PBGC Pension Reporting Requirements Add More Strain to Financially Distressed Employers

The COVID-19 pandemic has created great financial uncertainty for many employers.  For those sponsoring defined benefit pension plans, certain Pension Benefit Guaranty Corporation (PBGC) reporting requirements may arise during these challenging times.  Failure to timely comply with these requirements may result in the assessment of significant PBGC penalties.

PBGC Reporting Requirements – Why Does the PBGC Care?

The PBGC is concerned that financially distressed pension plan sponsors are more likely to seek termination of the plan.  If this occurs, then the PBGC might assume a significant portion of the obligation to pay employees the benefits promised under the pension (to the extent pension assets are insufficient, the PBGC steps in, subject to certain limits prescribed under ERISA).  The PBGC requires employers to file a report with the PBGC if an event occurs that may signal financial problems for the employer or indicates that its pension plan is at risk.  Upon receipt of the notice, the PBGC can determine whether it has opportunities for “early intervention” aimed at minimizing the PBGC exposure.

1. In our article last spring, Furloughs, Workforce Reductions, and Facility Closures Due to Coronavirus: Important Defined Benefit Plan Reporting Obligations, we provided an overview of certain PBGC reporting obligations that may arise when implementing COVID-19-related workforce reductions and facility closures.  Here, we keep the focus on PBGC reporting requirements, but turn our attention to those triggered when an employer is experiencing financial distress, namely: 

• Loan Defaults
• Insolvency

Loan Defaults

If the plan sponsor (or any member of the sponsor’s controlled group)  has outstanding loan balances of $10 million or more, the employer must report to the PBGC on PBGC Form 10 within 30 days if:

• There is an acceleration of payment or a default under the loan agreement, or
• The lender waives or agrees to an amendment of any covenant in the loan agreement, the effect of which is to cure or avoid a breach that would trigger a default.   

Compliance with this reporting requirement will require a coordinated effort between the sponsor’s employee benefits and finance teams.  The benefits group must ensure that the finance team understands the reporting requirement, and the finance team must communicate with the benefits group when an event triggering reporting may have occurred.  This will require a coordinated effort to review the terms of the loan agreement (including any related security agreements and covenants) and accurately complete PBGC Form 10 when required.

Two final points on this requirement.  First, depending upon the grace period and notice provisions under the plan sponsor’s credit facility, failure to make a payment when due may not immediately trigger a default, but certainly indicates the possibility that PBGC reporting should be in the forefront.  Second, in many cases where a plan sponsor experiences an issue with its credit facility, the plan sponsor and the lender are able to work through the issue, such as if the lender temporarily waives compliance with a loan covenant or the parties negotiate an amendment to the covenant in order to avoid a default.  While these might be fairly typical solutions within the borrower-lender relationship, note that the PBGC reporting requirement remains, even if the parties negotiate a waiver or amendment of the covenant that has the effect of avoiding a default.   “Working it out” with the lender does not waive the PBGC reporting requirement.    

Insolvency Proceedings 

Likewise, timely reporting of insolvency events requires coordinated efforts and communication within the company.  In general, an insolvency reporting event occurs when the financially distressed business engages in any one of the following transactions:

• Commences any insolvency proceeding, other than a bankruptcy case under the Bankruptcy Code,
• Commences a proceeding to initiate a settlement with creditors, or
• Executes a general assignment for the benefit of creditors.

For example, if an employer commences insolvency proceedings under state law (as opposed to federal bankruptcy law), then it must report to the PBGC on PBGC Form 10 within 30 days.  Interestingly, there is no PBGC reporting requirement if a financially distressed employer files under Chapter 11 (Reorganization) of the Bankruptcy Code.  The PBGC learns of bankruptcy filings through various public sources and other means. 

Financially distressed employers are dealing with a constant barrage of operations, financial, and human resource concerns.  Nevertheless, employee benefit plan compliance remains critical in order to avoid costly penalties and time-consuming governmental inquiries.