can establish a church plan, and that religiously-affiliated hospitals are not churches.
The law became more settled last year when the Supreme Court ruled on June 5, 2017 that church plans need not be established by churches but can be maintained by certain tax-exempt organizations that are controlled by or associated with a church. Notwithstanding the Supreme Court’s ruling, litigation continues regarding these church plan, where plaintiffs argue, inter alia, that the plan sponsor is not sufficiently controlled by or associated with a church for the plan to qualify as a church plan.
Perhaps due to the legal developments and increased clarity of the legal landscape regarding church plans, PBGC, through the proposed form, appears to be willing to issue coverage determinations regarding purported church plans. However, it is unclear whether PBGC will make a determination with regard to a plan that is the subject of ongoing litigation. Such a determination could raise issues as to the appropriate “deference” that a court should give to PBGC’s determination.
IV. Governmental Plans
In 2011, the IRS issued advance notice of proposed rulemaking to define the term “governmental plan” under section 414(d) of the Code. The anticipated rulemaking is relevant to PBGC’s coverage determinations with respect to governmental plans because PBGC has historically relied on IRS guidance in making such a determination. Moreover, PBGC, the IRS, and the Department of Labor historically coordinated on governmental plan determinations. The anticipated proposed rule, which was drafted in consultation with PBGC, would define key terms in the definition of governmental plans such as “established and maintained,” “political subdivision,” “agency,” and “instrumentality.”
Since the 2011 notice of the anticipated proposed regulations was published, PBGC has made very few coverage determinations with respect to governmental plans. PBGC’s reluctance to issue determinations can be challenging for plan sponsors, particularly those that are paying PBGC premiums pending PBGC’s response to the coverage determination request. It is especially problematic for sponsors paying premiums because historically PBGC has not paid interest on premium overpayments. Moreover, PBGC has taken the position that only premiums paid within the 6-year limitations period under ERISA 4003(f)(5)(A) can be refunded to the sponsor. This means that if a sponsor pays premiums while a coverage determination request is pending and PBGC later determines a plan is a non-covered governmental plan, PBGC may take the position that only premiums paid within the previous 6 years may be refunded, and without interest.
In light of these issues, the absence of any reference to governmental plans from the proposed form is significant. Although the form does have a general box for “[o]ther exemption under ERISA § 4021(b),” which a plan sponsor would check if submitting a request for coverage determination with respect to a governmental plan, PBGC does not list documents that it would need from the plan sponsor to make such a determination.
V. Options for Governmental Plan Sponsors
Plan sponsors of governmental plans that have made a coverage determination request and/or a request for premium refund to PBGC but have not received a response in a reasonable time may want to consider taking additional steps given that PBGC does not currently appear to be willing to issue governmental plan coverage determinations.
First, a plan sponsor should consider requesting that PBGC enter into an agreement to (a) toll the 6-year limitations period under ERISA section 4003, foreclosing any later argument by PBGC that the sponsor cannot recover premiums paid more than 6 years before PBGC’s coverage determination, and (b) pay interest on any premiums refunded to the sponsor as permitted under ERISA section 4007(b)(2).
If PBGC declines to enter into such an agreement, the sponsor may consider not making premium payments and instead wait for PBGC to pursue the collection of premiums from the sponsor if the agency believes the plan is covered. Sponsors should consider, however, that PBGC is required under ERISA section 4007 to assess interest on due and unpaid premiums, and may assess penalties (currently up to 50 percent of the unpaid premiums). PBGC has issued guidance as to the circumstances in which it may waive premium penalties, such as legal error or reliance on an erroneous interpretation of the law.
Another option sponsors that have requested a premium refund based on governmental plan status might consider is filing an action in federal court seeking a declaratory judgment that the plan is not covered by ERISA or PBGC’s insurance program. Such an action would force PBGC to take a position on the covered status of the plan notwithstanding the lack of an IRS regulation defining governmental plans.
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For additional information or to discuss PBGC issues, please contact the authors or your Groom attorney.