Understanding Employee Benefits and key developments in the employee benefits field and items of interest to our clients. MORE

This article is for employers who sponsor defined benefit plans that are subject to Pension Benefit Guaranty Corporation (PBGC) coverage. Those employers pay premiums to the PBGC and also are required to report certain events to the PBGC. Some events must be reported in advance; others are reportable after the event has occurred. Some events relate to the plan itself; others relate to the plan sponsor or the plan sponsor’s controlled group. Failure to provide the reports can subject the employer to penalties of up to $1,100 per day, depending on the failure.

In 2013, the PBGC proposed rules to change the reportable events structure to focus more on risk‑based concepts, establishing safe harbors that would exempt many companies and plans from a number of the reportable events filings. These regulations were finalized in October of 2015, effective January 1, 2016. The focus of this blog post is on one reportable event, the loan default.

Under the old reportable events rule, a loan default of $10,000,000 or more was a reportable event unless the default was cured within certain time frames to avoid advance reporting or post-event filings. Post-event filings were also waived if the plan was not required to pay a variable PBGC premium, if the plan underfunding was less than $1,000,000 or if certain other criteria of reasonable funding were met.

Under the new rules, a loan default is a reportable event when the loan has an outstanding balance of $10,000,000 or more. The loan may be to the plan sponsor or may be to another member of the plan sponsor’s controlled group. A reportable event includes an acceleration of payment or default under a loan agreement or the lender’s waiving or agreeing to an amendment of any covenant of the loan agreement, the effect of which is to cure or avoid a breach that would trigger a loan default. Notice of the event is waived if the debtor is a noncontributing sponsor and the debtor represents a de minimus 10% or less segment of the plan’s controlled group. Notice is also waived if the debtor is a foreign entity other than the foreign parent company. Notice is not waived simply because the default was cured or the lender waived the default.

Advance notice is required if there is an acceleration of payment, a default, a waiver, or an amendment to a loan agreement as described above. In other words, if a plan sponsor or member of the controlled group renegotiates loan covenants in order to avoid default under a loan, that renegotiation can result in a reportable event without a default having occurred.

Even the Participant and Plan Sponsor Advocate of the PBGC highlights this reportable event as concerning in her 2015 report. Employers who sponsor defined benefit plans will need to keep these rules in mind when they negotiate and renegotiate loan covenants.

 

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