ERISA Section 4043 requires plans or sponsors to notify the Pension Benefit Guaranty Corporation (PBGC) upon the occurrence of certain company or plan events that may put pensions at risk. Reportable events provide PBGC an opportunity to assess a company's or plan's financial problems, encourage plan continuation, or, if necessary, maximize participant recovery upon a termination.
Last fall, PBGC published its final rules, making significant updates to the reportable events structure. Under the new rules, the PBGC believes it is better able to monitor and address situations most likely to result in problems for the pension insurance system. In addition, PBGC predicts 94 percent of plans and sponsors will be exempt from many reporting requirements, resulting in an overall reduction in reporting.
The following is a brief summary of the reportable event triggers and new waivers.
Reportable Events
Effective January 1, 2016, a company or plan must generally report the following events within 30 days of occurrence:
Active participant reduction: The active participant count falls below 80 percent of the count at the beginning of the current plan year or 75 percent of the count from the preceding plan year following a single-cause event or due to attrition.
Missed contributions: A sponsor fails to make minimum funding contributions required by ERISA Sections 302 or 303, or a contribution required as a condition of a funding waiver. However, no report is required if the missing contribution is made within 30 days of the due date, or if it was missed solely because of the sponsor's failure to timely make a funding balance election.
Inability to pay benefits when due: A plan is currently unable or projected to be unable to pay benefits. A plan is "currently unable" when it is unable to provide a participant (or beneficiary) with the full benefits at the time and in the form the benefits are due. A plan is not "currently unable" if it is unable to locate the participant (or beneficiary), if the payment is limited by IRC Section 436, or if the delay is purely administrative and is less than two months or two benefit payment periods. A plan is projected to be unable to pay benefits if as of the last day of any quarter, the plan's liquid assets are less than two times the amount of disbursements from the plan for that quarter.
Distribution to substantial owner: A sponsor makes distribution to a substantial owner (i.e., greater than 10 percent owner) where:
- Total distributions to the substantial owner made over the previous 12 months exceeds $10,000;
- Distribution is not made on account of the substantial owner's death;
- The plan is underfunded; and
- The sum of all distributions to any one substantial owner within the preceding 12 months is more than one percent of the year-end plan assets for each of the previous two years, or the sum of all distributions to all substantial owners over the preceding 12 months is more than five percent of the year-end plan assets for each of the previous two years.
If the distribution is in the form of an annuity only, the sponsor only needs to report the event once (at the time of the first payment).
Controlled group change: If a transaction results, or will result, in one or more entities ceasing to be members of a plan's controlled group. However, the merger of one member into another is not a reportable event.
Extraordinary dividends/stock redemption: A member of plan's controlled group declares a dividend or redeems its own stock, the value of which, when combined with other such distributions during the same fiscal year, exceeds the recipient's net income before after-tax gain or loss on any assets for the prior fiscal year, as determined in accordance with generally accepted accounting principles.
Transfer of benefit liabilities: A plan transfers liabilities to a person(s) (or a plan maintained by a person(s)) outside of the transferor's controlled group and the amount of liabilities transferred, combined with the other liabilities transferred during the prior 12-month period, is three percent or more of the plan's total liabilities. Lump-sum payments or purchases of an irrevocable commitment to provide an annuity in satisfaction of a benefit liability are not transfers of benefit liabilities.
Loan default: With respect to a loan to a member of the plan's controlled group with an outstanding balance of $10 million or more:
- An acceleration of payment or default under the loan agreement, or
- Waiver or amendment of any covenant in the loan agreement that will cure or avoid a breach that would trigger default.
Liquidation: A member of plan's controlled group is involved in any transaction to implement its complete liquidation, institutes (or has instituted against it) a proceeding to be dissolved or is dissolved, or liquidates in a case under the Bankruptcy code (or any similar law).
Insolvency or similar settlement: A member of the plan's controlled group commences (or has commenced against it) any insolvency proceeding, other than one under the Bankruptcy code; commences (or has commenced against it) a proceeding to effect a composition, extension or settlement with creditors; executes a general assignment for the benefit of creditors; or undertakes to effect any other nonjudicial composition, extension or settlement with substantially all its creditors.
Application for minimum funding wavier: A plan submits an application for a minimum funding wavier.
Reportable Event Waivers
PBGC retained and expanded many of the waivers existing under the old regulations. These waivers (small plan, de minimis segment, foreign entity and public entity) now cover more events and sponsors where the risk of default is low.
PBGC added two new safe harbor waivers: (1) the low-default-risk waiver; and (2) the well-funded plan waiver. The new safe harbors cover five of the reportable events: active participant reduction, distribution to substantial owner, extraordinary dividend, transfer of benefit liabilities and change in controlled group.
The low-default-risk safe harbor waives reporting if company financial metrics show the company has adequate financial capacity to meets its obligations on time and in full. Criteria for satisfying the safe harbor are detailed in the regulations and are based on existing financial information companies commonly use for business purposes. Both the company and its highest-level U.S. parent must meet the stated criteria for the safe harbor to apply.
The well-funded plan safe harbor exempts reporting for plans that do not owe a variable-rate premium (VRP) for the plan year preceding the year in which the reportable event occurs. VRPs are not required where plans are 100 percent funded.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
