Opinions June 28, 2017

PBGC’s Early Warning Program

Marcia Wagner, founder of The Wagner Law Group, discusses how the Early Warning Program works and what will trigger it.
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With last December’s update of its Early Warning Program (EWP), the Pension Benefit Guaranty Corporation (PBGC) suggested that credit deterioration and a downward trend in cash flow, or other financial factors, would trigger the EWP. But in May, the PBGC indicated that it had neither expanded the program nor changed its monitoring criteria or the processes involved. However, while a change in a plan sponsor’s credit quality does not trigger an EWP review, the PBGC generally does include credit quality, along with other information, as part of the analysis. With that said, how does the EWP work?

Q: What is the PBGC’s Early Warning Program? 

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A: Although the PBGC first issued published guidance with respect to its Early Warning Program in 2000, in Technical Update 00-03, the EWP has existed since 1992. In 1995, the Kennedy School of Government and the Ford Foundation awarded the PBGC the Innovations in Government Award for the EWP.

The EWP is not explicitly authorized under the Employee Retirement Income Security Act (ERISA). However, under ERISA Section 4042(a)(4), the PBGC has the authority to involuntarily terminate a plan “whenever it determines that the possible long-run loss of the corporation with respect to the plan may reasonably be expected to increase unreasonably if the plan is not terminated.” Once the PBGC identifies a transaction that could jeopardize retirement benefits, and thus potentially adversely affect both plan participants and itself, it will meet with corporate representatives to negotiate additional contributions or security for their underfunded pension. It attempts to reach an agreement that takes both the PBGC’s concerns and the plan sponsor’s specific circumstances into account. If an agreement cannot be reached, the PBGC can file a complaint in district court under ERISA Section 4043 to involuntarily terminate the plan.

Q: What are the screening criteria for the EWP? 

A: The screening criteria have changed over time. In 2000, these were either: 1) a below investment-grade bond rating and a pension plan that had a current liability in excess of $25 million, or 2) the company, regardless of its bond rating, sponsors a pension plan that has current liability in excess of $25 million and an unfunded current liability in excess of $5 million. The current monitoring criteria reference a participant count of 5,000 or more and an underfunding threshold of $50 million or more. Both the participant count and the underfunding monitoring are determined on an aggregate controlled group basis.

Q: What types of business transactions trigger the EWP, and in each case what is the reason for the PBGC’s concern? 

A: The PBGC is particularly concerned about transactions that may substantially weaken the financial support for a pension plan. These transactions include:

1)       A breakup of a controlled group, including a spin-off of a subsidiary – When a controlled group is split up, a plan may remain with or be transferred to a financially weaker sponsor or a sponsor may be weakened by separation from the controlled group;

2)       A transfer of significantly underfunded pension liabilities in connection with the sale of a business – In the case of a controlled group breakup, a plan may be left with or transferred to a weaker sponsor or controlled group;

3)      A leveraged buyout involving the purchase of a company using a large amount of secured debt – The plan sponsor’s debt service requirements may make it difficult for the firm to afford to maintain its pension plan, in which event the risk of loss to plan participants and the PBGC is increased. The PBGC is particularly concerned about leveraged buyouts because the new debt is secured by company assets and will have priority over unsecured obligations such as pension funding obligations and a claim by the PBGC for underfunding;

4)      A major divestiture by an employer, which retains significantly underfunded pension liabilities – The remaining business assets may not generate sufficient revenue to be able to afford the plan;

5)      A payment of extraordinary dividends – A plan sponsor that uses its free cash flow or debt proceeds to pay substantial dividends or buy back its own stock may have insufficient resources to fund its pension plan obligations; and

6)      A substitution of secured debt for a significant amount of previously unsecured debt – Lender requirements for secured debt may indicate that the plan sponsor is facing challenges that could put plan funding at risk. Further, in the event of bankruptcy, the secured debt reduces the PBGC’s recovery on claims for unpaid pension contributions and unfunded pension liabilities.

Q: If the PBGC determines that a transaction could result in a significant increase in the risk of the type of loss that would permit it to terminate the plan, what types of action might it take? 

