PBGC finalizes rules for 4010 reporting - Aon

Insight April 10, 2009

PBGC finalizes rules for 4010 reporting By Brian Donohue, Senior Vice President, Aon Consulting The PBGC recently published final regulations on ERISA section 4010 reporting requirements. PPA made two key changes to these requirements, changing the rules about the information that filers must provide and about who must file. Here, we review the PBGC's final rules. On March 16, 2009, the PBGC published final regulations on ERISA section 4010 reporting requirements, as amended by the Pension Protection Act (PPA), for certain underfunded pension plans. In this article we review the final rules.

Revised 4010 filings As the PBGC states in the preamble to the final rule, the purpose of the 4010 filing is to give the PBGC "an opportunity to anticipate and attempt to minimize potential liabilities that may arise from the termination of significantly underfunded plans." PPA made two key changes to ERISA section 4010 – it changed the rules for who must file and for what must be filed.

Who must file Pre-PPA rules required a 4010 filing if the aggregate unfunded vested benefits of the defined benefit (DB) plans of a controlled group of corporations exceeded $50 million. PPA replaced this rule with a requirement for a 4010 filing if the funding target attainment percentage (FTAP) of a plan maintained by the contributing sponsor or any member of its controlled group is less than 80%. This is called the "gateway" test. We've published a number of articles on the calculation of the FTAP. Oversimplifying, the FTAP equals the plan assets (net of credit balances) divided by liabilities as of the plan's valuation date (generally, the beginning of the year). Pre-PPA rules requiring a filing, in certain circumstances, where a minimum contribution is not made or a funding waiver is obtained, were retained under the new PPA rules.

What must be filed We will not review in its entirety what must be in a 4010 filing (which includes information about the plans in the controlled group – such as termination-type liabilities measured as of the end of the plan year using PBGC assumptions – and the financial condition of the sponsor(s)), as significant elements were not changed by PPA. We will highlight some key areas and identify elements added by PPA.

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Insight PBGC finalizes rules for 4010 reporting PPA revised 4010 reporting rules to require the provision of: The funding target of the plan determined as if the plan has been in “at-risk” status for at least five plan years. The FTAP of the plan. In addition to these new elements added by PPA, the PBGC regulations added requirements that: Filers report whether the plan, at any time during the plan year, was subject to any benefit restrictions, and, if so, which restrictions, when they applied, and when they were lifted (if applicable). We have written extensively about the new PPA benefit restriction rules. Filers generally must report (1) whether a required installment or other required payment to the plan was not made, triggering a lien, and (2) whether there are outstanding IRS minimum funding waivers totaling in excess of $1 million.

Timing and calculation methodology 4010 reporting is generally based on the sponsor's fiscal year. As under previous rules, reports are due 105 days after the close of the fiscal year (April 15 for calendar year taxpayers). The final regulations include a number of technical rules for controlled groups that include sponsors with multiple fiscal years, for multiple employer plans, etc. Whether a plan fails to pass the 80% gateway test is determined based on the plan's FTAP for the plan year ending within the fiscal year. The FTAP valuation date is, generally, the beginning of the plan year.

Avoiding a 4010 filing obligation There are a couple of things that a sponsor may do to improve funding and avoid a 4010 filing. First, it may make additional contributions. Generally, these contributions must be made (for calendar year plans) by September 15 of that year (e.g., for the filing for the 2009 year, which would be due April 15, 2010, contributions must be made by September 15, 2009). Second, it may waive a credit balance (as noted above, the FTAP is generally calculated by deducting credit balances from assets). For this purpose, credit balances are waived in accordance with IRS funding rules, which generally require the waiver to be made by the end of the plan year (e.g., to improve the January 1, 2009, FTAP, a waiver must be made by the end of 2009). The ability to avoid a 4010 filing by making additional contributions or waiving credit balances may be particularly useful for a "large" controlled group with a small plan that flunks the 80% gateway test. The controlled group may not (in part because of its size) be able to qualify for the de minimis exception discussed below, but a relatively small

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Insight PBGC finalizes rules for 4010 reporting contribution to the (small) under-80% plan may avoid the 4010 filing requirement. Because that contribution must be made by September 15, these rules put a premium on knowing the FTAP of the controlled group's plans and making contributions in time to address the 4010 issue.

De minimis exception to filing requirements The final rule provides a new (post-PPA) de minimis exception to the 4010 reporting requirement. If the aggregate controlled group "4010 funding shortfall" is less than $15 million, no filing is required. The "4010 funding shortfall" is calculated on the same basis as the FTAP except that you (1) disregard overfunded plans and (2) do not subtract credit balances from assets.

Waiver of obligation to file actuarial information In addition, even where a 4010 filing is required, actuarial information as to specific plans need not be filed where: The plan has fewer than 500 participants, and the plan's 4010 funding shortfall does not exceed $15 million. The plan has no unfunded benefits. For this purpose, unfunded benefits are generally determined in the same manner as for purposes of ERISA section 4010(d)(1), which requires the reporting of benefit liabilities using the assumptions used by the PBGC. This number is, generally, calculated on a "termination basis" as of the end of the year. *** The final rules do not contain any big surprises. The new calculation rules generally accommodate the actuarial process anticipated under the new PPA funding rules, basing calculations on the beginning of year FTAP. And the new de minimis rules will allow some sponsors to avoid reporting in marginal cases. The new 4010 reporting rules are generally effective beginning with the 2008 information year (i.e., April 2009 filings).

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##### For more strategies on retirement programs, contact Brian Donohue at 312.732.2164 or [email protected].

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