Monthly Archives: November 2012
Friday, November 30, 2012

Now that we’ve returned from Thanksgiving and have finished off the leftover pumpkin pie, we wanted to share a few more recent benefits-related(ish) stories and other links.

  • In case you didn’t see it, last week the DOL issued compliance guidance for employee benefit plans in wake of Hurricane Sandy.
  • This blog post lists four ways to internally market your benefits and compensation programs.
  • One way you might help participation in your wellness programs is develop an app, says this article.
  • Are you having trouble keeping track of all the lawsuits about the PPACA contraceptive mandate?  Fortunately for you, Politico has a good summary.
  • Some other countries provide some interesting benefits, as detailed in this article.  Which ones would you like to see replicated in the US?

Have a link that you’d like to share?  Leave us a comment below or send it to us at LinkedIn or Twitter.


Tuesday, November 27, 2012

After failed court-ordered mediation, Hostess Brands, Inc. – makers of iconic bakery goods that include Twinkies, Ding Dongs, Ho Hos and Wonder Bread – received permission from a bankruptcy court to cease operations and liquidate last week.

So, what does the impending liquidation of Hostess have to do with employee benefits? Well, one of the largest issues facing Hostess has been crippling union pension contributions, which have been reported as high as $1 billion.

Members of the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union, which represents roughly 30% of the Hostess workforce, went on strike after rejecting the company’s latest contract offer which would have reduced the employees’ wages, pension contributions and health care benefits. Management at Hostess threatened that a failure to get the union members back to work would tie their hands and force them to close their doors.  Following the expiration of a deadline set for the union workers to come back to work, Hostess followed through on its threat and announced it would close its doors.  While the bankruptcy judge overseeing the case initially required that Hostess mediate with the union to see if the liquidation could be avoided, the mediation efforts quickly broke down and the judge approved the liquidation.

Roughly 18,500 Hostess workers will lose their jobs over the next year.  The small silver lining? Many of the bakery brands that Americans have come to know and love, like Twinkies, are likely to be scooped up by the highest bidder – who would be freed from the pension contribution obligations which crippled Hostess.

Tuesday, November 20, 2012

Originally posted on by Kathy Sherby & Stephanie Moll

The Tax Court in Neff v. Commissioner, TC Memo 2012-244 (8/27/2012) recently ruled on the income tax consequences of the termination of a split dollar life insurance arrangement (“SDLIA”), in ruling that the payment of a discounted amount by the employees on the termination of the SDLIA resulted in the recognition of income to the employees to the extent of the difference between the amount owed to the corporation under the SDLIA and the amount the employees paid. The Tax Court did not address the issue of the extent the equity portion of a SDLIA may be subject to income taxation on the termination of the SDLIA as that issue was not raised by the Service nor addressed by the Tax Court.

This case involves a pre-final regulation SDLIA to which the final regulations do not apply. Rather Rev. Ruls. 64-328 and 66-110 and Notice 2002-8 apply to determine the income tax consequences of the rollout of the SDLIA. Here the two employees/owners of the J & N Management Company (the “Company”) entered into split dollar arrangements whereby the Company was obligated to pay the premiums on six life insurance policies owned by the employees and family limited partnerships of the employees. In return, the Company was entitled to receive the lesser of the premiums paid and the cash value of the policies on the termination of the SDLIA. By the end of 2003, the Company had paid $842,345 in premiums and the cash value of the policies was $877, 432. The employees and the Company orally agreed to terminate the SDLIA with the employees paying the Company the discounted present value of the right to receive the premiums paid at the death of the employees. However, the Company was entitled to reimbursement of the premiums paid on the termination of the policy and were not required under the terms of the SDLIA to wait until the death of the employee to recover those funds. As a result of discounting the value of the Company’s entitlement, the employees paid the Company $131,969 instead of the $842,345 owed to the Company on termination of the SDLIA, and the Company released its interest in the policies. The IRS then included the difference of $710,376 in the taxable income of the employees for 2003 and assessed an income tax deficiency.

The Tax Court ruled that Neff and Jensen received substantial value from the Company related to their employment when they ended up with unrestricted rights to the remaining cash value of the policies, and that as a result, Neff and Jensen realized taxable compensation income. The Tax Court stated that “each year an SDLIA was in effect, an employee was required to include in taxable income the total value or cost of the economic benefit received each year by the employee, less any amount contributed by the employee.” However, the Tax Court noted that Neff and Jensen had not included any amount in income. Interestingly, the government did not assess a tax deficiency on this failure to include the economic benefit in taxable income for the several years the SDLIA was in place. Had the taxpayers included such economic benefit in taxable income, they could have asserted that they were entitled to a reduction in the taxable income from the economic compensation income on termination of the SDLIA.

