Updated PBGC Guidance for Defined Benefit Plans
Earlier this year, the US Pension Benefit Guarantee Corporation (PBGC) issued a final rule, modifying PBGC regulations that apply to defined benefit pension plans. Among those changes were revisions to: (i) the reportable event notification requirements; (ii) annual financial and actuarial information (Form 4010) reporting; (iii) single-employer plan termination rules; and (iv) the premium rate calculation rules. The rule was generally effective on March 5, 2020, but some provisions have different applicability dates.
New Guidance on Reportable Events and Notification Requirements
Section 4043 of the Employee Retirement Income Security Act of 1974 (ERISA) requires that the PBGC be notified of certain “reportable events” that may signal financial issues with a plan or a contributing employer to the plan. The final rule includes a new method for counting participants. Under the prior PBGC rules, an active participant reduction reportable event generally occurs when, either as a result of a single event or through normal employee attrition, the number of active participants in a plan is reduced below 80% of the number of active participants at the beginning of the year (a “one-year lookback”) or below 75% of the number of active participants at the beginning of the prior year (a “two-year lookback”). The final rule revises this by:
- Clarifying that the participants who ceased to be active and were covered by a single-cause event reported in the same year are included in the year-end count, even though such participants are not active at year-end. (This prevents duplicative reporting by disregarding the earlier single-cause event if already reported to the PBGC.)
- Clarifying that multiple single events during a plan year must be reported separately.
- Eliminating the two-year lookback requirement.
A reportable event also occurs when a member of the pension plan’s controlled group is involved in a transaction to implement its complete liquidation. The final rule clarifies that a liquidation event occurs when a member of the plan’s controlled group “resolves to cease all revenue-generating business operations, sell substantially all its assets, or otherwise effect or implement its complete liquidation (including liquidation into another controlled group member) by decision of the member’s board of directors (or equivalent body such as the managing partners or owners) or other actor with the power to authorize such cessation of operations or a liquidation.” This change specifically adds to a liquidation event when “revenue-generating” business operations have stopped, capturing the fact a company is not earning revenue to enable it to support a pension plan.
Updates to Annual Financial and Actuarial Information Reporting (4010 Filings)
Section 4010 of ERISA requires the reporting of actuarial and financial information by controlled groups with single-employer pension plans that have significant funding problems. The final rule eliminates a requirement that each controlled group member submits individual financial information as part of a consolidated information report.
The PBGC also simplified the calculation for determining whether the $15 million aggregate funding shortfall waiver applies. The final rule provides that the special rules for at-risk plans in Section 303(i) of ERISA and Section 430(i) of the Internal Revenue Code are disregarded for purposes of determining the funding target underlying the funding shortfall for a plan, even if the plan is in at-risk status.
Single-Employer Plan Termination Updates
PBGC is providing more time to submit a complete PBGC Form 501 in the standard termination process. Generally speaking, the plan administrator of a plan undergoing a standard termination must certify to the PBGC that the plan’s assets have been distributed to pay all benefits under the plan within 30 days after the final distribution of assets is completed. The final rule provides an alternative timeline to file the Form 501 by permitting a plan administrator to submit a completed Form 501 within 60 days after the last distribution date for any affected party if the plan administrator certifies to the PBGC that all assets have been distributed in accordance with Section 4044 of ERISA and 29 CFR part 4044 within 30 days after the last distribution date for any affected party.
Premium Rate Calculation Guidance
Lastly, the PBGC made clarifications to the premium rate calculation rules. First, the final rule amends the applicable regulation to expressly state that a plan does not qualify for the variable-rate premium (VRP) exemption for the year in which a standard termination is completed if the plan engages in a spinoff during the premium payment year (with an exception for de minimis spinoffs). Second, the final rule clarifies that in instances of plan-to-plan transfers, the participant count date of the transferee plan for determining the flat-rate premium for a plan year shifts to the first day of its plan year. Third, the final rule modifies the circumstances under which the premium is prorated for a short plan year resulting from a plan’s termination to exclude situations where the plan engages in a non de minimis spinoff in that same year. The PBGC believes that where a completed termination is preceded in the same year by a non de minimis spinoff of a group of the plan’s participants to another plan, the transferred participants remain in the insurance program and PBGC coverage of their benefits is still in effect.