PBGC Issues Final Regulations on Reportable Events, Information Reporting, Plan Terminations, and PBGC Premium Rates

Practical Law Legal Update w-023-8883 (Approx. 11 pages)

PBGC Issues Final Regulations on Reportable Events, Information Reporting, Plan Terminations, and PBGC Premium Rates

by Practical Law Employee Benefits & Executive Compensation

Reportable Events

The PBGC issued revised regulations on reportable events in September 2015. To learn more about those regulations, see:

The PBGC has received comments and questions on the reportable events regulations. The PBGC issued the final regulations to clarify the reporting requirements.

Company Low-Default-Risk Safe Harbor (Reporting Waiver)

The 2015 final regulations added DOL Regulation Section 4043.9 (29 C.F.R. § 4043.9), under which an entity determines whether it qualifies for the low-default-risk safe harbor once during an annual financial reporting cycle, on a "financial information date" (see Practice Note, Reportable Events for Pension Plans Under ERISA Occurring On or After January 1, 2016: New Waivers Provided by the 2015 Final Regulations: 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 2015 final regulations as Category 1 events; for a list of those events, see Practice Note, Reportable Events for Pension Plans Under ERISA Occurring On or After January 1, 2016: New Waivers Provided by the 2015 Final Regulations: Company Low-Default-Risk Safe Harbor).

Reporting is waived under the low-default-risk safe harbor for an entity (a company) that has adequate capacity to meet its financial obligations in full and on time as of a financial information date (the qualifying date), based on satisfying several criteria, such as the commercial measures criterion which is satisfied if the company's probability of default on its financial obligations is no more than 4% over the next 5 years or .4% over the next year, as determined on the basis of widely available financial information on the company's credit quality (29 C.F.R. § 4043.9(e)(1)).

The final regulations include an amended DOL Regulation Section 4043.9 that clarifies that a plan must use third-party financial information for this safe harbor, not information that the company generates.

Active Participant Reduction

A reportable event occurs when there is a reduction in the number of active participants in the plan caused by either a single-cause event (such as a business reorganization, discontinuance of operations, natural disaster, mass layoff, or early retirement) or an attrition event (general employee attrition during a plan year) (29 C.F.R. § 4043.23(a); for a detailed explanation of this event and when reporting is not required, see Practice Note, Reportable Events for Pension Plans Under ERISA Occurring On or After January 1, 2016: Active Participant Reduction).

The preamble to the final regulations explains that since the publication of the 2015 final regulations, the PBGC has received questions regarding whether a plan administrator or contributing sponsor that reports an active participant reduction due to a single-cause event must also file an attrition event notice at a later date due to the same active participant reduction. Although the PBGC recognizes that the regulation could be interpreted in that way, the PBGC did not intend that result.

Therefore, the final regulations amend DOL Regulation Section 4043.23(a)(2) (29 C.F.R. § 4043.23(a)(2)) to change how active participants are counted when determining whether an attrition event has occurred. Specifically, an attrition event is based on the sum of the total number of active plan participants at the end of the plan year plus the number of individuals who ceased to be active participants during the same plan year that were reported to the PBGC in connection with a single-cause event. This change is intended to prevent duplicative reporting by disregarding the earlier single-cause event that was already reported to the PBGC.

The final regulations include other amendments to the regulation governing the active participant reduction reportable event.

DOL Regulation Section 4043.23(a)(1)(i) (29 C.F.R. § 4043.23(a)(1)(i)) has been revised to clarify that each single-cause event that occurs during the plan year must be reported separately. Each time a new single-cause event results in an active participant reduction greater than 20% over the number of active participants at the beginning of the plan year, the plan will have to report the event to the PBGC by filing a new Form 10 (see Practice Note, Reportable Events for Pension Plans Under ERISA Occurring On or After January 1, 2016: PBGC Notice Forms: Form 10).

The definition of a single-cause event has been revised in a non-substantive way to provide that "as a result of a new single cause, the ratio of the aggregate number of individuals who ceased to be active participants because of that single-cause, to the number of active participants at the beginning of such plan year, exceeds 20 percent." The PBGC thinks this is a clearer formula than what was formerly provided in DOL Regulation Section 4043.23(a)(1).

The final regulations eliminate the two-year lookback requirement to ease the compliance burden, and they waive notice of the two-year lookback under ERISA Section 4043(c)(3) (29 U.S.C. § 1343(c)(3)).

The final regulations clarify, in DOL Regulation Section 4043.23(b)(2) (29 C.F.R. §4043.23(b)(2)), that an "active participant" includes a plan participant who is "receiving compensation from any member of the plan's controlled group for work performed for any member of the plan's controlled group." This change is intended to dispel any confusion about participants who leave the employ of one controlled group member and go to work for another member of the group.