The Tax Court then held that, notwithstanding the arguments of the taxpayers, the transaction constituted “an effective rollout of the SDLIAs and that the equity split dollar life insurance arrangements were terminated” despite the absence of a written termination agreement, and that as a result, Neff and Jensen realized the economic benefit of the difference between the premiums paid by the Company and the discounted amount repaid to the Company by Neff and Jensen, which economic benefit was includible in their taxable income.

The Tax Court did not rule on, and was not presented with, the question of the extent to which the equity in the policies at the time of the termination of the SDLIA, the difference between the premiums paid of $842,345 and the cash value of $877,436, would also be taxable to the employee on pre-final regulation policies on termination of the SDLIA. Therefore, the practitioner cannot assume that this equity would not be includible as taxable income on rollout of a SDLIA. At most, this case stands for the proposition that these taxpayers were not called upon to defend the inclusion of such equity in their taxable income. Perhaps this was because the easier case was the includibility of the economic benefit of not having to repay the Company the full amount of the premiums paid, and the amount of the equity on termination of these policies was small in relation to this much larger economic benefit.

As a final note, the Tax Court declined to impose a § 6662(a) penalty on the taxpayers, stating that the taxpayers “acted with reasonable cause and in good faith in relying on their professional tax advisers…” Really?? Was it really reasonable for Neff and Jensen to assume they could be relieved of the obligation to repay the Company for the $842,345 in premiums paid with a repayment of $131,969 without any income tax consequences?

Disclaimer/IRS Circular 230 Notice

Monday, November 19, 2012

On November 16, the IRS released guidance intended to assist individuals impacted by Hurricane Sandy by providing access to certain retirement funds.  Under the guidance, 401(k) plans and similar employer-sponsored retirement plans (including 403(b) plans and, in the case of plans maintained by governmental employers, 457(b) plans) can make loans and hardship distributions to victims of Hurricane Sandy and members of their families.

The Internal Revenue Code generally contains strict rules governing when and how a hardship distribution can be made.  Under the guidance released on Friday, the IRS has clarified that a distribution to a qualified participant (described below) to meet needs arising from Hurricane Sandy will not run afoul of those rules.  The guidance also relaxes the “red tape” typically involved in obtaining a plan loan or distribution from a plan.

Under the relaxed rules, a plan loan can be made by making a “good-faith diligent effort under the circumstances” to comply with the generally-applicable procedural requirements so long as, as soon as practicable, the plan administrator makes a reasonable attempt to assemble any forgone documentation.

In the hardship distribution context, this means that a plan administrator can rely solely on a representation from the participant as to the need for and the amount of a hardship distribution (that is, unless the plan administrator has actual knowledge that the participant’s representation is incorrect).   Plans are also not required to impose the typically required six month delay on making elective deferrals following receipt of a hardship distribution received on account of Hurricane Sandy.

In order to qualify for the relief, a retirement plan participant or his/her son, daughter, grandchild, parent, grandparent, spouse or other dependent must have either lived or worked in a covered disaster area on October 26, 2012.  Covered disaster areas include those “federally declared disaster areas [listed] in the News Releases issued by the IRS for Victims of Hurricane Sandy”.  This list is available here

While a plan does not need to be amended before it can make a loan or hardship distribution under this guidance, it must be amended by no later than the end of the first plan year beginning after December 31, 2012 (i.e., by December 31, 2013 for calendar year plans).

NOTE – To qualify for this special relief, a hardship distribution must be made by no later than February 1, 2013.

Related Links (Updated Dec 4)

IRS Dec. 11 Phone Forum on Sandy Relief

IRS Slides for Dec. 11 Phone Forum on Sandy Relief

DoL Guidance on Sandy Relief


Disclaimer/IRS Circular 230 Notice

Friday, November 16, 2012

Just as we did last week, below, we share some recent benefits-related(ish) stories and other links.

  • Today would have been the deadline for states to submit their PPACA health insurance exchange blueprints, but HHS extended the deadline for the blueprints and then, a few days later, extended the deadline for states to tell HHS if they were starting an exchange.   As these reports from Kaiser show, some states are in and some states are out.  State Refor(u)m is keeping a list of state responses here.
  • The IRS released the latest edition of the Employee Plans News with some helpful information about plan administrative issues.
  • The New York Times recently featured one company that is offering income for life through its 401(k) plan.  Is this something you’re considering?
  • This Wall Street Journal article shares some innovative weight loss technologies employers are using to curb health care costs.

