PBGC final regs exempt most plans and sponsors from many reportable events rules

The Pension Benefit Guaranty Corporation (PBGC) has issued final regulations that establish risk-based safe harbors that exempt most companies and plans from many of its reportable events requirements and target reporting toward the minority of plan sponsors and plans presenting the most substantial risk of involuntary or distress termination. The regulations make the requirements of the sponsor risk-based safe harbor more flexible, make the funding level for satisfying the well-funded plan safe harbor lower and tied to the variable-rate premium, and add public company waivers for five events.

The PBGC anticipates the final rule will exempt about 94 percent of plans and sponsors from many reporting requirements and result in a net reduction in reporting to the PBGC.
The PBGC final regulations are effective October 13, 2015. The reportable events regulations apply to post-event reports for reportable events occurring on or after January 1, 2016, and to advance reports due on or after that date.

Waiver structure

The final rule provides a new reportable events waiver structure that is more closely focused on the risk of default than the old waiver structure. Some reporting requirements that poorly identify risky situations—like those based on a modest level of plan underfunding—have been eliminated. A new low-default-risk safe harbor based on company financial metrics is established that better measures risk to the pension insurance system, according to the PBGC.

The final regulations also provide a safe harbor for plans owing no variable-rate premium (VRP) (referred to as the well-funded plan safe harbor). The PBGC explains that this safe harbor is consistent with a Congressional determination of the level of underfunding that presents risk to the pension insurance system. Other waivers, such as public company, small plan, de minimis segment, and foreign entity waivers, have been retained in the final regulations, and in many cases expanded, to provide additional relief to plan sponsors where the risk of an event to plans and the pension insurance system is low.

Under the final regulations, all small plans (about two-thirds of all plans) will be waived from reporting Category 1 events (other than substantial owner distributions). Further, if a reportable event occurs, 82 percent of large plans (more than 100 participants) qualify for at least one waiver for these events. Category 1 events include extraordinary dividend or stock redemption, active participant reduction, change in contributing sponsor or controlled group, distributions to a substantial owner, and transfer of benefit liabilities events. Thus, if a reportable event occurs, the PBGC estimates that 94 percent of plans covered by the pension insurance system will qualify for at least one waiver of reporting for Category 1events.

Low-default-risk safe harbor

Based on its experience, the PBGC has found that the default risk of a plan sponsor generally correlates with the risk of an underfunded termination of the sponsor’s pension plan. In the proposed regulations, the PBGC developed a waiver from reporting for the five Category 1 events if, as of the date an event occurred, each contributing sponsor met a financial soundness standard. Most commenters opposed the sponsor financial soundness safe harbor, with some of the commenters seeing the financial soundness test as a pronouncement by PBGC on the financial status of American businesses, which they believed to be inappropriate for a government agency. The PBGC responds that many federal agencies have rules that include standards for measuring aspects of financial health or ability to meet certain financial obligations for a wide variety of purposes. The PBGC explains that the safe harbor tests were never meant for that purpose. Rather, they were intended to measure the likelihood that a company would be able to continue to sponsor a plan and, thus, not present a risk to the pension insurance system. To clarify this point, the final regulations more precisely characterize this safe harbor as the company low-default-risk safe harbor rather than the sponsor financial soundness safe harbor, and refers to a safe harbor for plans (described below) as the well-funded plan safe harbor rather than the plan financial soundness safe harbor.

The PBGC states that its company low-default-risk safe harbor is entirely voluntary and relies mainly on private-sector financial metrics derived from a company’s own financial information. Use of the safe harbor is not conditioned on an evaluation by the PBGC of plan sponsor financial soundness. It does not involve sponsors reporting to the PBGC (or anyone else) any financial metrics, such as company financial information, credit scores or other evidence of creditworthiness. Since the PBGC is convinced that adding a company low-default-risk safe harbor to the reportable events regulations furthers the PBGC’s goals of tying reporting to risk and avoiding unnecessary reports, the final regulations retain the risk-based safe harbor with modifications to mitigate commenters’ concerns, particularly by providing more flexibility in applying the safe harbor and clarifying when and how the satisfaction of the low-default-risk standard is determined.

