As a background, the reportable event rules require pension plan administrators, sponsors and contributing employers to notify the PBGC either 30 days before or 30 days after a specified event occurs, including events such as extraordinary dividends or stock redemptions; changes in the controlled group or plan sponsor; termination or partial termination of a pension plan; active participant reductions; loan default; distributions to substantial owners; missed contributions; inability to pay benefits when due; application for a minimum funding waiver; insolvency; and transfers of benefit liabilities. The new rules, however, reduce the reporting burden in many of these circumstances. PBGC reporting now is automatically waived for certain reportable events if any of the following conditions are met: (1) the well-funded plan waiver, (2) the public company waiver, (3) the low-risk default waiver, and (4) small plan, foreign entity and de minimis waivers. In addition to these waivers, the new PBGC rules modify the definition of certain events that must be reported, and require electronic filing of all event notices. These new reportable event rules apply to post-event reports for events occurring on or after January 1, 2016, and apply to advance reports due on or after January 1, 2016.
Well-Funded Plan Waiver
During the plan year in which certain reportable events occur, a pension plan may utilize this waiver if no variable rate premium is due for the plan year prior to the reportable event. Generally, only a pension plan that is fully funded on an on-going basis (without smoothing) can avoid paying a variable rate premium to the PBGC. For example, if a pension plan does not pay a variable rate premium in 2016, the plan qualifies for the well-funded plan waiver for reportable events that occur in 2017 even if the plan is required to pay a variable rate premium in 2017.
Public Company Waiver
The public company waiver is available for certain reportable events if any contributing employer to the plan is a public company and files a SEC Form 8-K disclosing the reportable event. The waiver does not apply if the SEC Form 8-K disclosure is made under Item 2.02 (results of operations and financial condition) or under Item 9.01 (financial statements and exhibits).
Low-Default Risk Waiver
The low-default risk waiver is based on financial metrics that are readily available for most employers that contribute to a pension plan. Specifically, a pension plan’s contributing employer and highest level U.S. parent (collectively, the company) can satisfy the low-default risk waiver for certain reportable events if either: (1) the company meets both of the first two below factors, or (2) the company meets at least four of the below seven factors:
- The probability that the company will default on its financial obligations is not more than four percent over the next five years or not more than .4 percent over the next year, based on widely available financial information of credit worthiness
- The company’s secured debt (with some exceptions) does not exceed 10 percent of its total asset value
- The company’s ratio of total-debt-to-earnings before interest, taxes, depreciation and amortization (EBITDA) is 3.0 or less
- The company’s ratio of retained-earnings-to-total-assets is .25 or more
- The company has positive net income for the two most recent completed fiscal years
- The company has not experienced any loan default event in the past two years, regardless of whether reporting was waived
- The sponsor has not experienced a missed contribution event in the past two years unless reporting was waived
The company must meet these factors during its annual financial reporting cycle, which generally begins on the date of a U.S. public company’s 10-K filing, the closing date of a non-public company’s accounting period for its audited or unaudited annual financial statements, and the date of the company’s IRS Form 990 filing if there are no annual financial statements. The cycle then ends either on the earlier of the company’s next financial reporting date or after 13 months. For example, assume a non-public U.S. company completes its audited financial statements on March 15, 2016, for the preceding calendar year. This company can rely on these financial statements to meet the low-default risk waiver during the period starting on March 15, 2016, and ending on April 15, 2017, provided that the audited financial statements for the company’s fiscal year are available only after April 15, 2017.
Small Plan, Foreign Entity and De Minimis Waivers
For certain events, the PBGC’s new regulations provide additional waivers for small pension plans with 100 or fewer participants and for foreign entities, if the foreign entity is not a direct or indirect parent of the contributing employer of the pension plan. Likewise, an entity that constitutes a de minimis percentage of the overall controlled group does not need to report certain events, where the entity: (1) has revenue that is 10 percent or less of the controlled group’s revenue; (2) has annual operating income that does not exceed the greater of $5 million or 10 percent of the controlled group’s annual operating income; and (3) has tangible net assets at the end of the fiscal year that does not exceed $5 million or 10 percent of the controlled group’s net tangible assets.
Changes to Reportable Event Definitions
The final regulations also make a number of changes to the rules for determining whether and when a reportable event occurs. Some of these changes include the following:
- An active participant reduction now occurs either by attrition during a plan year or rapidly due to a reorganization, discontinuance of an operation, natural disaster, mass layoff or an early retirement incentive program. The reporting deadline for a rapid active participant reduction is 30 days after the event, but the reporting deadline for an active participant reduction due to attrition is extended to the due date for the payment of the plan sponsor’s PBGC premiums (generally October 15 for calendar year pension plans)
- A bankruptcy filing is no longer a reportable event
- A loan default was expanded to require reporting where there is an amendment or waiver of any loan covenant for the purpose of avoiding a default
- A merger of one controlled group member into another is no longer a reportable event
Although the final PBGC reportable event rules add many welcome exemptions for pension plan administrators, sponsors and contributing employers, these rules remain very fact specific and complex. In addition, failure to comply with the reportable event requirements also can result in significant penalty exposure, with a potential penalty of up to $1,100 per day for as long as the reporting delinquency continues. Given that a reportable event likely occurs sporadically rather than on a normal cycle, pension plan administrators, sponsors and contributing employers need to diligently monitor any changes in their pension plans and related controlled group entities to avoid reportable event errors and penalties.