United States: Pension Benefit Guaranty Corporation Issues Final Regulations On Reportable Events

Last Updated: October 2 2015
Article by Robert B. Wynne, Katie M. Rak and James P. McElligott, Jr

Earlier this month, the Pension Benefit Guaranty Corporation (PBGC) issued final regulations on reportable events under ERISA in connection with defined benefit pension plans and their sponsors (the Final Regulations). The Final Regulations expand and increase the flexibility of the waiver provisions of the proposed regulations issued in 2013 (the 2013 Proposal). The Final Regulations are intended to reduce unnecessary reporting requirements while at the same time aligning PBGC resources with plans that pose the greatest risks to the pension insurance system.

The Final Regulations apply to post-event reports for reportable events occurring on or after Jan. 1, 2016, and to advance reports due on or after that date.


As discussed in an earlier WorkCite article, under ERISA Section 4043 and the prior regulations thereunder (the Prior Regulations), a contributing sponsor or plan administrator of a pension plan subject to Title IV of ERISA must notify PBGC when certain events occur that may indicate a plan funding problem and possible need to terminate the plan. These "reportable events" include failures to make minimum required funding contributions, missed benefit payments and loan defaults. In certain circumstances, these reportable events must be reported to PBGC before the event occurs ("advance notice"), and in other circumstances, the reporting requirement is waived if the plan's funding level is at or above certain levels.

Purpose of Reportable Event Regulations

PBGC's single-employer program insures the pensions of about 30 million workers and retirees in about 22,000 ongoing plans sponsored by private-sector employers. In 2014, PBGC estimated the program's deficit at about $19.3 billion. The program's potential exposure to future pension losses from financially weak companies was estimated at about $167 billion. In Fiscal Year 2014, PBGC assumed responsibility for about 53,000 people in 97 trusteed single-employer plans.

PBGC receives no tax moneys for its programs. Its financing comes from insurance premiums paid by companies whose plans PBGC protects, from its investments, from the assets of pension plans that PBGC takes over as trustee and from recoveries from all members of the plan sponsor's controlled group for the plan's unfunded benefit liability upon termination.

In bankruptcy, PBGC's claim for termination liability is only a general unsecured claim. For this reason, the reportable-event regulations give PBGC an early warning of possible financial threats to pension plans. When PBGC learns of events that impact financially troubled plan sponsors and poorly funded pensions, PBGC seeks to obtain protections for the plans before a transaction increases PBGC's risk of loss.

After receiving a notice of a reportable event, PBGC may seek more information to determine whether PBGC action is needed. PBGC has broad investigation powers and can use the threat of PBGC liens and involuntary termination to persuade plan sponsors and control group members to cooperate. For failures to report when required, PBGC may assess penalties of up to $1,100 per day.

Overview of the Final Regulations

The Final Regulations expand and increase the flexibility of the 2013 Proposal's waiver provisions. The PBGC estimates that these changes will exempt about 94 percent of plans and sponsors from some or all of the reporting requirements that would otherwise apply. In addition to these changes, the Final Regulations eliminate most filing extensions and require that reports be submitted electronically.

Changes to Safe Harbors Based on Financial Soundness

A key concept of the 2013 Proposal was the establishment of certain "safe harbors" to enable financially sound businesses and plans to avoid having to report certain events, particularly those events that appeared to have little chance of threatening a plan. Specifically, the 2013 Proposal provided a safe harbor for (i) entities that are plan sponsors or members of a plan sponsor's controlled group that are deemed to be "financially sound" and (ii) plans that are deemed to be "financially sound." Both safe harbors required satisfaction of specified conditions to be considered financially sound. If met, the safe harbors provided a waiver from reporting for each of five reportable events (active participant reductions; substantial owner distributions; controlled-group changes; extraordinary dividends or stock redemptions; and benefit liability transfers).

