dealing with pbgc reportable events: a practical guide for...
TRANSCRIPT
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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?
Early Warning Program:
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
Early Warning Program:
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
Early Warning Program:
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!
Early Warning Program:
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
Early Warning Program:
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
Early Warning Program:
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
Early Warning Program:
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
Reportable Events Final Rule:
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
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 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
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 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
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
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
(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
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
(202) 558-5150
Deborah Tully, FSA
Pine Cliff Consulting Inc.
45 Concord Street
Framingham, MA 01701
www.pinecliffconsulting.com
(508) 620-4778