On April 3, 2013, the Pension Benefit Guaranty Corporation ("PBGC") issued a proposed rule amending its existing reportable events rule that it expects will exempt more than 90 percent of pension plans and sponsors from many PBGC reporting requirements, while also simplifying reporting requirements for those companies and plans that must report.
Generally, ERISA requires pension plans and the companies that sponsor them to report a range of corporate and plan events to the PBGC. The PBGC uses the information provided in connection with these "reportable events" to assess the risk that the PBGC will have to take over defined benefit pension plans. The proposed rule is intended to more closely link reporting requirements with this financial risk, and in doing so, to allow the PBGC to better focus its resources on companies and plans that are at substantial risk of default.
Under the current rules, reportable events may fall within specific exceptions that waive or extend the reporting requirement, in some cases based on the plan’s funding level. Under the proposed rule, reporting requirements will be waived for most events currently covered by these funding-based waivers if a plan or its sponsor (or the plan sponsor’s highest-level U.S. parent company) falls within a "safe harbor" based on employer financial soundness. Under the rule, financial soundness is determined through a credit score indicating a low likelihood of default, reported by a commercial credit reporting company that is commonly used in the business community, and through the plan sponsor (or its highest-level U.S. parent company) satisfying four additional criteria:
- Positive net income for the past two years, as measured under GAAP or IFRS
- No secured debt (with a few exceptions, such as mortgages and equipment financing)
- No loan defaults or similar debt service problems (with a de minimis exception)
- No missed pension plan contributions over the past two years (other than quarterly contributions for which reporting is waived)
The proposed rules also retain plan funding level as a basis for reporting relief, replacing most current automatic funding-based waivers with a safe harbor for plans that are either fully funded on a termination basis or are 120 percent funded on a premium basis (in each case, measured as of the immediately preceding plan year).
The new proposed rules expand the availability of waivers in many areas (e.g., small plans, foreign entities, de minimis transactions, missed contributions that are made up quickly). They also revise the definition of reportable events in other areas to reduce the situations to which reporting applies with respect to active participant reductions, distributions to substantial owners, extraordinary dividends, and bankruptcy.
The PBGC is seeking comments on the new proposed rule, particularly with regard to the new safe harbors. Comments must be submitted on or before June 3, 2013. A public hearing will be held June 18, 2013.
If you have any questions regarding this proposed rule, or any other employee benefits-related questions, please contact one of the authors or the Reed Smith attorney with whom you usually work.
Client Alert 2013-117