To prevent duplicative reporting of the same event, the final regulations provide that a plan need not report a reduction in the number of active participants under DOL Regulation Section 4043.23 (29 C.F.R. § 4043.23) if the reduction is reported under ERISA Section 4062(e) or 4063(a) (29 U.S.C. §§ 1362 or 1363) before the filing of a notice is due under Section 4043.23.

The final regulations include additional examples of the interplay of single-cause and attrition events, as well as a single-cause event that occurs over a period of time.

Inability to Pay Benefits When Due

Under the 2015 regulations, a reportable event occurs when a plan is currently unable or is projected to be unable to pay benefits, except if the failure is caused solely by, among other things, "any other administrative delay," including the need to verify a person's eligibility for benefits, that is less than the shorter of two months or two full benefit payment periods (29 C.F.R. § 4043.26(a)(1); see Practice Note, Reportable Events for Pension Plans Under ERISA Occurring On or After January 1, 2016: Inability to Pay Benefits When Due).

The final regulations do not place a time limit on the need to verify a person's eligibility for benefits; employers may need more time than the shorter of two months or two full benefit payment periods to verify a person's eligibility for benefits. An exception remains for any other administrative delay that is less than the shorter of two months or two full benefit payment periods.

Contributing Sponsor or Controlled Group Changes

The 2015 reportable events regulations provided that a reportable event occurs when a transaction results or will result in at least one person ceasing to be a member of the plan's controlled group, other than by a merger involving members of the same controlled group (29 C.F.R. § 4043.29(a)) (see Practice Note, Reportable Events for Pension Plans Under ERISA Occurring On or After January 1, 2016: Contributing Sponsor or Controlled Group Changes).

The proposed regulations tried to clarify the regulatory definition of this event by providing that a reportable event occurs when one or more persons cease to be either a contributing sponsor of a plan or a member of the plan's controlled group (other than by a merger involving members of the same controlled group). The PBGC had received inquiries over the scope of the current regulation because the heading mentions contributing sponsor changes but the text of the regulation does not discuss changes in contributing sponsors.

The 2015 regulations also provided an exception to the reporting requirement for this event if the event results solely in a reorganization involving a mere change in identity, form, or place of organization. This exception to the reporting requirement would have been narrowed under the proposed regulations to apply only to changes to the controlled group.

After reviewing the public comments on the proposed regulations on this reportable event, the PBGC decided not to adopt it as final because:

The risk to the plan's participants and the PBGC's insurance program does not rise to the level of a reportable event if the change does not result in a contributing sponsor ceasing to be a member of the plan's controlled group.
Current statutory rules adequately ensure that the PBGC can protect the pension plan where the controlled group does not change.

Instead, the final regulation clarifies DOL Regulation Section 4043.29(a)(1) by:

Adding after "one or more persons" the following parenthetical: "(including any person who is or was a contributing sponsor)."
Changing the event heading to read: "Change in controlled group." The PBGC believes that the change in heading of this regulation in the final regulations will help minimize confusion.

The final regulations, like the proposed regulation, revise and add several examples to the existing regulation.

Liquidation

The final regulations expand DOL Regulation Section 4043.30(a)(1) (29 C.F.R. § 4043.30(a)(1)) to clarify when the liquidation reportable event occurs. Currently, that paragraph provides that a reportable event occurs for a plan when a member of the plan's controlled group "is involved in any transaction to implement its complete liquidation (including liquidation into another controlled group member)" (see Practice Note, Reportable Events for Pension Plans Under ERISA Occurring On or After January 1, 2016: Liquidation).

The final regulations, like the proposed regulations, provide that a reportable event occurs when a member of the plan's controlled group decides to cease operations. Specifically, this occurs when that member "resolves to cease all revenue-generating business operations, sell substantially all its assets, or otherwise effect or implement its complete liquidation (including liquidation into another controlled group member) by decision of the member's board of directors (or equivalent body such as the managing partners or owners) or other actor with the power to authorize such cessation of operations, sale, or a liquidation," unless the event is reported under another event described in Section 4043.30(a) (for example, there is a proceeding to dissolve the entity or the entity liquidates under the Bankruptcy Code).

The PBGC believes that linking the reporting obligation to the time the entity decides to cease operations will be the most protective of the plan participants and the pension system because it will provide more time to preserve plan assets.

The PBGC included in the final regulations the three additional examples from the proposed regulations that discuss how the reportable events requirements apply to a liquidation.