Have a link that you’d like to share?  Leave us a comment below or send it to us at LinkedIn or Twitter.

Wednesday, November 14, 2012

The Eleventh Circuit Court of Appeals recently issued an opinion that provides guidance on what constitutes an appeal for purposes of exhausting administrative remedies under ERISA § 503.  In Florida Health Sciences Center, Inc. v. Total Plastics, Inc. (Nov. 6, 2012), the Court held that a participant’s written protest to the signing of a subrogation agreement did not constitute an administrative appeal of the plan administrator’s claim denial.  To read a copy of the Eleventh Circuit’s opinion, click here.

The case involves tragic facts.  Kristy Schwade’s infant son started to exhibit symptoms of “shaken baby syndrome” when he was five months old.  The cause of the condition was ultimately traced to a daycare provider, who later pled guilty to aggravated child abuse.  Doctors determined that the child had incurred catastrophic and permanent brain damage, which required hospitalization and continuous medical treatment.  The child later died at age four.

For the first two months after the child’s injury, his medical expenses were paid by the ERISA medical benefits plan sponsored by Schwade’s employer, Total Plastics, Inc.  Thereafter, the plan administrator sent Schwade a letter explaining that it could not process her claim for benefits unless she signed and returned a subrogation agreement.  The administrator’s request was consistent with the subrogation provision in the SPD, which expressly provided that: (i) “if requested,” a participant must “execute documents . . . and deliver instruments and papers and do whatever else is necessary to protect the Plan’s rights;” and (ii) the administrator “has no obligation” to pay medical benefits if the participant “does not sign or refuses to sign” the documents.

Schwade never responded to the administrator’s request for a signed subrogation agreement.  In the months that followed, the plan administrator sent Schwade 54 separate Explanation of Benefit (“EOB”) forms showing non-payment of provider claims.  Nearly all of those EOB forms explained that the claims were not payable because the plan “needed updated accident information to process [the] claim.”  The EOBs provided a phone number and a website Schwade could use to contact the plan administrator, but she never responded to any of the EOBs.

Seven months later, Schwade’s lawyer sent a protesting the plan administrator’s position and complaining that the language of the subrogation agreement was “totally unacceptable.”  The lawyer then tried to cut a deal with the plan.  In follow-up correspondence, he proposed that that Schwade and the plan split any recovery from a civil action equally (after payment of attorneys’ fees and costs).  The plan ignored the lawyer’s proposal.

Tampa General Hospital ultimately sued Schwade for more than $600,000 in unpaid medical expenses.  Schwade filed a third-party complaint against Total Plastics, challenging the plan’s denial of benefits.  The trial court granted summary judgment to Total Plastics on the grounds that the lawyer’s correspondence did not constitute an administrative appeal, and that Schwade therefore did not exhaust her administrative remedies under the plan.

On appeal, the Eleventh Circuit affirmed the trial court’s grant of summary judgment.  It rejected Schwade’s argument that the attorney letters constituted an “appeal,” and it noted that even if the letters could be construed as an appeal, they were sent after the expiration of the plan’s 180-day administrative appeal period.

The late submission of the protest letters from Schwade’s lawyer clouds the real holding in this case.  The import of Florida Health Sciences Center is that mere written protests to the signing of a subrogation agreement do not constitute an administrative appeal for exhaustion purposes.  In order to exhaust administrative remedies, and thereby preserve a claim for litigation, the claimant should make it clear that he or she is appealing the prior denial of benefits and at least attempt to address the merits of the claim denial.  Protestations as to the fairness of an express subrogation requirement will not carry the day.

Tuesday, November 13, 2012

Now that the election dust has settled, much of the news is about the looming fiscal cliff (as discussed on our sister blog, As most of us recall, this is not a new issue, but one that our elected leaders have created for us. (This Forbes op-ed has a pretty good explanation, including mentioning the tax increases we’ve blogged about previously.)

In 2010, the National Commission on Fiscal Responsibility (commonly known as the Simpson-Bowles Commission) issued its report on how to solve the fiscal crisis. Among the features of its comprehensive plan were 2 benefits related items. Given that a combination of a lame duck Congress and a second term President are likely to address the fiscal cliff in some fashion, it is worth revisiting the report and these two items, as they will probably factor in the discussion.

