Pension Benefit Guaranty Corporation Issues New Proposed Regulations On Reportable Events

Last month, the Pension Benefit Guaranty Corporation (PBGC) issued new proposed regulations on reportable events under ERISA (the 2013 Proposal) that supersede proposed regulations issued in 2009 (the 2009 Proposal). The PBGC expects that the 2013 Proposal would reduce reporting requirements for more than 90 percent of companies and pension plans and would exempt from many requirements all small plans and the more than 70 percent of pension plans whose sponsors are "financially sound" (as explained below).

Background

Under ERISA Section 4043 and the current PBGC regulations thereunder (Current Regulations), a contributing sponsor or plan administrator of a defined benefit pension plan subject to Title IV of ERISA must notify the 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 the 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.

After receiving notice of a reportable event, the PBGC may seek more information and will decide whether or not PBGC action is needed. For failures to report when required, the PBGC may assess penalties of up to $1,000 per day.

The 2009 Proposal

The 2009 Proposal would have eliminated most automatic waivers and extensions in the Current Regulations. The PBGC's rationale was that many of the automatic waivers and extensions in the Current Regulations were depriving it of early warnings that would enable it to mitigate distress situations. Also, the PBGC justified the reporting burden stemming from the elimination of most of the automatic waivers and extensions by its need for timely information that might contribute to plan continuation or the minimizing of funding shortfalls.

Public reaction to the 2009 Proposal was negative. Plan sponsors and pension practitioners asserted that the PBGC would have required reporting where the actual risk to plans and PBGC was minimal.

Commenters on the 2009 Proposal also claimed that commercial lenders typically incorporate PBGC reportable events into credit agreements as triggers indicating that the borrower's ability to pay is in question and possibly constituting a default under the loan. The elimination of the waivers, commenters argued, could result in defaults occurring even in situations where the creditworthiness of the plan sponsor/borrower remains sound. In the preamble to the 2013 Proposal, the PBGC indicated that it has not been able to substantiate these concerns. It reviewed 25 credit agreements from 20 distressed and/or small public companies and found that an event of default would not automatically be triggered by a reportable event...