Dealing with PBGC Reportable Events: A Practical Guide for …media.straffordpub.com/products/dealing-with-pbgc... · 2017-01-23 · Dealing with PBGC Reportable Events: A Practical

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Dealing with PBGC Reportable Events:

A Practical Guide for Employers

and Their Advisors

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

TUESDAY, JANUARY 24, 2017

Harold J. Ashner, Partner, Keightley & Ashner, Washington, D.C.

Constance A. Donovan, Participant and Plan Sponsor Advocate,

Pension Benefit Guaranty Corporation, Washington, D.C.

Deborah A. Tully, FSA, Pine Cliff Consulting, Framingham, Mass.

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Dealing with PBGC Reportable Events: A Practical Guide for Employers and Their Advisors

Strafford Publications, Inc.

Webinar/Teleconference

January 24, 2017

Harold J. Ashner Deborah A. Tully, FSA

Keightley & Ashner LLP Pine Cliff Consulting Inc.

Early Warning Program:

PBGC Focus

6

o PBGC focus: increased risk to PBGC and/or pension plans resulting from transaction, event, or trend

Effect on credit quality of controlled group

Changes in capital structure and effect on PBGC’s/pension plan’s position in structure

o Joint and several controlled group liability is key

o “Long-run loss”/legal analysis: likelihood of future termination, current vs. future PBGC loss

o Financial/practical analysis for planned transaction: is transaction good or bad for plan/PBGC?


Triggers and Transactions, Etc.

7

o Triggers for PBGC monitoring

Aggregate controlled group underfunding = at least $50M

Aggregate CG participant count = at least 5,000

“Other reasons as appropriate” (e.g., credit rating)

o PBGC learns of transactions, events, or trends through

Reportable events filings

Company press releases and SEC filings

Media reports

PBGC’s own monitoring


Triggers and Transactions, Etc. (Cont.)

8

o Transactions, events, or trends of concern

Change in controlled group responsible for supporting plan

Major divestiture by employer that retains significant underfunded pension liabilities

Leveraged buyout involving purchase of company using large amount of secured debt

Substitution of secured debt for significant amount of unsecured debt

Payment of very large dividend to shareholders

Significant credit deterioration.

Downward trend in cash flow or other financial factors

o Most Early Warning Program cases focus on transactions


Providing Information to PBGC

9

o Consider contacting PBGC first

Where contact is inevitable, sooner may be better

Avoid last-minute complications

Plan for PBGC involvement

o PBGC information requests re planned transactions

Timing flexibility if nothing imminent

Protect confidentiality (confidentiality agreement and/or 4043(f) coverage as reportable event follow-up)

Generally best to comply (subpoena authority)

Request will cover transaction, plan(s), and makeup and financial status of pre- and post-transaction controlled group

Demonstrate viability of post-transaction controlled group!


PBGC Analysis

10

o Contribution/financial projections may be key factors in Early Warning Program analysis

o PBGC recovery analysis may also be a key factor

PBGC’s analysis will include assessment of

Likely PBGC recovery if plan terminates pre-transaction

Likelihood of future plan termination and likely PBGC recovery if transaction occurs with future plan termination

Many variables (e.g., fire-sale pricing, claims of other creditors) can affect and complicate analysis


PBGC Leverage

11

o PBGC “clearance”

No legal requirement to get PBGC “clearance” of transaction

But PBGC concerns can block transaction unless settlement reached

o Primary PBGC leverage: “involuntary termination” (pre-transaction)

Requires court approval or plan administrator agreement

Would increase/accelerate liability, add termination premium, and likely lead to bankruptcy, job losses

Initiation would likely trigger various defaults


PBGC Leverage (Cont.)

12

o PBGC can quickly set termination date

PBGC publishes notice

“Locks in” termination date, related liability

But subject to later court approval or agreement

o Potential 4069 or fraudulent conveyance action (post-transaction)

o PBGC’s pre-transaction remedy can be too extreme and its post-transaction remedy can be too uncertain

o But parties to transaction may be unwilling to proceed absent pre-transaction PBGC settlement


Settlement Options

13

o PBGC has broad settlement authority (more like private entity than government agency)

o Settlement possibilities include:

Additional contributions to plan

May have other reasons to pay above minimum

Agreement will prohibit using excess as prefunding balance

But effect will be to reduce future minimum contributions

Retention of plan by strong seller

Guarantee by seller if future plan termination

Grant to plan or PBGC of security interest

o Direct actuary-to-actuary, lawyer-to-lawyer, business-to-business discussions can work well

Reportable Events:

The Basics

Reportable event: an event that may be indicative of a need to terminate a plan

Reportable event may be a plan event or a corporate event

Post-event reporting

Obligation is imposed on plan administrator and contributing sponsor (but filing by either is deemed to be filing by both)

Filing is due 30 days after actual or constructive knowledge of the occurrence of the event

14

Reportable Events:

The Basics (Cont.)