One benefits item was capping the tax exclusion for employer-provided health insurance at 75% of the 2014 cost until 2018, with a gradual phase out of the cap lasting until 2038.  (The report also suggests reducing the PPACA “Cadillac Tax” from 40% down to 12%.)  While capping the tax exclusion for health insurance (the largest of the so-called “expenditures”) would be unpopular, our guess is that it would probably not have a great impact on the availability of employer-provided insurance. The availability of the health care reform insurance exchanges, if they are viable and provide affordable coverage, are more likely to have an impact.

The other benefits-related item is capping the tax deduction for retirement plan contributions to the lesser of $20,000 or 20% of income. Many in the retirement industry panned this idea when it was originally proposed, including both ASPPA and the American Benefits Council.  ASPPA has recently gone so far as to create “” and Facebook and Twiter accounts to allow people to voice their displeasure with the proposal to their Congresspeople and share information about the importance of retirement savings.

Part of the problem is that, for budgeting purposes, Congress treats the retirement contribution tax benefit as revenue lost, which is not completely accurate.  Unlike the tax exclusion for employer-provided health insurance (which is lost revenue), the government does receive the revenue from retirement contributions, just many years down the road.  Because the revenue is collected outside the window that the Congress uses to determine the budgetary impact of tax bills, it appears to be “lost” to lawmakers when they are reviewing bills.  However, it is, in fact, only delayed.

As we’ve blogged previously, there is a belief among some that there is a retirement crisis in America and both federal and state plans have been proposed to address it.  It seems to run counter to the idea of solving a retirement crisis to limit contributions to retirement accounts.  That said, there are tough decisions ahead to address the fiscal cliff, and retirement savings may be an unfortunate casualty of the inevitable political battle.

Friday, November 9, 2012

As a new feature here on, we are going to regularly share some recent benefits-related(ish) stories and other links.

  • Get out your flotation devices because Politico is predicting a post-election flood of health care reform guidance.
  • Several states had PPACA measures on the ballot.  You can check out this list of the measures, and how they fared on election night.
  • Speaking of health care and elections, this Washington Post article says many employees are overwhelmed by open enrollment.
  • And just when you thought we were done with PPACA litigation, the Obama administration has said it does not have a problem with the Supreme Court allowing Liberty University’s challenge to PPACA to be reviewed at the Fourth Circuit.
  • A Plan Sponsor Council of America study showed that participant fee disclosure did not significantly change participant behavior, but it did change the behavior of some plan sponsors.
  • Do you think you know your facts about health care?  Take this short LA Times quiz and see how your score.

Have a link that you’d like to share?  Leave us a comment below or send it to us at LinkedIn or Twitter.

Thursday, November 8, 2012

It’s that time of year again!  Time to ensure year-end executive compensation deadlines are satisfied and time to plan ahead for 2013.  Below is a checklist of selected executive compensation topics designed to help employers with this process.

I.       2012 Year-End Compliance and Deadlines

□      Section 409A – Amendment Deadline for Payments Triggered by Date Employee Signs a Release

It is fairly common for an employer to condition eligibility for severance pay on the release of all employment claims by the employee.  Many of these arrangements include impermissible employee discretion in violation of Section 409A of the Internal Revenue Code because the employee can accelerate or delay the receipt of severance pay by deciding when to sign and submit the release.  IRS Notice 2010-6 (as modified by IRS Notice 2010-80), includes transition relief until December 31, 2012 to make corrective amendments to plans and agreements.

Generally, the arrangement may be amended to either (1) include a fixed payment date following termination, subject to an enforceable release (without regard to when the release is signed), or (2) provide for payment during a specified period and if the period spans two years, payment will always occur in the second year.  We recommend employers review existing employment, severance, change in control and similar arrangements to ensure compliance with this payment timing requirement.  The December 31, 2012 deadline for corrective amendments is fast approaching.

□      Compensation Deferral Elections

Compensation deferral elections for amounts otherwise payable in 2013 must generally be documented and irrevocable no later than December 31, 2012.  The remainder of 2012 is sure to pass quickly, especially with the added distractions of the elections and tax law uncertainty.  Employers should consider additional communications to ensure the deadline is not overlooked. (It’s also a good time to confirm 409A compliance generally, as we have discussed previously.)

□      Payroll Deduction True-Up for Fringe Benefits and Other Compensation

Some employers utilize a rule for administrative convenience that permits income and employment tax withholding on certain items of compensation to be made at the end of the year (i.e., imputed income on after-tax long-term disability premiums).  Employers should ensure that all payroll deductions for taxable compensation for the year are taken into consideration.

