PBGC proposes new test for waiver in re-proposed reportable events regulation

In April, the Pension Benefit Guaranty Corporation (PBGC) re-proposed reportable event regulations under ERISA section 4043. The major feature of the new proposal is a waiver of reportable event reporting where the plan sponsor meets a “financial soundness” test. This most recent proposal follows proposals by PBGC to use sponsor financial condition as a criterion for enforcement of ERISA section 4062(e) rules and in setting PBGC premiums.

In this article, after a brief discussion of ERISA 4043 reportable events and their significance, we discuss the ‘sponsor financial soundness’ provisions of the proposed regulation. We then briefly review the standards used in the ERISA section 4062(e) enforcement guidelines and PBGC’s proposal for a sponsor-risk-based premium structure. We conclude with a discussion of the implications of these sorts of policies for plan sponsors.


This article does not provide a comprehensive review of the new proposed reportable event regulation. We focus only on the introduction of the (new) criterion of “sponsor financial soundness” for a waiver of reportable events reporting. But — for those who are interested — we do want to provide a brief background on what ERISA section 4043 reportable events are, how current funding-based waivers for reportable events work, and when a reportable event may be significant for a sponsor. A lot of this is very technical — if you just want the bottom line, feel free to skip to the section PBGC’s reportable event proposal — sponsor financial condition.

ERISA section 4043 reportable events

ERISA section 4043 and the related regulations identify certain events that have to be reported to PBGC, including:

Certain reductions in the number of a plan’s active participants

Failure to make required minimum funding payment

Inability to pay benefits when due

Distribution to a substantial owner

Change in contributing sponsor or controlled group


Extraordinary dividend or stock redemption

Transfer of benefit liabilities

Application for minimum funding waiver

Loan default

Bankruptcy or similar settlement

What’s in the ‘report?’

The ‘report’ of the reportable event must include: plan identification information; a brief statement of the pertinent facts relating to the reportable event; a copy of the plan document; a copy of the most recent actuarial statement; and a statement of any material change in the assets or liabilities of the plan occurring after the date of the most recent actuarial statement. PBGC may ask for more information.

Waiver of the reporting requirement based on plan financial condition

Under current rules reportable event reporting is waived in certain circumstances. With respect to seven events — active participant reduction, distribution to a substantial owner, controlled group change, extraordinary dividend, transfer of benefit liabilities, liquidation, and loan default — reporting is waived if plan funding meets a specified test (a “plan financial condition test”). Generally, the requirement is that plan assets equal at least 80% of vested benefits. For this purpose, the value of vested benefits is determined on the same basis as it is for purposes of calculating the variable rate premium (hereafter, on a ‘premium basis’). That calculation is made using current interest rates and ‘ongoing plan’ assumptions. (We discuss the difference between ‘ongoing plan’ assumptions and ‘termination’ assumptions below.)

Each such ‘funding-based’ waiver includes its own wrinkles. And for a transfer of benefit liabilities a different rule applies – with respect to such a transfer, both the transferor and transferee plans must be fully funded on a Tax Code section 414(l) basis.

Significance of reportable events

PBGC clearly views the ERISA reportable event rules as an ‘early warning.’ Quoting from the proposal’s preamble:

Reports required by section 4043 of ERISA tell PBGC about events that may presage distress termination of plans or require PBGC to monitor or involuntarily terminate plans. … When PBGC has timely information about a reportable event, it can take steps to encourage plan continuation — for example, by exploring alternative funding options with the plan sponsor — or, if plan termination is called for, to minimize the plan’s potential funding shortfall through involuntary termination and maximize recovery of the shortfall from all possible sources.

It’s unclear how significant the reportable event rules are for sponsors. The only technical consequence of having a reportable event is, you have to report it and provide PBGC certain (fairly accessible) information. It is possible that a reportable event may, in effect, make a plan or plan sponsor a target of PBGC concern (as the above quote illustrates).

It is often suggested, however, that the biggest concern for sponsors is the possibility that a reportable event would trigger a covenant in a credit agreement. In connection with its proposal, PBGC undertook a review of that issue, examining several credit agreements. It’s conclusion:

PBGC has been unable to find a record of any case where the filing of a reportable event notice has resulted in a default under a credit agreement. These observations suggest that the [proposed] elimination of reporting waivers would not adversely affect most plan sponsors with loan agreements.

Certainly, some sponsors will disagree with PBGC’s view here. Whatever the case may be generally, in considering PBGC’s new reportable event proposal sponsors will want to review their own credit agreements to determine whether a change in the rules may increase risk under them.

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Now let’s turn to PBGC’s proposal to revise these rules.

