Q&A: Bela Palli
This month’s Q&A features Ms. Bela Palli, the manager of the Standard Termination Compliance Division at the Pension Benefit Guaranty Corporation (PBGC).
Norm: What’s your position at PBGC and how long have you been there? Do you have any private sector experience? If so, what was it?
Bela: I have worked at the Pension Benefit Guaranty Corporation (PBGC) for 21 years, 11 as the manager of the Standard Termination Compliance Division (STCD). Before joining PBGC, I worked for 10 years in the private sector, mainly conducting audits in the commercial banking industry.
Norm: Several years ago I personally experienced a period of 18 months during which every single plan I had submitted under a standard termination received a post-termination audit, and it certainly felt like my plans were being targeted for some reason (hopefully this interview will not trigger that again :) ). Does this happen, or are audits of smaller plans always randomly generated?
Bela: You must feel like a part of the STCD family now :). No, we do not target plans for audit. We are statutorily required to audit a statistically significant number of plans ending in a standard termination. Currently, PBGC audits all plans with more than 300 participants and a random sample of smaller plans. Plans may also be selected for audit when there is an indication of a problem (e.g., based on a complaint from a plan participant or practitioner). In addition, we now audit all plans that distribute plan assets in satisfaction of plan liabilities before or without filing a standard termination notice (Form 500) in accordance with PBGC’s regulation (29 CFR part 4041).
Norm: Since smaller plans (under 300 participants) are audited randomly, why is it necessary to always submit the plan document with the 501? Why create this requirement for practitioners if PBGC will not audit the plan and will never need the plan document? Can we at least agree that it’s a burdensome requirement to send PBGC something they will not need?
Bela: PBGC receives hundreds of inquiries each year from individuals seeking pension benefits from plans that ended in a standard termination. We need plan documents to determine if these individuals were eligible for a benefit from the plan and what their benefit amounts are. We also need proof of distributions to determine if an eligible participant received a benefit at plan termination. To fulfill our obligation to pay guaranteed benefits to participants who did not receive them, PBGC now requires the submission of plan documents and proof of distributions along with the Form 501. I believe that instead of looking for old plan documents and distribution records years after plan termination when individuals inquire about their benefit, providing them along with the Form 501 is less burdensome on practitioners.
Norm: On post-termination audits, PBGC routinely ask for documents that many sponsors simply don’t retain, such as source documents to verify employees’ dates of birth, marital status, etc. Why is PBGC asking for these, and what are we supposed to do if we can’t get these documents?
Bela: PBGC requests source documents to verify benefits owed by the plan to its participants. These include documents to verify length of service, compensation, age, marital status, etc. Plan administrators are required to maintain records supporting the calculation and valuation of benefits and assets for at least six years after the date a post-distribution certification is filed with PBGC. If you are unable to provide source documents, you may call the PBGC auditor to discuss the case-specific circumstances.
Norm: Why do some audits take several years to complete? It's mind boggling and very frustrating to us practitioners that they drag on this long, not to mention to our clients, so I’d like to hear your perspective as to why they drag on for so long.
Bela: As mentioned earlier, PBGC is statutorily required to audit a statistically significant number of plans ending in a standard termination. We also conduct compliance audits of plans when there is an indication of a problem (e.g., based on a complaint from a plan participant or practitioner). In addition, we now audit all plans that distribute plan assets in satisfaction of plan liabilities before or without filing a standard termination notice (Form 500) in accordance with PBGC’s regulation (29 CFR part 4041).
We strive to complete audits as quickly and efficiently as possible; however, problems with obtaining complete plan records, supporting documents and answers to resolve issues add to the processing time. Additionally, in the last five years, the number of enforcements (audits that require corrective action) has more than doubled. Enforced audits, typically, take longer to complete. Like any other organization, we experience a modest amount of employee turnover which necessitates transfer of cases between auditors, resulting in longer processing times.
Despite the challenges, we are committed to working with plan sponsors and practitioners to accelerate the audit process when the need arises.
Norm: I’d like you to put yourself in the position of a plan sponsor who voluntarily sponsors a defined benefit plan, and then after several years decides to terminate the plan and chooses to submit the termination to IRS for approval. They wait and get IRS approval, make distributions, and then subsequently receive a post-termination audit from PBGC, and PBGC disagrees with how some benefits were calculated, and requires additional distributions to be made. Can you see from the sponsor’s perspective how that is very frustrating? Couldn’t PBGC work with IRS to together come up with a termination review standard so that if the sponsor receives IRS approval, that is a de facto acceptable standard for PBGC?
Bela: A favorable determination letter issued by the IRS on plan termination is only determinative of the issue of tax qualification. Title IV of ERISA requires PBGC to audit plans to determine if participants and beneficiaries have received the benefits they earned. PBGC is the only federal agency charged with protecting the benefits of participants whose plans have ended in a standard termination. Accordingly, notwithstanding a favorable IRS determination letter, PBGC may take enforcement action if it determines that participants or beneficiaries have not received their benefits.
It would be helpful if professionals assisting with the termination of the plans explain this to plan sponsors and administrators.