□      Annual Compensation Risk Assessment for SEC Reporting Companies

Beginning with the 2010 proxy season, companies have been required to perform a risk assessment of their compensation policies and practices.  The purpose of the assessment is to evaluate compensation-related risk-taking incentives.  Where a company determines that its employee compensation program includes  “risky” pay policies and practices, it must include disclosures (including mitigating practices).  In recent addresses, representatives of the SEC have included a “reminder” to public companies that the compensation risk assessment must be performed annually.

□      Compensation Consultant Conflict of Interest Assessment for SEC Reporting Companies

Beginning with the 2013 proxy season, the Dodd-Frank Act requires a company to disclose whether the work of its compensation consultant has raised any conflict of interest.  The assessment should consider six specified factors outlined in the rules.  The purpose of the assessment is to determine whether the work of the consultant raised a conflict of interest.  If the company determines a conflict of interest was raised, the company must disclose the nature of the conflict and how the conflict is being addressed.

II.     2013 Planning

□      Section 162(m) Employer Compensation Deduction Limit

Section 162(m) of the Internal Revenue Code limits the deduction for a publicly-held corporation to $1 million for each covered employee (typically the chief executive officer and four most highly compensated officers, other than the CEO and CFO).  This deduction limit does not apply to “qualified performance-based compensation.”  To qualify for the exception, the compensation must be payable solely on account of the attainment of one or more pre-established performance goals and other technical requirements must be satisfied.  Employers should review their plan design and administrative practices to ensure compliance with the technical requirements.  For example:  (1) review the timing of prior shareholder approval to determine whether new shareholder approval must be obtained in 2013, (2) confirm that the compensation committee is comprised solely of two or more “outside directors,” and (3) ensure that the committee timely establishes the performance goals for the new performance period, and pre-certifies the level of achievement of the performance goals at the end of each performance period.  A few other technical requirements to note include:

  • If the company issues restricted stock and restricted stock units (RSUs) that are designed to qualify as performance-based compensation, any related dividends and dividend equivalents must separately satisfy the performance-based compensation requirements (i.e., must be contingent on achievement of the performance goals).
  • It is common for a shareholder-approved equity plan to include a per-employee share limit for a stated period for awards granted under the plan.  It is important for the company to keep track of this limit to ensure actual awards do not exceed this cap.

New for 2013 – Deduction Limit for Health Insurance Providers and Related Entities

A new provision enacted under the Health Care Reform law takes effect on January 1, 2013.  New Section 162(m)(6) of the Internal Revenue Code limits the deduction covered health insurance providers (and their related entities) may take for compensation paid to certain employees in excess of $500,000.   There is no performance-based compensation exception to this limit.

□      Monitor Tax Law Changes

There are a number of tax law changes scheduled to occur beginning in 2013 that will impact required income and employment tax withholding for many forms of executive and equity compensation.  Congress could act to extend some tax rate cuts beyond 2012.  We recommend employers monitor tax law developments and be prepared to make changes to current payroll reporting processes.  Below are some of these changes:

Employment Taxes.  On October 16, 2012, the Social Security Administration announced employment tax rates for 2013.  The taxable wage base for earnings subject to the Social Security tax for 2013 is $113,700, up from $110,100 in 2012.  In addition to an increase in the Social Security taxable wage base, the tax withholding rate is scheduled to return to 6.2% (the temporary 4.2% reduced rate is scheduled to expire at the end of 2012).  The Medicare tax also applies and the required withholding rate is an additional 1.45% with no wage limit.  Starting in 2013, an additional Medicare tax of 0.9% applies to earnings from wages and other taxable compensation over a threshold amount (i.e., $200,000-$250,000 based on filing status).

Supplemental Wage Withholding.  The supplemental wage withholding rate is used by  employers for income tax withholding on bonus, commissions, severance payments, equity awards and other special payments.  The supplemental wage withholding rate for 2012 is 25% or a mandatory 35% once aggregate supplemental wages exceed $1 million for the year.  Due to the scheduled expiration of the Bush-era tax cuts, the 2013 rates are scheduled to increase to 28% and 39.6% for aggregate amounts in excess of $1 million.

