Understanding the New Loan Default Reportable Event Rules for Single-Employer Defined Benefit Plans
Federal law requires the sponsor of a single-employer defined benefit plan to notify the Pension Benefit Guaranty Corporation (the “PBGC”) of the occurrence of “reportable events.” Some reportable events directly involve the plan, such as an inability to pay benefits when due. Other events may involve a member of the controlled group that sponsors the plan. The PBGC can assess penalties of up to $1,100 per day for violation of the reportable event rules and other similar rules under Section 4062(e) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). As a result, timely reporting is imperative. This LEGALcurrents® supplements our more general newsletter on the topic of PBGC reportable events and events reportable under Section 4062(e) of ERISA, which is available at http://www.hselaw.com/news-and-information/legalcurrents/886-single-employer-de%C2%ADfined-benefi%C2%ADt-plans-pbgc-reporting-obligation.
On September 11, 2015, the PBGC issued long-awaited final regulations addressing the reportable event rules. The final regulations revised the definition of several of the reportable events and applicable reporting event waivers. This LEGALcurrents® focuses on the new rules surrounding the loan default reportable event.
Broadening of the Loan Default Reportable Event
The new regulations expand the definition of the loan default reportable event. As a result, certain situations relating to loans that previously did not trigger a PBGC reportable event, including some events that do not even result in default, now require reporting.
Under the new reportable event regulations, a reportable event occurs for a plan when a member of the plan’s controlled group experiences either of the following on a loan with an outstanding balance of $10 million or more:
- The lender accelerates the loan or there is a default under the loan agreement; or
- The lender waives or agrees to an amendment of any covenant in the loan agreement that has the effect of curing or avoiding a breach that would trigger a default.
Accordingly, under the new regulations, a loan default reportable event can even occur in situations where there is no actual default if the lender waives or agrees to an amendment of a covenant in the loan agreement that has the effect of curing or avoiding a breach that would trigger a default.
The new regulations also eliminated the waivers that previously applied to the loan default reportable event and replaced them with two other waivers that are expected to apply in very specific situations. Under the new regulations, the loan default reportable event is waived only if (i) the debtor is a foreign entity within the plan sponsor’s controlled group other than a foreign parent; or (ii) the debtor is not a contributing sponsor of the plan and represents a de minimis 10 percent of the plan’s controlled group (based on certain revenue, operating income and tangible assets tests) for the most recent fiscal year(s) ending on or before the date the reportable event occurs.
For loan default reportable events requiring post-event reporting to the PBGC, the plan administrator and contributing sponsor of each affected plan are required to report the event to the PBGC within 30 days after the person responsible for reporting knows, or has reason to know, that a reportable event has occurred. Where appropriate, the PBGC grants extensions on a case-by-case basis. A filing by one person required to le on behalf of a given plan is treated as satisfying the filing obligations for the other individual(s) required to file in connection with that plan.
For advance reporting situations, the new regulations require that reportable event filings be made at least 30 days before any acceleration of payment, default, waiver of breach or default, or amendment of any covenant in the loan agreement that has the effect of curing or avoiding a breach that would trigger a default. As we indicated in our prior LEGALcurrents® on this topic, public companies are not subject to the advance reporting requirements. A contributing sponsor or controlled group member which is not a public company is subject to advance reporting if the controlled group has one or more plans that have unfunded vested benefits exceeding $50 million, and the aggregate level of plan assets is less than 90 percent of the aggregate premium funding target.
Although filing a reportable event notice is generally straightforward, identifying events that require a filing (and available exceptions and waivers) can be difficult. Monitoring company and plan actions, including, without limitation, any actions relating to loans to members of the plan’s controlled group, staying in contact with your plan actuary, and consulting legal counsel when potential reporting situations arise are important parts of keeping your pension plan in compliance and avoiding costly reporting penalties.
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