During the recent economic recession, many pension plan sponsors have either been forced to shut facilities/plants or have experienced rounds of layoffs which reduced the number of active participants in the pension plan. As many pension plan sponsors know, a significant drop in the number of active participants can trigger a PBGC “reportable event.” This occurs when either:
1) The active headcount drops to less than 80% of the headcount on the first day of the current plan year, or
2) The active headcount drops to less than 75% of the headcount on the first day of the prior plan year.
What might surprise plan sponsors is that even if they qualified for a waiver of the reportable event in one year, the same participant reduction could trigger another reportable event in the following year. Consider the active headcount statistics for a sample plan sponsor with a plan year beginning on July 1.
|Date||Active Participants||Current Val Date||Current Year Active Ratio||Prior Val Date||Prior Val Date Ratio|
A PBGC reportable event occurred sometime during the plan year beginning on 7/1/2008 (PYB08) because the current year active headcount ratio on the last day of the plan year (720/1000 = 72% on 6/30/2009) was less than 80%. However, let’s suppose that the plan sponsor qualified for one of the reporting waivers such as having no unfunded vested benefits for PYB08. They might think that they have escaped the notification requirements entirely.
Not so fast! Even though the active headcount has not changed between 6/30/2009 and 7/1/2009, we still need to recalculate the headcount ratios as of the new plan year valuation date. Now the current year ratio is 100% (i.e., above 80%), but the prior year ratio is only 72% and the Plan has experienced a PBGC reportable event even though the only change is that we have started a new plan year. The PBGC has confirmed this interpretation in its 2006 Blue Book Q&A #12.
If we assume that Plan assets dropped enough during PYB08 such there are now unfunded vested benefits for PYB09, then the Plan does not qualify for a reporting waiver for PYB09. According to our sample data above, the Plan would also have a second reportable event during PYB09 because the active participant count dropped to 570 on 6/30/2010 and the current year ratio is now below 80%.
This is just one of several potential pitfalls in the PBGC reportable event rules, but it is one we have dealt with recently. There are several more summarized here. Another item to be aware of is that the proposed PBGC reportable event regulations also eliminate many of the reporting extensions and waivers that saved plan sponsors who realized too late that a reportable event had occurred. Without these waivers, more plans will likely be subject to reportable event notifications. Even if the PBGC notification itself is not a big deal, a PBGC reportable event can lead to unforeseen consequences such as violation of an employer’s credit agreements or loan arrangements with creditors.