□     Proxy Statement Preparation for SEC Reporting Companies

With the implementation of Say on Pay, proxy statement disclosures serve as a key investor communication tool to help explain the company’s compensation program and how it ties to company performance.  Now is the time to improve disclosures and implement best practices for the upcoming proxy season.  Below are some areas for consideration:

  • Add an executive summary at the beginning of the proxy statement
  • Reorganize the proxy and improve the table of contents
  • Begin the CD&A with highlights including company financial performance and the absence of problematic pay practices
  • Add a comparison of realizable pay to Summary Compensation Table pay (consider using charts and graphs)
  • Explain how the performance pay measures and targets were selected and the outcome of actual results
  • Improve disclosure of peer group selection, benchmarking and company rank
  • Explain recent compensation design changes and rationale for the changes
  • Remove excess words and repetitive disclosures


 Disclaimer/IRS Circular 230 Notice

Wednesday, November 7, 2012

Last Friday, the Pension Benefit Guaranty Corporation officially announced a change in enforcement under ERISA § 4062(e) that had been encountered some time ago by practitioners.  This is the “Third Act” in the unfolding saga of 4062(e) enforcement.

In broad terms, 4062(e) gives the PBGC the authority to seek protection for a defined benefit pension plan by forcing an employer to fund, or post security to fund, a pension plan if there is a substantial cessation of operations at one or more facilities covered by the plan.  Essentially, if there was a 20% or greater reduction in headcount at a facility, the PBGC could force the employer to fund the pension plan with respect to the terminated employees.   This provision has been in the law since 1974, but was rarely enforced until the mid-2000s. The thinking was that by forcing employers to fund their plans in these situations, it would reduce the likelihood that the plan would be turned over to the PBGC or would ease the burden on the cash-strapped PBGC (which is funded only by premiums from companies that sponsor pensions) if it did eventually get turned over.  When the PBGC began enforcing it in earnest it would, in most cases, negotiate with sponsors to either put money in escrow, post a bond, get a letter of credit, or make an additional contribution to the plan.

Act I.  The PBGC proposed regulations in 2010 that expanded the scope of the statute even further, to include items like the sale of a facility, even where operations at the facility did not cease.  This was widely viewed as a significant expansion of the statute and arguably beyond the PBGC’s authority.  In response, the practitioner community fought the PBGC’s rule, and ultimately got the PBGC to reconsider the proposed rule as part of its regulatory review plan under President Obama’s directive for agencies to engage in a review of their regulations.

Act II. However, apparently word that the proposed 4062(e) regulations were under consideration did not get around at the PBGC as fast as practitioners would have liked because even after the PBGC announced it was reconsidering the proposed rule, practitioners complained that the PBGC was enforcing the rule as if it was current law.

Act III. After the backlash from enforcing a proposed rule under reconsideration, the PBGC said it would adopt a different enforcement approach.  The PBGC began to raise, in individual cases, the issue of the creditworthiness of the plan sponsor and this eventually culminated on Friday in the form of FAQs.  The brief FAQ basically confirms two important points.  First, the PBGC will not assess 4062(e) liability against plans with 100 or fewer participants.  Second, in pursuing any 4062(e) enforcement action, the PBGC will consider the creditworthiness of the plan sponsor.  If the plan sponsor is sufficiently creditworthy, the PBGC will not assess 4062(e) liability and force the sponsor to fund the plan for the terminated participants.

While the guidance is helpful to many plan sponsors, it does not deal with the statutory expansion that the PBGC engaged in as part of its proposed regulations.  That said, the guidance is practical in some respects.  By not pursuing smaller plans and those of creditworthy sponsors, the PBGC is recognizing that, even under the statutory framework, it may not make sense in all circumstances to force a funding of a plan where the risk that the plan sponsor will turn the plan over to the PBGC is minimal.  This is responsive to some practitioner concerns that 4062(e) liability was being assessed in some circumstances where the plan in question posed little to no risk to the PBGC.

However, the enforcement position could backfire if it forces employers who are less financially stable to use their potentially dwindling assets to fund pension plans.  In doing so, it could increase the likelihood that those sponsors will subsequently fail and turn their plans over to the PBGC.  In some cases, those assets might have been better served to stay in the company and keep it afloat.  Therefore, the guidance creates a delicate balancing act where the PBGC has to choose whether the money is better served to stay with the sponsor or be put in the plan. While the PBGC may receive relief in the form of better-funded plans, it may also cause some plans to become the PBGC’s responsibility due to a plan sponsor failure that would not otherwise become so.  It remains to be seen whether this new enforcement approach creates a better or worse situation for plan sponsors and the PBGC.

Disclaimer/IRS Circular 230 Notice