PBGC Issues Final Reportable Events Regulations That Provide Additional Reporting Waivers

Practical Law Legal Update 4-618-7037 (Approx. 7 pages)

PBGC Issues Final Reportable Events Regulations That Provide Additional Reporting Waivers

by Practical Law Employee Benefits & Executive Compensation

Reportable Events

ERISA Section 4043 (29 U.S.C. § 1343) requires sponsors of single-employer defined benefit plans to provide to the PBGC written notice of the occurrence of certain reportable events that may signal problems with the plan or the plan sponsor that could ultimately result in a risk of loss to the PBGC (see Practice Note, Reportable Events for Pension Plans under ERISA). The purpose of the reportable event rules is to allow the PBGC to monitor covered plans and to take action encourage plan continuation or maximize recovery if the plan is terminated.

Usually, the events must be reported within 30 days after the event. However, 30-day advance notification is required in certain circumstances.

The PBGC's regulations under ERISA Section 4043 specify the circumstances when these reportable events must be reported. The final regulations revise the Section 4043 regulations.

Reporting Waivers

The PBGC's amendments to the reportable event notice waivers are driven by the goals of tying reporting to risk and avoiding unnecessary reports. These goals will allow the PBGC to better allocate its scarce resources and advance the objective of reducing regulatory burdens on the public that was expressed in Executive Order 13563.

The safe harbors provided in the final regulations measure whether a company will be able to continue to sponsor a pension plan and not present a risk to the pension insurance system.

Company Low-Default-Risk Safe Harbor

The low-default-risk safe harbor provides a waiver from reporting for five reportable events (which are referred to in the preamble to the final regulations as Category 1 events):

Active participant reduction.
Distribution to a substantial owner of a contributing sponsor of the plan.
Contributing sponsor or controlled group changes (a transaction has resulted or will result in at least one person ceasing to be a member of the plan's controlled group).
Extraordinary dividend or stock redemption (any member of the plan's controlled group declares a dividend or redeems its own stock).
Transfer of benefit liabilities outside of a plan's controlled group.

Category 1 events and missed contribution events together comprised over 90% of reportable events filings between 2012 and 2014.

For this safe harbor to apply, an entity (a "company") that is a contributing sponsor of a plan or the highest level US parent of a contributing sponsor must have adequate capacity to meet its financial obligations in full and on time. A company demonstrates that it has adequate capacity by satisfying either the first two, or any four, of the following seven criteria during a safe harbor period that is specified in the regulations:

The probability that the company will default on its financial obligations is not more than 4 percent over the next five years or not more than 0.4 percent over the next year, in either case determined on the basis of widely available financial information on the company's credit quality. Unlike the 2013 proposed regulation, this criterion is not based solely on the score provided by a commercial credit reporting company.
The company's secured debt (disregarding certain items) does not exceed 10 percent of its total asset value.
The company's ratio of total-debt-to-EBITDA (commonly referred to as the leverage ratio) is 3.0 or less. This ratio is used to assess a company's ability to meet its debt obligations.
The company's ratio of retained-earnings-to-total-assets is 0.25 or more. This ratio shows how much of a company's assets have been financed with the company's profits. The PBGC has found that companies with high retained earnings tend to have higher profitability or a longer operating history, which indicate that a company can meet its financial obligations.
The company has positive net income for the two most recent completed fiscal years.
In the past two years, the company has not defaulted on a loan with an outstanding balance of $10 million or more regardless of whether reporting was waived.
The sponsor has not experienced a missed contribution event in the past two years unless reporting was waived.

Reporting is waived under this safe harbor only if both the contributing sponsor of the pension plan and the highest level US parent of the contributing sponsor satisfy the requirements of the safe harbor. The whole controlled group need not satisfy these requirements.

Under the final regulations, a company determines whether it qualifies for the low-default-risk safe harbor once during an annual financial reporting cycle, on a "financial information date." A company that qualifies for the safe harbor on the financial information date is considered to be qualified for the entire safe harbor period that ends 13 months later. If it does not qualify, then its non-qualified status remains until the next financial information date.

The financial information used to determine the availability of the safe harbor is similar to that used in the PBGC's regulation on Annual Financial and Actuarial Information Reporting (29 C.F.R. § 4010.9). If the company accountant's audit or review report includes a material adverse view or qualification regarding the company's financial status, the company will not satisfy the low-default-risk safe harbor.

Although sponsors of small pension plans (which have 100 participants or fewer) may have greater difficulty in obtaining some of the financial information provided in the seven criteria, they will generally qualify for the small-plan waiver for all Category 1 events except for the distributions to a substantial owner event.

Companies will make their own determination of whether and how they meet the low-default-risk safe harbor and will not need to inform the PBGC of this determination.

This safe harbor will be located in 29 C.F.R. Section 4043.9.

Well-Funded Plan Safe Harbor

The final regulations also establish a well-funded plan safe harbor for an event year if no variable-rate premium (VRP) was required to be paid (which means that the plan was 100% funded) for the plan year preceding the event year. The safe harbor will apply even if a VRP is owed for the event year. Plans exempt from the VRP, such as certain new plans, will qualify for the safe harbor regardless of their funding percentage. This safe harbor provides a waiver from reporting for the five Category 1 events.

The old regulations provided a reporting waiver for the liquidation and loan default events if no VRP was required to be paid for the plan for the event year. The final regulations eliminate this waiver for both events.

This safe harbor will be located in 29 C.F.R. Section 4043.10.