In response to comments that these financial soundness tests could be seen as a pronouncement by PBGC on the overall financial status of a company, the Final Regulations have renamed and modified the two safe harbors to clarify that they are intended only 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. These modifications are referred to in the Final Regulations as the "low-default-risk safe harbor" for companies and the "well-funded plan safe harbor" for plans.

Company Safe Harbor: The Low-Default-Risk Safe Harbor

Under the Final Regulations, a company that is a contributing sponsor of a plan meets the "low-default-risk safe harbor" if both the company and its highest-level U.S. parent of the plan's controlled group have "adequate capacity" to meet their obligations in full and on time. To demonstrate adequate capacity, each of these entities must satisfy either (i) the first two, or (ii) any four, of the following seven criteria:

  1. The probability that the entity 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 entity's credit quality.

    Note : PBGC's intent is to provide flexibility to companies in meeting this standard and to allow an entity to determine whether it satisfies this new criterion by referring to third-party information (e.g., credit scores or credit ratings) that the company considers reliable and already uses with confidence for other business purposes.
  2. The entity's secured debt (disregarding leases and debt incurred to acquire or improve property and secured only by that property) does not exceed 10 percent of its total asset value.

    Note : The 2013 Proposal had required that an entity have no secured debt. The PBGC's addition of a 10 percent requirement reflects its understanding that a financially healthy company may obtain secured debt for a variety of business reasons that do not relate to credit risk (e.g., to obtain favorable interest rates or because the company has assumed the debt from an entity it acquires).
  3. The entity's ratio of total debt to EBITDA is 3.0 or less.

    Note : This is a new criterion, which is commonly referred to as a leverage ratio and is used to assess an entity's ability to meet its debt obligations.
  4. The entity's ratio of retained earnings to total assets is 0.25 or more.

    Note : Like the ratio of total debt to EBITDA, this is a new criterion. PBGC included this measure because it shows how much of an entity's assets have been financed with the company's profits. In PBGC's experience, companies with greater accumulations of retained earnings are more likely to meet financial obligations.
  5. The entity has positive net income for the two most recently completed fiscal years.
  6. The entity has not experienced any loan default event in the past two years regardless of whether reporting was waived.
  7. The entity has not experienced a missed contribution event in the past two years unless reporting was waived.

An entity determines whether it qualifies for the safe harbor once during an annual financial reporting cycle (referred to in the Final Regulations as the "financial information date"). If it satisfies the criteria described above on that financial information date, then its qualification remains in place for a period that ends 13 months following such date or on the next financial information date (if earlier). Importantly, if the entity does not qualify, its nonqualified status remains in place until its next financial information date.

In an FAQ on reportable events, PBGC provides the following example to explain how the low-default-risk safe harbor works:

For example, a company completes its audited financial statements and files them with the SEC on March 15, 2106 for the period January 1 - December 31, 2015 ("2015 Financial Statements"). The company uses the 2015 Financial Statements to determine whether it meets the low-risk-default waiver on March 15, 2016. If it meets the waiver criteria, the company is exempt from reporting events that occur from March 15, 2016 through April 16, 2017. For the following year, if the company completes its financial statements for the 2016 financial year by March 15, 2017 and no longer meets the low-default-risk criteria, the safe harbor is no longer in effect beginning on March 15, 2017.

Plan Safe Harbor: The Well-Funded Plan Safe Harbor

The well-funded plan safe harbor applies to the same five events as the low-default risk safe harbor (active participant reductions; substantial owner distributions; controlled-group changes; extraordinary dividends or stock redemptions; and benefit liability transfers). It applies if a plan owed no variable-rate premiums (VRPs) for the plan year preceding the event year.

A PBGC FAQ provides the following example for the well-funded plan safe harbor:

For example, consider a calendar year plan, for which the 2016 premium filing is due October 15, 2016. If that filing shows that no VRP is owed for 2016, the plan qualifies for the well-funded plan waiver with respect to reportable events for which the waiver applies occurring in 2017. This is the case even if the 2017 filing (due October 15, 2017) shows that a VRP is owed for 2017.

