On September 11, 2015, the Pension Benefit Guaranty Corporation (“PBGC”) issued final regulations that make significant revisions to its reportable events requirements, which require defined benefit pension plan sponsors and administrators to report the occurrence of certain events that may indicate problems with their financial stability or plan funding levels. The new rules take effect on January 1, 2016.
Revised Reportable Event Definitions and New Waivers
The new rules revise most reportable event definitions, with significant changes to the definitions of the active participant reduction and loan default events. They also establish two new “safe harbor” waivers from post-event reporting requirements, one for companies at low risk of default and the other for well-funded plans, and make public company and small plan waivers applicable in more situations. The low risk of default waiver is available if each contributing sponsor and the highest level U.S. parent of each contributing sponsor satisfy certain financial requirements. The well-funded plan waiver is available if the plan sponsor was not required to pay a variable-rate premium for the preceding plan year (because the plan did not have unfunded vested benefits). The two safe harbor waivers do not apply to the reporting requirements for insolvency, liquidation, loan default, failure to make a required contribution, application for a funding waiver or inability to pay benefits when due.
The most notable changes with respect to plan-level reportable events are:
- An active participant reduction through attrition will not need to be reported until the premium due date for the plan year following the event year. (Current regulations require reporting as soon as the active participant count falls below the applicable threshold.)
- A failure to make a required minimum funding payment will not need to be reported if the failure occurs solely because the plan sponsor failed to make a timely funding balance election.
- A failure to pay a missing participant will not trigger the reporting requirement for a current or projected inability to pay benefits when due, which applies to plans with 100 or fewer participants. (Under current regulations, the only exception is for administrative delays of less than two months.)
- Reporting will be required if distributions to substantial owners exceed 5% of plan assets for both of the two preceding plan years (and distributions made to a single substantial owner exceed $10,000). As under current regulations, a distribution to a single substantial owner must be reported if it exceeds $10,000 and 1% of plan assets for both of the two preceding plan years.
- Lump sum distributions and annuity purchases are now explicitly excluded from the definition of atransfer of benefit liabilities.
The most notable changes with respect to sponsor-level reportable events are:
- As a result of a significant (and counterintuitive) expansion of the definition of a reportable “loan default,” waivers and amendments of loan covenants will be reportable if they cure or avoid a breach that would otherwise trigger a default. (As under current regulations, reporting is not required if the outstanding loan balance is less than $10 million.) Well-funded plans will no longer be exempt from the loan default reporting requirement.
- The final regulations specify that the determination whether a transaction agreement is legally binding (and whether a reportable change in contributing sponsor or controlled group occurs when the agreement is signed) must be made without regard to any conditions in the agreement.
- The definition of a reportable insolvency or similar settlement will no longer include insolvency proceedings under the U.S. Bankruptcy Code.
Impact of the New Rules
Several of the PBGC’s revisions to the reportable events requirements will be helpful to defined benefit plan sponsors and administrators, particularly sponsors and administrators of plans with declining numbers of active participants. The revised requirements may be problematic for parties to credit agreements and corporate transactions, however. Lenders should carefully consider whether credit agreement representations and covenants that refer to reportable events should be revised, while creditors should be aware that a waiver or amendment of a loan covenant may constitute a reportable event. Parties to corporate transactions should determine before the transaction agreement is signed whether the transaction will trigger a reportable event.