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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

• 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

• Joint and several controlled group liability is key
• “Long-run loss”/legal analysis: likelihood of future

termination, current vs. future PBGC loss

• Financial/practical analysis for planned transaction: is

transaction good or bad for plan/PBGC?

Early Warning Program: Triggers and Transactions, Etc.

7

• 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)

• PBGC learns of transactions, events, or trends through

 Reportable events filings  Company press releases and SEC filings  Media reports  PBGC’s own monitoring

Early Warning Program: Triggers and Transactions, Etc. (Cont.)

8

• 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

• Most Early Warning Program cases focus on transactions

Early Warning Program: Providing Information to PBGC

9

• Consider contacting PBGC first

 Where contact is inevitable, sooner may be better  Avoid last-minute complications  Plan for PBGC involvement

• 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!

Early Warning Program: PBGC Analysis

10

• Contribution/financial projections may be key factors

in Early Warning Program analysis

• 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

Early Warning Program: PBGC Leverage

11

• PBGC “clearance”

 No legal requirement to get PBGC “clearance” of transaction  But PBGC concerns can block transaction unless settlement reached

• 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

Early Warning Program: PBGC Leverage (Cont.)

12

• PBGC can quickly set termination date

 PBGC publishes notice  “Locks in” termination date, related liability  But subject to later court approval or agreement

• Potential 4069 or fraudulent conveyance action

(post-transaction)

• PBGC’s pre-transaction remedy can be too extreme

and its post-transaction remedy can be too uncertain

• But parties to transaction may be unwilling to proceed

absent pre-transaction PBGC settlement

Early Warning Program: Settlement Options

13

• PBGC has broad settlement authority (more like private

entity than government agency)

• 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

• 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

• wner

 Transfer of benefit liabilities*  Application for minimum funding waiver*

16

 Corporate events (post-event reporting):

 Change in contributing sponsor

• r 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

• ccurring on or after 1/1/16

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

18

Reportable Events Final Rule: Effect on Corporate Agreements

 Consider effect of changes on loan agreements and

• ther 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

Reportable Events Final Rule: 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

Reportable Events Final Rule: “Low-Default-Risk” Waiver

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

 Active participant reduction  Distribution to substantial owner  Change in contributing sponsor or controlled group  Extraordinary dividends  Transfer of benefit liabilities

 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

Reportable Events Final Rule: “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

Reportable Events Final Rule: “Low-Default-Risk” Waiver (Cont.)

 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

Reportable Events Final Rule: “Low-Default-Risk” Waiver (Cont.)

 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

Reportable Events Final Rule: “Well-Funded Plan” Waiver

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

 Active participant reduction  Distribution to substantial owner  Change in contributing sponsor or controlled group  Extraordinary dividends  Transfer of benefit liabilities

 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

Reportable Events Final Rule: “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

Reportable Events Final Rule: Public Company Waiver

 “Public company” waiver applies (post-event) to same five events as does “low-default-risk” waiver:  Active participant reduction  Distribution to substantial owner  Change in contributing sponsor or controlled group  Extraordinary dividends  Transfer of benefit liabilities  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

Reportable Events Final Rule: Small Plan Waiver

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

 Active participant reduction  Failure to make required minimum funding payment (but waiver applies only to quarterlies)  Change in contributing sponsor or controlled group  Extraordinary dividends  Transfer of benefit liabilities

 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

Reportable Events Final Rule: Foreign Entity Waivers/Extensions

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

 Change in contributing sponsor or controlled group  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

Reportable Events Final Rule: 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)  Extraordinary dividend  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

Reportable Events Final Rule: De Minimis Segment Waiver (Cont.)

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

 Change in contributing sponsor or controlled group  Liquidation (if each plan that was maintained by liquidating entity is maintained by another controlled group member)  Extraordinary dividend

31

Reportable Events Final Rule: 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

Reportable Events Final Rule: 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

Reportable Events Final Rule: 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

Reportable Events Final Rule: 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

Reportable Events Final Rule: 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

Reportable Events Final Rule: 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

Reportable Events Final Rule: 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

Reportable Events Final Rule: 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

Reportable Events Final Rule: 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

Reportable Events Final Rule: 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

Reportable Events Final Rule: Loan Default

 Old regulation defined event as default on loan with

• utstanding 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

Reportable Events Final Rule: 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

• f 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

Reportable Events Final Rule: 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

Reportable Events Final Rule: 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

Reportable Events Final Rule: 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

• 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

• Consider working evaluation of possible reportable events

into existing internal controls procedures

• Coordinate closely with outside advisors to evaluate

events

• Determine qualification of “low-default-risk,” “well-funded

plan” and “small plan” waivers on annual basis

PBGC Reportable Events: Reporting Effectively

49

• 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

• Multiple events or events for multiple plans can be

combined in one filing

• In general, expect follow-up inquiry from PBGC for

more information re event and re plan

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

PBGC Reporting Requirements: Dealing with Penalties

50

• Late reporting penalties

 Not mechanical/automatic (considerable discretion)  $2,063 daily penalty max, lower guideline penalties

• 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

• r potential harm to PBGC or participants
• 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

• 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

• Asset sale

 Not a reportable event in and of itself  Possible “extraordinary dividend” reportable (post-event or advance)  Possible “transfer of benefit liabilities” reportable event (post-event or advance)  Possible “active participant reduction” reportable event (post-event only)  Transfer of full plan outside controlled group (with controlled group remaining intact) is reportable event

• 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 haroldashner@keightleyashner.com (202) 558-5150

  

Deborah Tully, FSA Pine Cliff Consulting Inc. 45 Concord Street Framingham, MA 01701 www.pinecliffconsulting.com deborah.tully@pinecliffconsulting.com (508) 620-4778   