Certain plans exempt from VRPs (e.g., certain new plans) will qualify for the well-funded plan safe harbor regardless of their funding percentage.

Other Changes to Waiver Provisions Under Final Regulations

The following are examples of other changes to the waiver provisions under the Final Regulations:

  • Public Company Waiver : The Final Regulations waive reporting for the same five events as the low-default risk and well-funded plan safe harbors (active participant reductions; substantial owner distributions; controlled group changes; extraordinary dividends or stock redemptions; and benefit liability transfers) where any contributing sponsor of the affected plan is a public company and the contributing sponsor timely files an SEC Form 8-K disclosing the event, except where such disclosure is under a SEC Form 8-K item relating primarily to results of operations or financial statements (Items 2.02 and 9.01, respectively). The 2013 Proposal did not include a waiver for public companies.
  • Controlled Group Situations : Commenters on the 2013 Proposal were concerned about the difficulty in monitoring members of complex controlled groups for reportable events, particularly with respect to the five events that involve reporting at the controlled group level rather than the plan level (controlled-group changes; liquidations; loan defaults extraordinary dividends; and insolvency events). The Final Regulations address these concerns in the following ways:
    • A waiver is provided for public companies for reporting five events (discussed above).
    • The low-default-risk safe harbor (which applies to controlled group changes and extraordinary dividends) is clarified to require satisfaction by a contributing sponsor at the highest-level U.S. parent of the contributing sponsor, rather than not by the entire controlled group or by the contributing sponsor or highest-level U.S. parent alone.
    • The satisfaction of the low-default risk safe harbor is based on a single point in time during an annual financial cycle rather than a determination after each of one or more events during a year.
  • Small-Plan Waivers : The Final Regulations change the small-plan waiver from fewer than 100 participants to 100 participants or fewer for consistency with PBGC's recent premium final regulation. Additionally, small-plan waivers are available under the Final Regulations for the following five events: failures to make required quarterly contributions; extraordinary dividends or stock redemptions; active participant reductions; changes in contributing sponsor or controlled group; and benefit liability transfers. Under the Prior Regulations, the small-plan waiver applied to only two events.

Other Changes Under Final Regulations

  • Active-Participant Reductions : The Final Regulations generally track the 2013 Proposal for active-participant reductions. However, the Final Regulations eliminate the short-period event, lengthen the reporting extension for attrition events (the notice date is extended until the premium due date for the plan year following the event year) and make some minor editorial changes for clarification.
  • Failure to Make Required Minimum Funding Payments: The Final Regulations add a waiver for a missed contribution where the failure to timely make the contribution is due solely to the plan sponsor's failure to timely make a funding balance election. As under the 2013 Proposal, the Final Regulations provide a waiver for missed contributions made up within 30 days after its due date and for small plans that miss quarterly contributions.
  • Inability to Pay Benefits when Due: The Prior Regulations would have waived a failure to pay benefits due to an inability to locate a payee or any other administrative delay of less than two months (or two benefit payment periods). Recognizing that it would be unfair to require a plan to report an inability to pay benefits when due simply because a payee could not be located within the prescribed time limit, the Final Regulations clarify that the time limit does not apply to a delay in paying a missing payee. Other administrative delays are excused only to the extent they do not exceed the prescribed time limit.
  • Form 200 Reporting: Under the Final Regulations, if a plan sponsor makes up a missed contribution by the due date for Form 200 (Notice of Failure to Make Required Contributions), and the sponsor has not missed any other required contributions during the two-year period ending on the Form 200 notice due date, the plan may file the Form 200 notice with none of the attachments (e.g., controlled group listing and company financial statements) otherwise required by the Form 200 and instructions.

Summarizing Tables

The Final Regulations contain tables summarizing waiver and safe-harbor provisions for which post-event reporting is required, including comparisons between the Final Regulations and the Prior Regulations.

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.

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