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.
Background
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.
See Prop. Reg. 29 C.F.R. §
4043.1 et. seq.
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.
Conclusion
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.
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.