PBGC’s reportable event proposal — sponsor financial condition

Under the proposal, five reportable events for which, currently, there is a funding-based waiver, would be eligible for a “sponsor financial condition” waiver: active participant reduction; distribution to a substantial owner; controlled group change; extraordinary dividend; and transfer of benefit liabilities. Two other reportable events for which a current funding-based waiver is available — sponsor liquidation and loan default — would not be eligible for this waiver.

To qualify for the “sponsor financial condition” waiver, the sponsor must meet five criteria:

(1) The entity is scored by a commercial credit reporting company (such as Dun & Bradstreet), and the score indicates a low likelihood that the entity will default on its obligations. “To give an idea of the level of score that PBGC has in mind, a minimum Dun & Bradstreet financial stress score of 1477 would have satisfied the standard in 2011.”

(2) The entity has no secured debt, disregarding leases or debt incurred to acquire or improve property and secured only by that property. PBGC has asked for comment on “the extent to which the proposed no-secured-debt test might be failed by plan sponsors whose risk level is in fact as low as that of other sponsors capable of passing the test.”

(3) For the most recent two fiscal years, the entity has positive net income under generally accepted accounting principles or International Financial Reporting Standards.

(4) For the two-year period ending on the determination date, there has been no default on a loan with an outstanding balance of $10 million or more.

(5) For the two-year period ending on the determination date, the entity has not failed to make when due any required minimum funding payments.

The rule applies to the plan’s contributing sponsor or (where the contributing sponsor was a member of a controlled group) “the contributing sponsor’s highest U.S. parent in the controlled group.”

A tougher plan financial condition test

As noted, current rules use an 80% funding test, determined on a ‘premium basis,’ for funding-based waivers. But according to the PBGC “that test is inadequate, in that many plans that have undergone distress or involuntary termination nonetheless have been 80% funded on a premium basis.”

In the proposal, PBGC has preserved a funding-based waiver but has increased the funding requirement. Under the proposal, with respect to the same five events (active participant reduction; distribution to a substantial owner; controlled group change; extraordinary dividend; and transfer of benefit liabilities), reporting may also be waived if either:

(1) As of the last day of the prior plan year, the plan had no unfunded benefit liabilities determined on a “termination basis.” In this regard, in the preamble, PBGC notes “assumptions about when participants will retire would be different for an ongoing plan than a terminating plan; in a terminating plan, participants generally retire earlier and may receive early retirement subsidies. Liabilities … are typically higher on termination assumptions than on ongoing assumptions, and thus, for a given amount of assets, a plan’s termination basis funding percentage is typically lower than its funding percentage on an ongoing basis.”

(2) For the prior plan year, the ratio of the value of the plan’s assets to the amount of its funding target, determined on a ‘premium basis,’ was not less than 120%. PBGC states: “[t]he 20% cushion is needed to help compensate for several differences between the termination-basis funding level and the [‘premium basis’] funding level.”

Generally, and especially in the current interest rate environment, it will be very hard for a plan to meet the 120% ‘premium basis’ funding requirement. Determining funding on a “termination basis” is, for many plans, complicated, and meeting a 100% ‘termination basis’ funding target may be equally problematic. Bottom line: the proposal would make the plan financial condition test a lot tougher to meet, heightening the importance of the new sponsor financial condition-based waiver.

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The foregoing describes how the PBGC wants to introduce a consideration of the plan sponsor’s financial condition into the reportable event rules. PBGC has made similar proposals in two other areas — 4062(e) enforcement and insurance fund premiums.

4062(e) enforcement guidelines

ERISA section 4062(e) applies if “an employer ceases operations at a facility in any location and, as a result of such cessation of operations, more than 20% of the total number of his employees who are participants under a plan established and maintained by him are separated from employment ….” Oversimplifying somewhat, a 4062(e) event triggers a reporting obligation and allows the PBGC to assess plan liability on a ‘termination basis’ (see our discussion of the calculation of termination liability above) and to require funding, escrow or a bond with respect to a portion of that liability. PBGC may also negotiate other concessions in connection with a 4062(e) event. The liability calculations under 4062(e) can get, for lack of a better word, bizarre and produce some very unusual results.

In recent years, PBGC’s practice with respect to 4062(e) had become very aggressive. It has applied a very expansive definition of ‘cessation of operations’ and required sponsors, e.g., to waive credit balances as part of a settlement. There were a number of complaints from sponsors about this practice.