Like the proposed regulations, the final regulations provide a reporting waiver for companies that liquidate as a result of insolvency. This waiver eliminates the need to report both the liquidation under DOL Regulation Section 4043.30 and the insolvency under DOL Regulation Section 4043.35 (29 C.F.R. § 4043.35). Instead, there are parallel waivers in both sections that waive notice if it had already been provided to the PBGC for the same event under the other section.

The preamble to the final regulations explains that the PBGC does not intend to compel public company plan sponsors to disclose liquidations on a Form 10 before notifying the public. Therefore, the final regulation includes an extension under DOL Regulation Section 4043.30(c) to file the post-event reportable events notice until the earlier of the timely filing of an SEC Form 8-K disclosing the event or the issuance of a press release discussing it. The PBGC had requested public comments on whether and how it should make this extension available for foreign private issuers, but it received no comments, and it determined that the public company extension should not be available with respect to an SEC Form 6-K filing.

Under the final regulations:

The public company extension is available to a foreign private issuer that is a public company where an English language press release relating to the event is issued in the US.
The public company extension for liquidations is applied to the parent company of a contributing sponsor within the same controlled group. Specifically, when a contributing sponsor's parent is a public company within the same controlled group and files a Form 8-K or issues a press release disclosing the liquidation event, the due date for reporting the event to the PBGC is extended to the earlier of either of those public disclosures.

Public Company Waiver

The public company waiver was added to the reportable events regulations in 2015. This is a reporting waiver for public companies that experience one of five specified events (referred to as Category 1 events) and 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) (see Practice Note, Reportable Events for Pension Plans Under ERISA Occurring On or After January 1, 2016: Expansions of Existing Waivers).

The PBGC did not propose changes to the public company waiver but it requested comments on whether the waiver should be expanded to apply when a parent company timely files a Form 8-K but is not a contributing sponsor to the plan. The PBGC received two public comments in favor of expanding the waiver.

The final regulations expand the public company waiver by:

Allowing it to apply where the contributing sponsor to the plan or the parent company, if not the contributing sponsor, files a Form 8-K adequately disclosing the event under an item of the Form 8-K other than under Item 2.02 or in financial statements under Item 9.01.
Clarifying in the Form 10 instructions the information that is sufficient for a particular reportable event for the public company waiver to apply.

Annual Financial and Actuarial Information Reporting

ERISA Section 4010 (29 U.S.C. § 1310) imposes special reporting obligations on contributing sponsors of a pension plan and their ERISA affiliates that have significant funding problems (see Practice Note, Guide to ERISA Provisions in Credit and Financing Agreements: Consequences of Failure to Meet Minimum Funding Standards: Reporting Obligations (ERISA Sections 4010, 4043)). Notice under ERISA Section 4010 is waived in certain circumstances (see Legal Update, PBGC Issues Final Regulations on Pension Plan Reporting Under ERISA Section 4010).

Regarding the information reporting requirements, the final regulations:

Include several new definitions, including "foreign entity" (similar to the definition in the reportable events regulations (29 C.F.R. § 4043.2)), "ultimate parent," and "U.S. entity."
Remove references to Section 104 of the Pension Protection Act of 2006 (PPA) because it expired.
Allow filers in controlled groups with more than ten non-exempt entities to provide information about the current members of the controlled group by filing a chart or diagram showing the relationship of the members. The final regulations clarify that exempt entities may but are not required to be included in the organizational chart.
Reorganize DOL Regulation Section 4010.8(d)(2) (29 C.F.R. § 4010.8(d)(2)) and put the actuarial assumptions and methods for determining a plan's benefit liabilities into a table. The final regulations provide guidance on the actuarial assumptions for cash balance plans. In response to comments on the proposed regulations:
- the final regulations provide that filers may disregard the updates to reflect expected improvements in mortality experience that are described in Treasury Regulation Section 1.411(b)(5)-1(e)(2)(iii)(A)(2) (26 C.F.R. § 1.411(b)(5)-1(e)(2)(iii)(A)(2)) for the purpose of valuing benefit liabilities under DOL Regulation Section 4010.8(d)(2); and
- this new valuation method is applicable to plan years beginning on or after January 1, 2020.
Change DOL Regulation Section 4010.9 (29 C.F.R. § 4010.9) by eliminating a financial information reporting requirement in paragraph (b)(2), clarifying that filers must submit financial information of a controlled group's members that are US entities but not for the ultimate parent if it is a foreign entity, and clarifying how to indicate where public financial information is located.
Make several clarifications and revisions to the reporting waivers under DOL Regulation Section 4010.11(a) and (b) (29 C.F.R. § 4010.11(a), (b)), which are the same as those included in the proposed regulations. In addition, the final regulations simplify the calculations for determining whether the $15 million aggregate funding shortfall waiver applies. Furthermore, the PBGC decided not to adopt a new waiver included in the proposed regulations that would have applied when a plan's funding target attainment percentage (FTAP) would have been greater than or equal to 80 percent because of a late election to reduce a funding balance. The preamble states that the PBGC encourages plan sponsors with an FTAP below 80% that is the result of an administrative error regarding a funding balance election to request a case-specific waiver under DOL Regulations 4010.11(d) (29 C.F.R. § 4010.11(d)).