Advance reporting

Only required if:

Neither sponsor nor controlled group member to which event relates is “public company,” and

Controlled group maintains plans that, in the aggregate (and disregarding plans with no unfunded vested benefits) have

Unfunded vested benefits above $50M, and

Funded vested benefits percentage below 90%

Obligation is imposed only on contributing sponsor

Filing is due 30 days before the effective date of the reportable event (without regard to actual or constructive knowledge)

Post-event or advance reporting delinquencies: PBGC may assess ERISA Section 4071 penalties of up to $2,063 per day

15

Reportable Events:

The Basics (Cont.)

Plan events (post-event reporting): Active participant reduction

Failure to make required minimum funding payment

Inability to pay benefits when due

Distribution to a substantial owner

Transfer of benefit liabilities*

Application for minimum funding waiver*

16

Corporate events (post-event reporting): Change in contributing sponsor

or controlled group*

Liquidation*

Extraordinary dividend or stock redemption*

Loan default*

Insolvency or similar settlement (previously “Bankruptcy or similar settlement”)*

* Also subject to advance reporting

Reportable Events:

The Basics (Cont.)

Waivers and extensions

Waiver for multiemployer plans

Waiver for terminating plans if notice due on or after distribution/trusteeship date

Unconditional waivers for certain statutory events

Conditional waivers/extensions for various regulatory events

Case-by-case waiver/extension if PBGC “finds convincing evidence” that waiver/extension is “appropriate under the circumstances”

Caution: multiple events or single events for multiple plans!

One set of facts may give rise to two events

Or one event may occur “for” two or more plans

Determine waivers, extensions, and required information separately for each event and for each plan

17

Reportable Events Final Rule:

Applicability

Final rule published 9/11/15 (80 Fed. Reg. 54980)

Post-event reporting: effective for reportable events occurring on or after 1/1/16

Advance reporting: effective for reports due on or after 1/1/16

18


Effect on Corporate Agreements

Consider effect of changes on loan agreements and other corporate agreements!

Representations and warranties

Notice requirements

Possible default triggers

Changes will result in:

Events that were not previously reportable being reportable

Events that were previously reportable not being reportable

Interpretive issue regarding existing agreements: reference to old vs. new PBGC regulations?

19


In General

Significant changes to waiver rules, including:

New “low-default risk” waiver

More stringent waiver based on plan funding level

Significant changes to various reportable events, including:

Active participant reduction

Change in contributing sponsor or controlled group

Extraordinary dividends

Transfer of benefit liabilities

Loan default

20


“Low-Default-Risk” Waiver

New “low-default risk” waiver applies (post-event) to:


Distribution to substantial owner




Requires “low-default-risk” status for both contributing sponsor(s) and highest-level U.S. parent(s)

Test is determined as of “financial information date”

Status remains in effect for 13 months or (if sooner) until next “financial information date”

21


“Low-Default-Risk” Waiver (Cont.)

“Financial information date” is: 10-K filing date

Date company closes annual accounting period that results in production of audited or unaudited financial statements, if audited financial statements not required to be filed with SEC

Date company files annual tax return or Form 990 with IRS, if there are then no annual financial statements for year at issue

To qualify for “low-default-risk” status (based on seven specified criteria), must meet: First two of seven criteria, or

Any four of seven criteria

Exception: no “low-default-risk” status if audit/review report expresses material adverse view or qualification

22



First criterion: commercial measures Company’s probability of default must be no more than either:

4% over next 5 years, or

0.4% over next year

Determination must be based on “widely available financial information on the company’s credit quality”

Second criterion: secured debt Company’s secured debt (subject to carve-out) must not exceed

10% of company’s total assets

Carve-out: leases and debt incurred to acquire or improve property and secured only by that property

Third criterion: ratio of retained earnings to total assets must be at least 0.25

23



Fourth criterion: ratio of total debt to EBITDA must be no more than 3.0

Fifth criterion: company must have positive net income for the two most recently completed fiscal years

Sixth criterion: company must not have experienced loan default reportable event in past two years (regardless of whether reporting was waived)

Seventh criterion: company must not have experienced missed contribution reportable event in past two years (unless reporting was waived)

24


“Well-Funded Plan” Waiver

“Well-funded plan” waiver applies (post-event) to same five events as does “low-default-risk” waiver






Plan is “well-funded plan” for events occurring in current plan year if no PBGC variable-rate premium was required for preceding plan year

25


“Well-Funded Plan” Waiver (Cont.)