A: The PBGC works with the company whose plan is being reviewed to tailor a settlement that is appropriate to the business transaction and financially feasible for the company. Examples of the types of protections that the PBGC has negotiated in the past include: 1) additional cash contributions to the plan; 2) letters of credit to secure promises to make future pension contributions or to secure unfunded pension plan liabilities; and 3) a pledge of specific company assets to secure unfunded pension plan liabilities. Further, in connection with controlled group breakups, the PBGC has negotiated for guarantees by financially stronger members that are leaving the controlled group either to assume the pension plan or to pay for termination liability if the plan sponsor cannot support the plan following the transaction.

Q: How might a negotiated settlement with the PBGC be structured? 

A: This March, the PBGC used the EWP to secure Sears’ pension plans. Sears gave the PBGC a $100 million real estate lien. The pension plans also receive rights to a $250 million payment that Sears will obtain from Stanley Black & Decker in three years as part of Stanley’s purchase of Sears Craftsman brand. Additionally, the plans will receive payments from Stanley over a 15-year period that are a portion of Stanley’s sale of Craftsman products. 

Q: Is a filing under ERISA Section 4010 a trigger for the EWP? 

A: No. Under ERISA Section 4010(b), only three sets of circumstances would trigger the EWP: 1) the funding target attainment percentage at the end of the preceding plan year of a plan maintained by the contributing sponsor or any member of its controlled group is less than 80%; 2) a person fails to make a contribution to the plan, and that missed contribution, in combination with other missed contributions, results in a lien in favor of the PBGC in excess of $1 million; or 3) minimum funding waivers by the contributing sponsor or any member of its controlled group exceed $1 million, and any portion thereof is still outstanding. The PBGC does not use information provided under ERISA Section 4010 to open an early warning review, and the filing of a return under ERISA Section 4010 is not a trigger for the EWP.

Q: Can a plan sponsor contact the PBGC in advance to determine if a proposed business transaction presents any concerns under the EWP? 

A: Yes. The PBGC encourages plan sponsors and their advisers to contact the PBGC in advance of a business transaction, to avoid any uncertainty about such concerns and to minimize any disruption in corporate plans or transactions.

Q: Does the PBGC enforce IRC [Internal Revenue Code] Section 414(l)? 

A: As a technical matter, the Internal Revenue Service (IRS), rather than the PBGC, is the agency that enforces Internal Revenue Code Section 414(l)—the section of the IRC that governs the allocation of assets in plan spinoffs. The PBGC does not review spinoff transactions for Section 414(l) compliance, but it will review a spinoff to determine whether it significantly increases the risk of long-term loss to the PBGC, which may occur if a plan uses “reasonable” actuarial assumptions to transfer assets rather than the PBGC safe harbor actuarial assumptions.

Marcia Wagner is a specialist in pension and employee benefits law and is the principal and founder of The Wagner Law Group P.C., one of the nation’s largest boutique law firms specializing in the Employee Retirement Income Security Act (ERISA), employee benefits and executive compensation. A summa cum laude and Phi Beta Kappa graduate of Cornell University and a graduate of Harvard Law School, she has practiced law for 30 years, 21 with her own firm. She is recognized as an expert in a variety of employee matters, including qualified and nonqualified retirement plans, fiduciary issues, all forms of deferred compensation, and welfare benefit arrangements.

NOTE: This article is informational purposes only and should not be used as legal advice.
Benefits June 28, 2017

Provisions of Senate Health Reform Could Negatively Impact Employers

While the Senate health care reform bill reduces costs and administrative burdens for employers, provisions affecting individuals and employees could cause a residual negative impact on employers and many have conflicted views about the bill, one benefits professional says.
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Shan Fowler, senior director of Product Strategy at Benefitfocus, based in Charleston South Carolina, says since the passage of the Affordable Care Act (ACA) he has taken on the role of policy expert to help employers navigate changes created by health care law.

He tells PLANSPONSOR that Republican leadership on both sides of Congress have indicated they want to put more into supporting employer-based benefits.

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Some significant pieces of the Senate version of the legislation appear to be similar to that of the House version. It repeals the employer and individual mandates, reduces taxes, removes the annual contribution cap on health flexible spending accounts (HFSAs) and increases annual contribution limits for health savings accounts (HSAs).

