COVID-19 Layoffs Can Mean PBGC Reporting Obligations

PBGC monitors workforce reductions, so plan sponsors must be vigilant.

The economic impact of the COVID-19 pandemic has forced many companies to lay off workers, with 26 million Americans filing for unemployment in just five weeks.

However, companies sponsoring pension plans need to keep in mind that a reduction of their workforce could trigger obligations to notify the Pension Benefit Guaranty Corporation (PBGC) under the Employee Retirement Income Security Act (ERISA).

ERISA Section 4043 requires that plan administrators and sponsors notify the PBGC of certain events that may signal problems with a pension plan or business. Among more than a dozen reportable events is a reduction in active plan participants. Examples include a reorganization or restructuring, the discontinuance of an operation or business, a natural disaster, a mass layoff, or an early retirement incentive program.

According to law firm BakerHostetler, an active participant reduction reportable event occurs when the number of active participants under a plan is reduced below 80% of the number of active participants at the beginning of the plan year. The event can occur either as a result of a “single-cause event” or an “attrition event.” 

A single-cause event occurs when, as a result of a new single cause, such as a reduction in workforce, the ratio of the aggregate number of individuals who ceased to be active participants under a plan as a direct result of that single cause, to the number of active participants covered by that plan at the beginning of such plan year, exceeds 20%.

An attrition event occurs if the total number of active participants covered by the plan at the end of the plan year plus the number of people who ceased to be active participants during the same plan year that are reported to PBGC in a single-cause event is less than 80% of the number of active participants at the beginning of the plan year.

However, under certain circumstances there is no obligation to provide notice of an active participant reduction to the PBGC. This includes plans with 100 or fewer participants for which only a flat-rate premium had to be paid to the PBGC for the prior plan year; low-default-risk plan sponsors that meet a long list of financial criteria published by the PBGC; well-funded plans with no variable rate premium due for the prior plan year; and public company plan sponsors that timely file a US Securities and Exchange Commission (SEC) form 8-K disclosing the relevant event.

Earlier this month, the PBGC extended deadlines for upcoming premium payments and other filings, including the reportable event filing for active participant reductions.

And under ERISA Section 4062(e), a plan sponsor must also report to the PBGC if there is a permanent cessation of operations at a facility that results in a workforce reduction of more than 15% of the total number of employees eligible to participate in any employee defined benefit or defined contribution pension plan.

However, there is an exemption from 4062(e) for pension plans that had fewer than 100 participants with accrued benefits as of the plan valuation date; or for plans that were at least 90% funded in the plan year before the cessation occurred. The funded level for this exemption is measured by comparing the plan’s assets to the plan’s unfunded vested benefits, as determined for purposes of paying PBGC premiums.

BakerHostetler said plan sponsors should be aware that the PBGC has an office that monitors business news and wire reports and is very proactive in contacting employers with pension plans when it sees these types of transactions or situations.

Related Stories:

Asset Managers Face COVID-19 Legal, Compliance Issues

Coronavirus News for CIOs

OCIO Roundtable (Part 1): Portfolio Rebalancing During COVID-19 Mayhem

Tags: , , , , , ,