PBGC Blue Book guidance: new plan resulting from spinoff or consolidation automatically qualifies

Status does not change during current plan year, even after variable-rate premium filing done for current year

Significantly more stringent test than prior “80% funded” waiver (also tied to variable-rate premium)

26


Public Company Waiver

“Public company” waiver applies (post-event) to same five events as does “low-default-risk” waiver:






For waiver to apply, a contributing sponsor must:

Be a public company, and

Timely file 8-K disclosing event (but not under 8-K items relating primarily to operations or financial statements)

See Q&A 15 of PBGC 2016 Blue Book for guidance on what information is needed to “disclose” the event

27


Small Plan Waiver

“Small plan” waiver applies (post-event) to:


Failure to make required minimum funding payment (but waiver applies only to quarterlies)




For waiver to apply, plan must have 100 or fewer participants for flat-rate premium purposes for plan year preceding plan year in which event occurs

28


Foreign Entity Waivers/Extensions

“Foreign entity” waiver applies (post-event) to:


Liquidation

Extraordinary dividend

Loan default

Insolvency or similar settlement

For waiver to apply, entity(ies) to which event relate(s) must be foreign entity(ies) other than direct/indirect parent(s)

Note: final rule drops foreign parent and “foreign-linked entity” reporting extensions (tied to actual knowledge)

Potential penalty exposure based on constructive knowledge!

Set up systems to find out about these events!

29


De Minimis Segment Waiver

“De minimis 10-percent segment” waiver applies (post-event) to: Change in contributing sponsor or controlled group

Liquidation (if non-sponsor)


Loan default (if non-sponsor)

Insolvency or similar settlement (if non-sponsor)

For waiver to apply, entity(ies) must have: Revenue not exceeding 10% of controlled group’s revenue

Annual operating income not exceeding greater of 10% of controlled group’s annual operating income, or $5M, and

Net tangible assets not exceeding greater of 10% of controlled group’s net tangible assets, or $5M

30


De Minimis Segment Waiver (Cont.)

Similar waiver (but substituting 5% for 10%) applies to advance reporting for:


Liquidation (if each plan that was maintained by liquidating entity is maintained by another controlled group member)


31


Advance Reporting Threshold

Advance reporting threshold is updated

Threshold (applicable only if neither sponsor nor member to which event relates is public company) tied to variable-rate premium

Reporting required where aggregate controlled group underfunding > $50M and funded vested benefit % < 90%, disregarding plans with no VRP underfunding

VRP rules changed by Pension Protection Act of 2006 and implementing PBGC regulations

Final rule updates reportable events regulations to reflect VRP rule changes (ties threshold tests to VRP determinations for plan year preceding plan year in which event becomes effective)

32


Active Participant Reduction

Under old regulation, event may occur on any day of plan year

Final rule provides that event can occur on any day of plan year only when, as result of “single cause,” active participant count reduced to less than: 80% of count at beginning of current plan year, or

75% of count at beginning of prior plan year

“Single cause” examples: Reorganization

Discontinuance of an operation

Natural disaster

Mass layoff

Early retirement incentive program

33


Active Participant Reduction (Cont.)

Under final rule, “attrition” event occurs at end of plan year if active participant count is then less than: 80% of count at beginning of current plan year, or

75% of count at beginning of prior plan year

Reductions tied to timely reported 4062(e) or 4063 event would be disregarded for purposes of “single-cause” event

Extension for “attrition” event until premium due date for following plan year

Can determine count (for single-cause or attrition) as of:

Beginning of plan year by using end-of-prior-plan-year count

End of plan year by using beginning-of-next-plan-year count

34


Active Participant Reduction (Cont.)

Note PBGC-specific definition of “active participant”!

“Single-cause” event may occur any day of plan year

May have two “single-cause” events (based on same or different

causes) in same plan year (two different thresholds)

May have to report attrition event in addition to “single-cause”

event(s)

Spinoff may trigger event, even if within same controlled group

4063(a) notice of 4062(e) event: no 4063(a) waivers/extensions!