Under the final regulations, an entity (a ‘‘company’’) that is a contributing sponsor of a plan or the highest level U.S. parent of a contributing sponsor satisfies the low-default-risk standard if the company has adequate capacity to meet its obligations in full and on time as evidenced by satisfying either (A) the first two, or (B) any four, of the following seven criteria:

1. 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.

2. The company’s secured debt (with some exceptions) does not exceed 10 percent of its total asset value.

3. The company’s ratio of total-debt to-EBITDA (earnings before interest, taxes, depreciation, and amortization) is 3.0 or less.

4. The company’s ratio of retained earnings-to-total-assets is 0.25 or more.

5. The company has positive net income for the two most recent completed fiscal years.

6. The company has not experienced any loan default event in the past two years regardless of whether reporting was waived.

7. The sponsor has not experienced a missed contribution event in the past two years unless reporting was waived.

For reporting to be waived for an event to which the safe harbor applies, both the contributing sponsor and the highest level U.S. parent of the contributing sponsor must satisfy the company low-default-risk safe harbor. To make the safe harbor user-friendly, the final regulations provide that 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’’). If it qualifies on that financial information date, its qualification remains in place throughout a ‘‘safe harbor period’’ that ends 13 months later or on the next financial information date (if earlier). If it does not qualify, its nonqualified status remains in place until the next financial information date. For a company that does not have annual financial statements, the financial information date is the date the company files its annual federal income tax return or IRS Form 990 with the IRS.

Well-funded plan safe harbor

In the proposed regulations, using plan funding as a basis for waivers of reporting, the PBGC provided that reporting would be waived if the plan was either fully funded on a termination basis or 120 percent funded on a premium basis (in both cases, using prior-year data). After considering critical comments, the PBGC, in the final regulations, eliminates the test for the well-funded plan safe harbor based on termination basis liability. The PBGC also decided that a well-funded plan safe harbor based on 120 percent funding on a premium basis is not helpful to most plans since plans are not likely to fund that high. The PBGC settled on 100 percent funding—meaning a plan would pay no VRP. Thus, the well-funded plan safe harbor in the final regulations applies if the plan owed no VRP for the plan year preceding the event year. Plans exempt from the VRP (e.g., certain new plans) will qualify for the safe harbor regardless of their funding percentage.

Public company waiver

The old regulations included a limited public company waiver for reporting controlled group change and liquidation events. However, the PBGC did not include such a waiver in the proposed regulations. One commenter urged the PBGC to add a public company waiver, arguing that public companies already have to report significant events on their Securities and Exchange Commission (SEC) filings and there should not be duplicative filings with the PBGC. Based on a review of SEC reporting requirements and reportable event notices, the PBGC waives reporting in the final regulations where any contributing sponsor of an affected plan is a public company and the contributing sponsor timely files a SEC Form 8-K disclosing the event, unless the disclosure concerns a Form 8-K item relating primarily to the results of operations or financial statements. This waiver applies to the same five events as the low-default-risk and well-funded plan safe harbors.

Other changes

In addition, the final regulations revise and simplify the descriptions of several reportable events, reflect changes made to the funding and premium rules by the Pension Protection Act of 2006 (PPA; P.L. 109-280), and make other technical changes.

The regulations simplify the descriptions of several reportable events and make some event descriptions (e.g., active participant reduction) narrower so that compliance is easier and less burdensome. One event is broadened in scope (loan defaults), and clarification of another event has a similar result (controlled group changes). These changes, like the waiver changes, are aimed at tying reporting burden to risk.

The PPA made changes to the plan funding rules in Title I of ERISA and the Code and amended the VRP rules to agree with the funding rule changes. These law changes affected the test for whether advance reporting of certain reportable events is required. The final regulations conform the advance reporting test to the new legal requirements.

Also, the final regulations make electronic filing of reportable events notices mandatory. However, the PBGC may grant case-by-case waivers of the electronic filing requirement.

Source: 80 FR 54979.

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