Last month, the Pension Benefit Guaranty Corporation (PBGC) issued new proposed regulations on reportable events under ERISA (the 2013 Proposal) that supersede proposed regulations issued in 2009 (the 2009 Proposal). The PBGC expects that the 2013 Proposal would reduce reporting requirements for more than 90 percent of companies and pension plans and would exempt from many requirements all small plans and the more than 70 percent of pension plans whose sponsors are “financially sound” (as explained below).
Under ERISA Section 4043 and the current PBGC regulations thereunder (Current Regulations), a contributing sponsor or plan administrator of a defined benefit pension plan subject to Title IV of ERISA must notify the PBGC when certain events occur that may indicate a plan funding problem and possible need to terminate the plan. These “reportable events” include failures to make minimum required funding contributions, missed benefit payments and loan defaults. In certain circumstances, these reportable events must be reported to the PBGC before the event occurs (“advance notice”), and in other circumstances the reporting requirement is waived if the plan’s funding level is at or above certain levels.
After receiving notice of a reportable event, the PBGC may seek more information and will decide whether or not PBGC action is needed. For failures to report when required, the PBGC may assess penalties of up to $1,000 per day.
The 2009 Proposal
The 2009 Proposal would have eliminated most automatic waivers and extensions in the Current Regulations. The PBGC’s rationale was that many of the automatic waivers and extensions in the Current Regulations were depriving it of early warnings that would enable it to mitigate distress situations. Also, the PBGC justified the reporting burden stemming from the elimination of most of the automatic waivers and extensions by its need for timely information that might contribute to plan continuation or the minimizing of funding shortfalls.
Public reaction to the 2009 Proposal was negative. Plan sponsors and pension practitioners asserted that the PBGC would have required reporting where the actual risk to plans and PBGC was minimal.
Commenters on the 2009 Proposal also claimed that commercial lenders typically incorporate PBGC reportable events into credit agreements as triggers indicating that the borrower’s ability to pay is in question and possibly constituting a default under the loan. The elimination of the waivers, commenters argued, could result in defaults occurring even in situations where the creditworthiness of the plan sponsor/borrower remains sound. In the preamble to the 2013 Proposal, the PBGC indicated that it has not been able to substantiate these concerns. It reviewed 25 credit agreements from 20 distressed and/or small public companies and found that an event of default would not automatically be triggered by a reportable event in any of the agreements, and 17 of the agreements would not have been affected at all by the changes that would be made by the 2009 Proposal. The PBGC was unable to find a record of any case where the filing of a reportable event notice has resulted in a default under a credit agreement. Because the 2013 Proposal would provide more waivers than the 2009 Proposal, the PBGC believes that commenters’ concerns in this area should be lessened.
Overview of the 2013 Proposal
The 2013 Proposal would revise the waiver structure of the Current Regulations, recognizing that since the reportable events program was enacted in 1974, a vast quantity of business and financial information has become available through the Internet and other means, thus enabling the PBGC to require less direct reporting from plans and their sponsors.
Safe Harbors Based on Financial Soundness
A key concept in the 2013 Proposal is the establishment of so-called “safe harbors” to enable financially-sound businesses and plans to avoid having to report many events, particularly those events that seem to have little chance of threatening pension plans.
The 2013 Proposal would treat an entity that is a plan sponsor or member of a plan sponsor’s controlled group as “financially sound” as of any date (the determination date) if on the determination date it has adequate capacity to meet its obligations in full and on time as evidenced by its satisfaction of all of the following criteria:
- The entity is scored by a commercial credit reporting company that is commonly used in the business community and the score indicates a low likelihood that the entity will default on its obligations.
- The entity has no secured debt, disregarding leases or debt incurred to acquire or improve property and secured only by that property.
- For the most recent two fiscal years, the entity has positive net income under Generally Accepted Accounting Principles or International Financial Reporting Standards.
- For the two-year period ending on the determination date, no default has occurred on any loan to the entity with an outstanding balance of $10 million or more, regardless of whether reporting had been waived under the regulations.
- For the two-year period ending on the determination date, the entity has not failed to make any required minimum funding payments when due, unless reporting were waived under the regulations.
A plan would be considered financially sound under the 2013 Proposal if, as to a plan year, the plan satisfies either of the following requirements:
- As of the last day of the prior plan year, the plan had no unfunded benefit liabilities.
- For the prior plan year, the ratio of the value of the plan’s assets (as determined for PBGC premium purposes) to the amount of the plan’s premium funding target was not less than 120 percent.
Changes in Post-Event Reporting Obligations under 2013 Proposal
The following are examples of how the 2013 Proposal would change the reporting obligations under the Current Regulations as to post-reportable-event notices:
- Active-Participant Reductions: Under the 2013 Proposal, there would be three types of active-participant reductions that would be reportable obligations: single-cause events, short-period events and attrition events. A small-plan waiver would apply if the plan had fewer than 100 participants for whom flat-rate premiums were payable for the plan year preceding the event year. Also, in place of a waiver based upon plan funding, there would be a waiver if (i) for each contributing sponsor of the plan, either the sponsor or the sponsor’s highest-level controlled-group parent that is a U.S. entity were financially sound when the event occurs; or (ii) the plan were financially sound for the plan year in which the event occurs.
- Failure to Make Required Minimum Funding Payments: As under the Current Regulations, notice would be waived if the missed contribution were made by the 30th day after its due date. In addition, however, notice would be waived as to a failure to make a required quarterly contribution if the plan had fewer than 100 participants for whom flat-rate premiums were payable for the plan year preceding the event year.