35


Missed Contributions

Final rule codifies expanded version of Technical Update 13-1 (reporting relief for missed quarterly contributions) Drops requirement in Technical Update 13-1 that failure not

have been due to financial inability to make the contribution

Expands availability of waiver to larger plans

Technical Update 13-1 waiver: plans with fewer than 25 participants

Final rule waiver: plans with up to 100 participants

Final rule retains waiver where missed contribution is paid within 30 days

Final rule adds waiver if failure is solely because of sponsor’s failure to timely make funding balance election

36


Inability to Pay Benefits When Due

Reportable event occurs based on current or projected inability to pay benefits when due (waived for large plans)

Current inability: failure to provide full benefits when due and in form

due (but subject to exceptions)

Projected inability: “liquid assets” are less than two times

“disbursements from the plan” (determined quarterly)

Old regulatory exceptions from “current inability” event:

Need to verify person’s eligibility for benefits (no explicit time limit)

Inability to locate person (no explicit time limit)

Any other administrative delay if delay is for shorter of two months or

two full benefit periods

37


Inability to Pay Benefits When Due (Cont.)

Final rule preamble: clarifies that “inability to locate person” is not subject to two-month/period time limit

Final rule regulatory language: imposes two-month/period time limit on “need to verify person’s eligibility for benefits”

PBGC informal guidance: this result was not intended and relief is being considered (Q&A 18(a) of 2016 Blue Book)

38


Distribution to Substantial Owner

Under final rule, event (involving distributions exceeding $10K over past year) occurs only if distributions over past year exceed: 1% of plan assets as of end of each of two prior plan years

(for any one substantial owner), or

5% of plan assets as of end of each of two prior plan years (for all substantial owners)

Final rule requires reporting only once (even if amount increases) for distributions in annuity form

39

Reportable Events Final Rule: Change in

Contributing Sponsor or Controlled Group

Event occurs when there is “transaction” that results, or will result, in person ceasing to be member of controlled group

“Transaction” includes “legally binding agreement”

Final rule provides that “legally binding” is determined “without regard to any conditions in the agreement”

So filing may be due long before transaction is effective!

Final rule eliminates reporting based on merger of one controlled group member into another

But liquidation of one controlled group member into another is a liquidation reportable event!

40


Extraordinary Dividend

Extraordinary dividend (or stock redemption)

Old regulation reporting threshold

Reporting required if distributions exceed specified levels

Threshold levels differ for cash and non-cash distributions

Cash distributions: test on 1-year and 4-year basis

Non-cash distributions: test on 1-year basis

Methodology for combining cash/non-cash distributions

Intra-controlled group distributions are taken into account

Final rule simplifies reporting threshold

Reporting required where distributions during current fiscal year exceed 100% of prior year net income (w/adjustments)

Intra-controlled group distributions are disregarded

De minimis segment waiver expanded from 5% to 10%

41


Transfer of Benefit Liabilities

Event occurs when plan transfers (outside controlled group, within 12-month period) 3% or more of its benefit liabilities

Final rule eliminates all old regulation event-specific post-event waivers for transfer of benefit liabilities

Complete plan transfer

Transfer of < 3% of assets

Section 414(l) safe harbor

Fully funded plans

But final rule adds several general post-event waivers (small plan, low-default risk, well-funded plan, public company)

Final rule clarifies that lump sums and irrevocable commitments are not reportable transfers

42


Loan Default

Old regulation defined event as default on loan with outstanding balance of at least $10M, but only if: Payment is more than 30 days late,

Lender accelerates loan, or

Lender issues written notice of default due to:

Drop in debtor’s cash reserves below agreed-upon level

Unusual or catastrophic event experienced by debtor, or

Persisting failure by debtor to attain agreed-upon financial performance levels

Old regulation provided following waivers: “Foreign entity” waiver (where debtor is foreign non-parent)

“Plan funding” waiver (based on various tests tied to VRP)

“Default cured” waiver (where default is cured, or waived by lender, within 30 days, or by end of longer cure period)

43


Loan Default (Cont.)

