On Sept. 15, the Pension Benefit Guaranty Corporation (PBGC) issued a technical update providing interim guidance under its final rule on reportable events for defined benefit pension plans and their sponsors.
This guidance outlines an alternative method for determining whether reporting an attrition event to PBGC is required. It is intended to clarify PBGC’s interpretation of the applicable regulation and to prevent duplicative reporting.
PBGC Reportable Events Regulation
Under Section 4043 of the Employee Retirement Income Security Act (ERISA) and its final regulations on reportable events, a contributing sponsor or administrator of a pension plan subject to Title IV of ERISA must notify PBGC of the occurrence of certain events 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, loan defaults and active participant reductions. In certain circumstances, these events must be reported to PBGC before the event occurs, 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, PBGC may seek more information to determine whether PBGC action is needed. PBGC has broad investigation powers and can use the threat of PBGC liens and involuntary termination to persuade plan sponsors and controlled group members to cooperate. For failures to report when required, PBGC may assess penalties of up to $1,100 per day. For a detailed discussion of the final rule, see McGuireWoods’ legal alert “Pension Benefit Guaranty Corporation Issues Final Regulations on Reportable Events.”
Active Participant Reductions
There are two kinds of active participant reduction reportable events — single-cause events and attrition events.
- Single-Cause Events: A single-cause event occurs on the date in a plan year when, as a result of a single cause, the number of a plan’s active participants is reduced to (i) less than 80 percent of the number of individuals actively participating at the beginning of such plan year, or (ii) less than 75 percent of the number of individuals actively participating at the beginning of the plan year preceding such plan year. Examples of single-cause events include reorganizations, plant closures, natural disasters, mass layoffs and early retirement programs.
- Attrition Events: An attrition event occurs at the end of a plan year if the number of a plan’s active participants at the end of such plan year is (i) less than 80 percent of the number of individuals actively participating at the beginning of such plan year, or (ii) less than 75 percent of the number of individuals actively participating at the beginning of the plan year preceding such plan year.
Technical Update Interim Guidance
The guidance clarifies that a plan that files a single-cause event notice is not required to file an attrition event notice at a later date due to the same active participant reduction. Until the PBGC publishes a final rule amending its reportable events regulation, plan administrators and sponsors should adhere to the following interim guidance when determining whether to report an attrition event for a plan year:
- A potential filer may disregard any cessations of active participant status reported to PBGC for single-cause events during the plan year or preceding plan year.
- When determining whether the number of active participants at the end of the plan year is less than 80 percent of the number of individuals actively participating at the beginning of the plan year, plans may include in the year-end active participant count the number of participants who ceased to be active participants during the plan year due to a reported single-cause event.
- When determining whether the number of active participants at the end of the plan year is less than 75 percent of the number of individuals actively participating at the beginning of the preceding plan year, plans may include in the year-end active participant count the number of participants who ceased to be active participants during the current or prior plan year because of a reported single-cause event.
The guidance provides an example using the following assumptions:
- Plan A uses a calendar-year plan year.
- Plan A had 1,000 active participants at the beginning of 2015 and 1,100 active participants at the beginning of 2016.
- On Feb. 1, 2016, 230 active participants ceased to be active participants as a result of a single-cause event. This event represents more than a 20 percent reduction since the beginning of 2016, so Plan A was required to (and did) submit a single-cause event notice (i.e., Form 10) to PBGC.
- At the end of 2016, Plan A had 720 active participants.
To determine whether an attrition event must be reported for 2016, the 230 participants reported to have ceased active participation are added to the Dec. 31, 2016, active participant count. On that basis, the number of active participants at Dec. 31, 2016, is 950 (720 + 230). Because the applicable one-year attrition percentage is not less than 80 percent (i.e., 950/1,100= 86 percent) and the applicable two-year attrition percentage is not less 75 percent (i.e., 950/1,000 = 95 percent), there is no reportable attrition event for 2016.
Effect of Subsequent Rulemaking
This guidance applies until the PBGC publishes a final rule amending its reportable events regulations. At that time, the guidance will be superseded with respect to the reportable events to which the final rule applies.
For further information, please contact any of the authors of this article — Robert B. Wynne, Katie M. Rak and James P. McElligott, Jr. — or any other member of the McGuireWoods employee benefits team.