Termination of Single-Employer Plans

Under DOL Regulation Section 4041.29 (29 C.F.R. § 4041.29), the administrator of a pension plan that is undergoing a standard termination must submit within 30 days after the final distribution of assets PBGC Form 501, which is a post-distribution certificate. The PBGC has received feedback that it is difficult to collect all of the information required to be submitted with the post-distribution certificate. Therefore, the final regulations amend DOL Regulation Section 4041.29(a) to provide an alternative filing option for plan administrators who need more time to complete the certificate.

The alternative method permits a plan administrator to submit a completed PBGC Form 501 within 60 days after the last distribution date for any affected party if the plan administrator certifies to the PBGC (in an email or as otherwise described in instructions to Form 501) that all plan assets have been distributed as required under ERISA within 30 days after the last distribution date for any affected party.

Corresponding amendments to DOL Regulation Sections 4041.29(b) and 4041.30, which account for the changes to Section 4041.29(a), were included in the proposed regulations. The final regulations include those amendments and, in response to comments, also modify Section 4041.29(b) to clarify that the PBGC will not assess a penalty if the required information is filed within 90 days after the distribution deadline. For more information, see Practice Note, Terminating Defined Benefit Plans: Role of the PBGC.

PBGC Premium Rates

ERISA Sections 4006 and 4007 provide that pension plans covered by the plan termination insurance program under Title IV of ERISA must pay premiums to the PBGC (29 U.S.C. §§ 1306, 1307; see Practice Notes, Defined Benefit Plans: Distress and Involuntary Terminations: Liability to the PBGC: Premium Liability and Freezing Defined Benefit Plans: Implications of Freezing a Defined Benefit Plan: PBGC Premiums and Reporting Requirements). These premiums include annual flat-rate and variable-rate premiums, which are due until a plan is terminated, and a termination premium that is due after the plan terminates.

The PBGC's final regulations:

Remove the references to PPA Sections 104, 105, and 106 in DOL Regulation Section 4006.4(f) (29 C.F.R. § 4006.4(f)) because those provisions have expired.
Add a reference to the special funding rules of ERISA Section 306 (29 U.S.C. § 1085a) and Internal Revenue Code (Code) Section 433 (26 U.S.C. § 433) for multiple employer defined benefit plans maintained by certain cooperatives and charities under the Cooperative and Small Employer Charity Pension Flexibility Act (Pub. L. 113-97 (Apr. 7, 2014)).
Amend DOL Regulation Section 4006.5(a)(3) (29 C.F.R. § 4006.5(a)(3)) to expressly state that a plan does not qualify for the variable-rate premium (VRP) exemption for the year in which a plan completes a standard termination if the plan engages in a spinoff during the premium payment year (unless the spinoff is de minimis). The final regulation moves the exemption for certain plans that are completing a standard termination initiated in a prior year from DOL Regulation Section 4006.5(a)(3) to DOL Regulation Section 4006.5(a)(4).
Amend DOL Regulation Section 4006.5(e) (29 C.F.R. § 4006.5(e)) to provide clarification on how to determine premiums following transfers of participants from one plan to another, and to specify that the special rule in this paragraph applies to beginning-of-year mergers where a large plan is merged into a smaller plan. In response to comments on the proposed regulations, the PBGC will consider whether future regulations should eliminate the exceptions to the special rule for de minimis transactions and whether the special rule should also apply to transactions that occur on the last day of the prior plan year.
Change the rule regarding premium proration for certain short plan years, to provide that premiums are not prorated for the year in which the plan completes a final distribution of assets in a standard termination if the plan engages in a spinoff in the same year, unless the spinoff is de minimis under the regulations under Internal Revenue Code Section 414(l) (26 U.S.C. § 414(l) (generally fewer than 3 percent of the assets are spun off)).

Practical Implications

The miscellaneous corrections, clarifications, and improvements provided in the PBGC's final regulations are largely similar to those included in the June 2019 proposed regulations. The changes are highly technical and warrant a close and careful review. The final regulations are effective March 5, 2020.

PBGC Issues Final Regulations on Reportable Events, Information Reporting, Plan Terminations, and PBGC Premium Rates | Practical Law