Small Plan Waiver

The final regulations waive the reporting requirement for small plans (defined as those with "100 participants or fewer," for consistency with the PBGC's final regulations on plan premiums) for five events:

Active participant reduction.
Contributing sponsor or controlled group changes (a transaction has resulted or will result in at least one person ceasing to be a member of the plan's controlled group).
Extraordinary dividend or stock redemption (any member of the plan's controlled group declares a dividend or redeems its own stock).
Transfer of benefit liabilities outside of a plan's controlled group.
Failure to meet minimum funding standards (which is a failure to make a required contribution).

The old regulations provided a small plan waiver for only two events (active participant reduction and failure to meet minimum funding standards).

Public Company Waiver

The final regulations provide a waiver from the five Category 1 events for public companies that timely file an SEC Form 8-K and disclose the event on the Form 8-K other than under Item 2.02 (Results of Operations and Financial Condition) or Item 9.01 (Financial Statements and Exhibits). The old regulations only provided limited public company waivers for the liquidation event and the contributing sponsor and controlled group change event.

Other Waivers

Foreign Entity and De Minimis Segment

The final regulations have kept the foreign entity waiver and expanded the de minimis segment waiver to two more events:

Loan default.
Insolvency.

Under the old regulations, the de minimis segment waiver only applies to three events:

Liquidation.
Contributing sponsor or controlled group changes.
Extraordinary dividend or stock redemption.

These waivers apply when the entity or entities involved in the event is a foreign entity or represents a de minimis percentage of the controlled group.

Loan Default and Liquidation

For the loan default and liquidation events, the final regulations eliminate the old waivers and provide that the notice is waived if the member causing the event is either:

Not a contributing sponsor and represents a de minimis 10% segment of the plan's controlled group for the most recent fiscal year ending on or before the date the reportable event occurs.
A foreign entity other than a foreign parent.

Failure to Meet Minimum Funding Standards

Under the final regulations, reporting is waived if a missed contribution either:

Is made up within 30 days.
Resulted only because the plan sponsor failed to make a timely election to use the plan's credit balance to satisfy the funding requirement.

Small plans can also use this waiver if the missed contribution was a quarterly installment.

Definitions of Reportable Events

The final regulations altered the rules for determining when a reportable event occurs for the following events:

Active participant reductions. The final regulations simplify how plan sponsors determine active participant reductions by dividing these events into two categories:
- single-cause events, such as a reorganization, mass layoff or end of operations, which require sponsors to determine if the reduction exceeds the threshold as of the date of the event; and
- general employee attrition, which does not require a special measurement date, but is counted once per year, on a date when an employee reduction account is required for another purpose (such as determining PBGC flat-rate premiums).
Insolvency. The final regulations exclude from the definition of the insolvency reportable event any bankruptcy case under the Bankruptcy Code. As the preamble notes, this means that reporting of insolvency events will not be necessary in most circumstances, because they will usually be brought under the Bankruptcy Code.
Loan Default. Under the final regulations, reporting is required when there is a default or acceleration of payment on a loan with an outstanding balance of $10 million or more or if the lender waives or agrees to an amendment of any covenant in the loan agreement that results in curing or avoiding a breach that would trigger a loan default.
Change of controlled group. The final regulations clarify that a reportable event does not occur when a controlled group member ceases to exist because it merges into another controlled group.

The final regulations also make minor changes to several other reportable events:

Failure to meet minimum funding contributions (missed contributions). The final regulations add a waiver for a missed contribution where the failure to timely make the contribution is due solely to the plan sponsor's failure to timely make a funding balance election.
Inability to pay benefits when due. The final regulations clarify that a reportable event does not occur if a plan does not make pay a benefit payment because the plan cannot locate the payee.
Distribution to a substantial owner. A distribution to a substantial owner in the form of an annuity only has to be reported once. The final regulations eliminated the requirement that the annuity be non-increasing.
Extraordinary dividend. Public companies need not report extraordinary dividends and stock redemptions.

Advance Reporting

Certain reportable events are also subject to the advance notice regulations (see Practice Note, Reportable Events for Pension Plans under ERISA: Reportable Events Requiring Advance Notice). The final regulations conform the advance notice requirements to the changes made under the PPA. The final regulations provide that:

The VRP data used for the advance reporting test are the data used to determine the VRP for the plan year before the effective date of the event.
The due date for the loan default event is the same as for other reportable events subject to the advance notice requirements (30 days before the event). No longer will advance notice of this event be allowed up to ten days after the event.

Reporting Forms

The final regulations require:

Filers to submit with notices of most events some information that is typically requested by the PBGC after the notices are reviewed.
The use of PBGC forms to notify the PBGC of reportable events. The forms are no longer optional, as they were under the old regulations.

The final regulations also move from the regulations to the forms and instructions the lists of information items that must be reported.

Plan sponsors should also be aware that the final regulations require plans to file reportable events notices electronically. No longer will plans be allowed to file paper copies of these notices with the PBGC.

Practical Implications

The PBGC crafted the final regulations in an attempt to reduce the regulatory burden on businesses that sponsor pension plans. As it noted in the preamble to the final regulations, the PBGC believes that the new safe harbors are simpler, more flexible and easier to comply with than those provided in the proposed regulations. The PBGC anticipates that approximately 94% of plans and sponsors will be exempt from many reporting requirements under the final regulations. With the addition of the safe harbors and the shift in emphasis to a plan's risk of default, the final regulations provide pension plan sponsors with more waivers from the reporting requirements and are expected to result in a net reduction in reporting.

The final regulations take effect on October 11, 2015. The changes to Part 4043 of the PBGC regulations apply to post-event reports for reportable events that occur on or after January 1, 2016 and to advance reports that are due on or after that date.

The PBGC has also provided FAQs on the final regulations.

PBGC Issues Final Reportable Events Regulations That Provide Additional Reporting Waivers | Practical Law