- Distribution to Substantial Owner of Plan Sponsor: The waivers under the Current Regulations based upon the amount of the distribution or the plan’s funding would be replaced with waivers based upon either (i) for each contributing sponsor of the plan, the financial soundness of either the sponsor or the sponsor’s highest-level controlled-group parent that is a U.S. entity when the event occurs; or (ii) the financial soundness of the plan for the plan year in which the event occurs.
- Liquidation of Member of Plan’s Controlled Group: The 2013 Proposal would eliminate the waivers under the Current Regulations based upon the plan’s funding or the plan sponsor being a public company.
- Extraordinary Dividend or Stock Redemption: The waivers in the Current Regulations relating to a foreign parent of the plan sponsor, or the plan’s funding, would be eliminated. The waiver in the Current Regulations if the person making the distribution were a de minimis 5-percent segment of the plan’s controlled group for the most recent fiscal year(s) ending on or before the date the reportable event occurs would be expanded to cover distributions by a person that represented a de minimis 10-percent segment of the plan’s controlled group. Also, waivers would be allowed under the 2013 Proposal if (i) the plan had fewer than 100 participants for whom flat-rate premiums were payable for the plan year preceding the event year; (ii) for each contributing sponsor of the plan, either the sponsor or the sponsor’s highest-level controlled-group parent that is a U.S. entity were financially sound when the event occurs; or (iii) the plan were financially sound for the plan year in which the event occurs.
- Default in Loan of $10 Million or More: The 2013 Proposal would re-define the reportable event to be (i) an acceleration of payment or a default under the loan agreement as to a loan with an outstanding balance of $10 million to a member of the plan’s controlled group; or (ii) a waiver by the lender or an agreement by it to an amendment of any covenant in the loan agreement for the purpose of avoiding a default. Due to the significance that the PBGC attaches to loan defaults, any type of default would be a reportable event under the 2013 Proposal. By contrast, the Current Regulations only apply to a default resulting from the debtor’s failure to make a required loan payment when due, unless the payment were made within 30 days of the due date. The waivers in the Current Regulations based upon the cure of the default or the waiver of the lender, or the plan’s funding, would be eliminated. Instead, there would be a waiver if the debtor were not a contributing sponsor of the plan and represented a de minimis 10-percent segment of the plan’s controlled group for the most recent fiscal year(s) ending on or before the date the reportable event occurs.
- Insolvency or Similar Settlement: The 2013 Proposal would exclude a bankruptcy filing under the United States Bankruptcy Code as a reportable event, as PBGC recognizes that notice of bankruptcies can be (and routinely is) reliably obtained by other means. Additionally, a waiver has been added as to notice of an insolvent entity if it were not a contributing sponsor of the plan and represented a de minimis 10-percent segment of the plan’s controlled group for the most recent fiscal year(s) ending on or before the date the reportable event occurs.
Changes in Advance-Notice Reporting Obligations under 2013 Proposal
The Current Regulations require advance reporting as to certain reportable events by contributing sponsors of certain underfunded plans of non-public companies. The 2013 Proposal would generally retain these criteria, although the terminology relating to funding would change to use determinations for premium purposes under ERISA Section 4006.
For the most part, the 2013 Proposal would retain the provisions in the Current Regulations as to advance-notice reporting obligations. Loan defaults are a notable exception, however, because the 2013 Proposal would require advance reporting as to loan defaults the same as with post-event reporting, and with none of the waivers available under the Current Regulations.
The 2013 Proposal would make electronic reporting of reportable events mandatory.
Effect of Changes in Plan Funding and Premium Requirements
The Pension Protection Act of 2006 (PPA) changed the plan funding requirements in Title I of ERISA and in the Internal Revenue Code of 1986 (Code) and amended the variable-rate premium (VRP) provisions of ERISA Section 4006 to conform to the changes in the funding requirements. The PBGC’s premium-rates and premium-payment regulations have been amended accordingly. Because underfunding for purposes of reportable events is measured by reference to the VRP, the thresholds for reportable events also had to be modified. Pending the adoption of conforming amendments to the Current Regulations, PBGC has issued a series of technical updates providing transitional guidance on how the PPA changes affect compliance with the reportable events requirements. The most recent guidance is Technical Update 13-1. When the PBGC publishes the final revision of the Current Regulations, the then-current technical update will be superseded as to reportable events to which the final revision applies, except to the extent that the final revision provides otherwise. See our WorkCite article this past February on Technical Update 13-1.
2013 Proposal’s Relationship to PBGC’s ERISA Section 4062(e) Pilot Program
The 2013 Proposal is similar in some respects to the PBGC’s “Pilot Program” for enforcement of ERISA Section 4062(e) “downsizing liability” announced last November. Section 4062(e) requires companies with pension plans to report to PBGC when they stop operations at a facility and employees lose their jobs. In such a case, Section 4062(e) requires the company to provide financial security to protect the plan. PBGC typically requires companies to make additional contributions or provide a financial guarantee.
Under the Pilot Program, if the PBGC concludes that a company is “financially sound” or “creditworthy,” the PBGC will not generally enforce any ERISA Section 4062(e) liability of the company, although reporting to the PBGC will still be required. The Pilot Program also provides relief to “small plans” having no more than 100 participants. The Pilot Program is a departure from the PBGC’s 2010 proposed Section 4062(e) regulations, which expansively interpreted Section 4062(e) liability and expressly stated that risk to the PBGC would not be a factor in assessing liability.
The 2013 Proposal may shed light on the standard for “financial soundness” and “creditworthiness” under Section 4062(e).
For further information, please contact any of the authors, Larry R. Goldstein, James P. McElligott Jr. or Robert M. Cipolla, or any other member of McGuireWoods’ employee benefits team.