The Senate version also keeps many of the provisions of the Affordable Care Act (ACA) that were popular with employers, including the requirement to cover dependent children through age 25. The only ACA provision in the House bill that was changed in the Senate bill is allowing states to define essential health benefits.

Fowler says the Senate version of the bill still allows for subsidies for people who do not get coverage by employers. “They seem more generous than in the House bill. The Senate bill maintains an income-based approach to subsidies as used in the ACA, rather than the House version’s age-based approach, but rather than letting subsidies go to people who make up to 400% of the federal poverty level, the Senate bill cuts that down to 350%,” he says.

Fowler notes that this means employers will still have some kind of reporting, such as 1094 and 1095 reporting so the government can know if a person is eligible for employer coverage. However, look-back reporting would seemingly go away because of the repeal of the employer mandate.

One change made in the Senate version of the bill is the removal of the continuous coverage requirement. The House bill included a provision that beginning in 2019, individuals would pay a 30% premium surcharge if they have a coverage gap of more than 63 days during a 12-month look-back period.

“The Senate bill is generally good for employers,” Fowler says.

NEXT: Provisions that may cause residual impacts for employers

However, Fowler notes that there are some provisions, not related to employer coverage, which could have a residual impact on employers.

For example, he says, “Cutting more than $700 billion from Medicaid over a five-year period starting in 2020 or 2021 arguably leaves the working poor exposed to additional costs and financial stress. This could have a residual impact on their ability to work and what these employees will ask from employers.”

In addition, Fowler notes that what is taken out of the subsidy structure could have an impact on the ability of self-employed people to get coverage. “This may encourage those self-employed to look to larger employers for employment in order to get coverage. Some say it may stifle entrepreneurialism,” he says.

The Senate’s stance on essential health benefits also may cause a residual effect on employers. “The Senate bill gives states some discretion in defining essential health benefits, so theoretically, a state could say maternal coverage is deemed not an essential health benefit as it is currently. This provision could change benefits coverage offered by insurance providers or providers may charge more for what states deem not to be essential health benefits. It may prevent people from getting coverage for things that drive a lot of costs. They may not be denied coverage outright, but offered coverage too expensive to handle,” Fowler explains.

The Congressional Budget Office (CBO) estimates 22 million fewer Americans will have coverage under the Senate version of health reform. “Employers are concerned about cost-shifting by providers to employers. Private insurance is charged double to 25 times what those on Medicare and Medicaid pay. If fewer are covered by those programs, providers will have to make up costs somehow, and the way they’ve done that in the past is to charge private insurance even more,” Fowler says.

NEXT: Conflicted views by benefits professionals

Fowler suggests not drawing a stark line between how health care reform will benefit employers and potentially hurt employees. “If it has a material impact on employees, it will likely have a residual impact on employers as well,” he says.

Benefit professionals are humans too, so some have a conflicting view of the health care changes. While there may be some employers that are not paternalistic in their benefits offerings, for the most part, human resources (HR) employees want to take care of employees. “They come from all political backgrounds and want things to be well-considered because it matters to people,” Fowler says.

He notes that what is happening in the public and individual coverage market can really impact decisions made in the employer market. He cites a report issued about 10-years ago by the U.S. Chamber of Commerce encouraging employers to help employees find public sources of safety net support—supplemental nutrition assistance program (SNAP), Medicare, Medicaid, food stamps, Head Start— because these programs are meant to address in a positive way the impact of poverty. “If an employee is struggling to make ends meet or find child care etc., moving to these programs reduces stress and helps with absenteeism. It’s not a silver bullet, but by encouraging employees and helping them find these things, employers can increase their effectiveness as employees,” Fowler says.

He notes that employers Benefitfocus speaks to that have a large hourly workforce see this reality, so they have concerns about the bill that go beyond political convictions. They’re asking, “How will this affect the lives of our employees and what can we do for them?”

Fowler says Benefitfocus’ customers are anxious and confused about the impacts of new health care reform, and some are not making major strategic decisions right now. However, at the same time the need for health care coverage continues and the use of benefits as a recruitment and retention tool continues. “Employers are continuing to modernize benefit programs through new kinds of benefits and technologies, but as for broader macro decisions, they are waiting to see what plays out,” he says.

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