Old regulation provided extensions until one day after:

Loan agreement cure period (for “payment” defaults)

Acceleration date (for “acceleration” defaults)

Date of receipt of notice of default (for “notice of default” defaults)

Final rule greatly expands reporting of loan defaults:

Captures any/all defaults on loan with $10M-plus balance

Captures also situations in which there is no default because lender waives or agrees to amendment of covenant, the effect of which is to cure or avoid breach that would trigger default

Eliminates “default cured” waiver, “plan funding” waiver, and all extensions

Provides waivers only where debtor is foreign non-parent or is (non-sponsor) de minimis 10% segment

44


Loan Default (Cont.)

For advance reporters, final rule eliminates extension

Old regulation extended “advance” reporting until (at least) 10 days after default

Final rule requires that advance report be filed at least 30 days before effective date of default or lender waiver/amendment

45


Insolvency or Similar Settlement

Reportable event under old regulation captured:

Bankruptcy Code proceedings

Any other insolvency proceeding

Proceeding to effect composition, extension, or settlement with creditors

General assignment for benefit of creditors

Any other nonjudicial composition, extension, or settlement with substantially all creditors

Final rule:

Eliminates Bankruptcy Code cases from post-event and advance reporting

Eliminates (except for involuntary proceedings) existing regulation’s extension of advance reporting until 10 days after event

46


Forms, Instructions, and Filing

Information requirements moved from regulation to instructions (to facilitate later changes)

More information required with initial filing

Largely same information as previously required in response to follow-up requests

Much of this change was already in effect under then-recently-revised “optional” forms/instructions

Plan in advance for filing (don’t wait until due date)!

Use of (previously optional) reportable events forms is mandatory

Electronic filing (previously optional) is also mandatory

47

PBGC Reportable Events:

Monitoring Effectively

48

o Avoid surprises by ensuring communication lines are open regarding potential transactions and business events Ensure key finance and HR staff have a basic understanding of

the types of events that may be reportable

Establish central point of contact within controlled group

Involve central point of contact when evaluating transactions

o Consider working evaluation of possible reportable events into existing internal controls procedures

o Coordinate closely with outside advisors to evaluate events

o Determine qualification of “low-default-risk,” “well-funded plan” and “small plan” waivers on annual basis

PBGC Reportable Events:

Reporting Effectively

49

o For reportable events, explain (where applicable) why event should not be of concern to PBGC

Go beyond required information where doing so is helpful to your case

May obviate need for PBGC follow-up

o Multiple events or events for multiple plans can be combined in one filing

o In general, expect follow-up inquiry from PBGC for more information re event and re plan

o Note: statutory confidentiality applies (4043(f))

PBGC Reporting Requirements:

Dealing with Penalties

50

o Late reporting penalties Not mechanical/automatic (considerable discretion)

$2,063 daily penalty max, lower guideline penalties

o If reporting late: Explain reason for delinquency

State steps taken to help ensure future compliance

Note (where applicable) that late filing resulted in no harm

or potential harm to PBGC or participants

o If penalty is assessed: Review 2001 proposed waiver guidance issued (still

reasonably current, per PBGC Blue Book/JCEB guidance)

PBGC won’t accept “it’s the consultant’s fault”

Early Warning Program: Key PBGC Reporting

Requirements in M&A Context

51

o Stock sale

Reportable event for controlled group change

Advance reporting: 30 days before effective date

Post-event reporting: 30 days after “legally binding

agreement” (may be due before advance reporting!)

Possible “transfer of benefit liabilities” reportable event

(post-event or advance)

Possible “active participant reduction” reportable event

(post-event only)

Early Warning Program: Key PBGC Reporting

Requirements in M&A Context (Cont.)

52

o Asset sale

Not a reportable event in and of itself

Possible “extraordinary dividend” reportable


Possible “transfer of benefit liabilities” reportable event


Possible “active participant reduction” reportable event

(post-event only)

Transfer of full plan outside controlled group (with controlled

group remaining intact) is reportable event

o Stock or asset sale: possible 4062(e)/4063(a) reporting

53

Questions?

Harold Ashner

Keightley & Ashner LLP

700 12th Street, NW, Suite 700

Washington, DC 20005

www.keightleyashner.com

[email protected]

(202) 558-5150

Deborah Tully, FSA

Pine Cliff Consulting Inc.

45 Concord Street

Framingham, MA 01701

www.pinecliffconsulting.com

[email protected]

(508) 620-4778

http://www.keightleyashner.com/

mailto:[email protected]

http://www.pinecliffconsulting.com/



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Dealing with PBGC Reportable Events: A Practical Guide for …media.straffordpub.com/products/dealing-with-pbgc... · 2017-01-23 · Dealing with PBGC Reportable Events: A Practical