In October 2012, PBGC announced new “Guidelines for Enforcement of ERISA section 4062(e).” Under those guidelines, PBGC announced that it would not initiate 4062(e) enforcement if the affected company is “financially sound.” In this case, the criteria for determining whether a company is “financially sound” are, generally:

The company has unsecured debt-equivalent ratings from both Moody’s and S&P, and the ratings are at least Baa3 by Moody’s and BBB- by S&P; or

The company is rated by only one of those agencies, and the rating is at least Baa3 or BBB-; or

The company is rated by neither of those agencies, and:

The company has a D&B Financial Stress Score of 1477 or higher, and

The company’s secured debt (disregarding debt incurred to purchase real estate or equipment) does not exceed 10% of its asset value.

We say ‘generally’ because PBGC reserves the right to ignore these criteria if “the company presents signs of financial weakness.”

Note that, unlike the reportable events proposed regulation, these ‘enforcement guidelines’ use Moody’s and S&P ratings. Apparently, those ratings are missing from the former because (quoting the preamble to the proposal): “[p]ursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, federal agencies are to review their regulations and remove any reference to or requirement of reliance on credit ratings and substitute other appropriate standards of creditworthiness.” The distinctions being that the reportable events proposal involves a regulation whereas the 4062(e) rules are only ‘guidelines’ and that Moody’s and S&P provide ‘credit ratings’ whereas Dun & Bradstreet only provides a credit ‘score.’

Risk-based premiums

PBGC is also advocating changing the current variable premium structure from one that focuses on plan funding only to one that focuses on both plan funding and the financial condition of the sponsor. With regard to the financial condition test for premiums GAO described PBGC’s process as follows:

For the financial health factor, PBGC assigned a measure on a scale of 1 to 5 based on the lower of the sponsor’s Standard & Poor’s or Moody’s credit ratings, or, if credit ratings were unavailable, a sponsor’s Dun & Bradstreet credit risk ranking. PBGC then combined these scores with scores based on the plan’s level of funding to assign a corresponding variable rate used for calculating the premium.

Any change along these lines, however, would require legislation.

(Sponsor) risk-based funding

Finally, we note that the Bush Administration’s original (2005) funding reform proposal (which ultimately turned into the Pension Protection Act of 2006) included a provision that would determine ‘at-risk’ status (triggering accelerated funding) based on a sponsor’s bond rating. That provision was not included in the PPA as passed.


In the preamble to the 4043 proposal PBGC states: “analysis of PBGC data indicates that the credit ratings of sponsors of the vast majority of underfunded plans taken over by PBGC were below investment grade for many years before termination.” This is a theme sounded in PBGC’s advocacy of sponsor-risk-based premiums as well. In PBGC’s view, the point is pretty obvious: financially ‘sound’ companies don’t present a risk; ‘unsound’ ones do. So PBGC wants to focus ERISA Title IV policy — premium setting, reporting, enforcement — on ‘unsound’ companies.

In our view there are three issues presented by PBGC’s approach to this issue. First, there is the threshold question: is this a good idea at all? It has some superficial appeal (for PBGC at least). But it puts ‘stress’ – higher premiums, PBGC demands for increased ‘funding enhancement’ – on companies that are already under stress. Indeed, both the Administration (in proposing risk-based PBGC premiums in the Budget) and the GAO (in its report on that issue) acknowledge this concern. And sponsors who are currently ‘financially sound’ may think twice about supporting it because of this possibility.

Second, even if this approach is right in principle, there is the question of whether PBGC has ‘drawn the right line.’ Is a D&B score of 1477 really the border between ‘sound’ and ‘unsound?’ Why isn’t Congress’s concern about the inadequacy/inaccuracy of ‘credit ratings’ just as applicable to ‘credit scores?’ Does the no-secured-indebtedness requirement really make sense? Is there a better measure for soundness, or a better process for measuring it?

Third, the changes to the funding-based waivers seem like an over-reach. The new tests are so hard to meet in the current environment that sponsors will be forced into the sponsor financial condition waiver rules. If there were, for sponsors with financial issues, a viable funding alternative, some of the stress of the sponsor financial soundness test would be relieved.

These comments apply to the reportable event proposal — but they also apply to (and may be more significant for) the 4062(e) enforcement guidelines and, especially, the risk-based premium proposal. With regard to the latter, since risk-based premiums would function more or less as a tax, the ability of the sponsor to fund its plan and thereby avoid the tax is critical.

For sponsors, this is definitely an ‘emerging issue.’ The only ‘rule’ that has been implemented is the 4062(e) enforcement guidelines. The 4043 rule is a proposal, and it generally only affects reporting. The PBGC risk-based premium proposal has been consistently rejected by House Republicans.

But these proposals are unlikely to go away, and sponsors will want to consider their implications for, e.g., their ability to borrow and the terms of credit agreements.

We will continue to follow this issue.