Section 4043 of the Employee Retirement Income Security Act of 1974 (ERISA) requires pension plan sponsors to report a variety of corporate and plan events to the Pension Benefit Guaranty Corporation (PBGC).  In November 2009, the PBGC proposed regulations that would have eliminated most of the reporting waivers available under current law and drastically increased the reporting requirements applicable to pension plans.  Plan sponsors and practitioners widely criticized the 2009 proposed regulations as overly burdensome.  Citing both this feedback and a 2010 executive order directing agencies to review existing regulations to identify those that could be made less onerous, the PBGC recently issued revised proposed regulations (the Proposed Regulations) that reinstate many of the exemptions that would have been eliminated under the 2009 proposed regulations.  The Proposed Regulations would also replace the current funding-based exemption scheme with an approach based on the financial soundness of pension plans and their sponsors.

Background

Section 4043 of the Employee Retirement Income Security Act of 1974 (ERISA) requires pension plan sponsors to report a variety of corporate and plan events to the Pension Benefit Guaranty Corporation (PBGC).  ERISA requires these reports so that the PBGC can identify pension plans that face financial risk and pursue protective measures designed to improve funding and reduce the risk of involuntary plan termination.  Existing regulations describe the events that trigger the reporting requirements and include extensions and waivers that permit plan sponsors to delay or avoid the reporting requirement with respect to certain events, provided the plans are sufficiently funded. 

In November 2009, the PBGC proposed regulations that would have eliminated most of the waivers available under current law and drastically increased the reporting requirements applicable to pension plans (the 2009 Proposal).  Plan sponsors and practitioners widely criticized the 2009 Proposal as overly burdensome and unnecessarily focused on events that do not in fact indicate that plans are at risk of failing to meet their benefit obligations.  Citing both this feedback and a 2010 executive order directing agencies to review existing regulations to identify those that could be made less onerous, the PBGC recently issued revised proposed regulations (the Proposed Regulations) that reinstate many of the exemptions that would have been eliminated under the 2009 Proposal.  The Proposed Regulations would replace the current funding-based exemption scheme with an approach based on the financial soundness of pension plans and their sponsors.

Financial Soundness Approach

Under current law, plan sponsors can receive waivers with respect to several reportable events if their plans satisfy certain funding-based requirements (generally, plans must be 80 percent funded to qualify for a waiver).  Significantly, the Proposed Regulations retain these waivers with respect to most of the events that are eligible for funding-based waivers under the current rules.  However, the Proposed Regulations replace the current funding-based waiver requirements with a financial soundness approach that focuses on the overall financial health of the plan sponsor or the plan.  If a plan sponsor or plan satisfies the criteria, it will be eligible for a waiver with respect to the following events (all of which are currently eligible for funding-based waivers):

  • Extraordinary dividend or stock redemption
  • Change in contributing sponsor or controlled group
  • Active participant reduction
  • Transfer of benefit liabilities
  • Distribution to a substantial owner 

Company Financial Soundness Criteria

Under the Proposed Regulations, the reporting requirement is waived for the applicable events if a plan sponsor is “financially sound.”  A plan sponsor is financially sound if it has adequate capacity to meet its obligations in full and on time as evidenced by its satisfaction of the following five criteria:

  • The entity is scored by a commercial credit reporting company that is commercially 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 (with certain exceptions, such as purchase-money mortgages and leases).
  • The entity has positive net income.
  • The entity has not defaulted or experienced similar issues with respect to a loan with an outstanding balance of $10 million or more.
  • The entity has not failed to make required minimum funding payments to the pension plan.

Plan Financial Soundness Criteria

In addition, the Proposed Regulations waive the reporting requirement for the applicable events if the plan itself is “financially sound.”  A pension plan is “financially sound” if it satisfies either of the following two criteria:

  • The plan is fully funded on a termination basis.
  • The plan is 120 percent funded on a premium basis.

The new financial soundness approach under the proposed regulations does not apply to the following events, subject to certain small plan, foreign entity and de minimis exceptions:

  • Bankruptcy or insolvency
  • Liquidation
  • Loan default
  • Failure to make required contributions
  • Application for a funding waiver
  • Inability to pay benefits when due

Notably, the liquidation and loan default events are eligible for funding-based waivers under the current rules.  The Proposed Regulations do not apply to these events, however, on the grounds that they may portend the type of financial risk that the PBGC seeks to identify early, so that it can intervene to stabilize the plan before manageable risk devolves into a funding crisis.

Effective Date and Next Steps

The Proposed Regulations would be effective for reportable events occurring on or after January 1, 2014. 

Assuming the Proposed Regulations are finalized, pension plan sponsors that satisfy the financial soundness criteria will face a significantly reduced administrative burden with respect to tracking and reporting events to the PBGC.