Late in 2009, the Pension Benefit Guaranty Corporation (PBGC) issued proposed regulations that will, if adopted, significantly accelerate the requirement to notify the PBGC when many “reportable events” occur or are about to occur with respect to a defined benefit plan. When finalized these rules will create new or accelerated reporting obligations for employers with defined benefit plans. They may also change the rights and obligations of both employers and lenders under credit agreements.
Reportable event rules became part of the law in the mid-1970s. In general, reportable events are events that are intended to signal that the PBGC may be required to provide guarantees to fund the defined benefit plan’s benefits. Some events are named in the statute (ERISA) and some were created by PBGC regulation. Although the statute has always required that notice of a reportable event be given no later than 30 days after the event occurred (and, for some, even before the event occurred), the PBGC by regulation entirely waived notice for some of the events and extended the 30 day notice requirement for many events. Employers, in their role as defined benefit plan sponsors, have grown accustomed to working with these rules.
Importance for Credit Agreements
Employers and lenders have also relied on the reportable event rules in drafting representations and warranties, covenants, notice requirements and default events in their credit agreements. Although it is too soon to know the final details, it seems clear that the final regulations will significantly change the reportable event regulations.
Most of the waivers that had excused giving the PBGC notice of certain reportable events are being eliminated. Notice will now be required for these events when notice was not previously required. Most of the extensions of time for giving the PBGC notice of certain reportable events are being eliminated. Notice will now be required for these events much sooner than was previously the case.
Concerns and Next Steps
Although it is far from clear when the PBGC will finalize new regulations, the proposal is that the final regulations would be effective for all events occurring after they are effective. This will leave little to no time for employers to transition to the new rules when they are finalized.
The significant impact on filing requirements with the PBGC may be overshadowed by a significant impact on credit agreements. Employers and lenders who have tied representations and warranties, notice events, covenants or events of default in their credit agreements to the reportable event rules will need to reassess whether their rights and obligations are being indirectly changed because the PBGC rules changed or whether the old, pre-amended, rules determine their rights and obligations under the credit agreements. Depending on how a credit agreement is drafted, it may be that this change in the reportable event regulations may turn a particular event into a default when it was not previously a default or make a particular event a breach of a covenant (or make a representation untrue) when it was not previously a breach or require notice by a borrower to the lender for an event when notice was not previously required.
In many credit agreements, the scope of reportable events which have an influence on the credit relationship are limited to those reportable events for which the PBGC has not waived the 30 requirement. If the PBGC eliminates the waiver of the 30 day notice requirement for many reportable events, the number of reportable events of consequence (including the occurrence of defaults) will be increased.
Although we cannot yet know precisely what the final regulations will provide, in anticipation of the almost certain changes, all credit agreements that were tied, in whole or in part, to the PBGC reportable event regulations should be inventoried and evaluated to determine whether modifications in the agreements or modifications in the rights and obligations of the parties to those agreements will result from changes that will almost certainly be adopted by the PBGC.
Employers that sponsor defined benefit plans should review their credit agreements to determine if the proposed changes impact their responsibilities or trigger a reporting requirement. Employers may also wish to consider commenting on the proposed regulations or contacting representatives to communicate the impact the changes will have. If you wish to discuss the proposed regulations and their impact, please contact the attorney in the Benefits and Compensation practice group or the Finance and Restructuring practice group with whom you work.