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PBGC interpretation of "greater than 20% active participant reduction" reportable event rule; voluntary late reporting policy


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Plan sponsor has frozen DB plan that is well funded in economic sense, but does not satisfy the "well-funded plan safe harbor" of PBGC reg. sec. 4043.10, because pays variable rate premium. May or may not satisfy the "low-default risk" safe harbor. Have not determined that yet.

Pursuant to SECURE Act, sponsor amends pan to permit in-service lump sums at age 59-1/2. Enough active employees cash out so that at some point during 2020 the number of active participants in plan drops from 55 to 30, so more than a 20% reduction. Plan has several hundred terminated vesteds and retirees, and paid flat-rate premium for more than 100 participants for 2019, so does not satisfy the requirement for small plan waiver.

It does not seem clear to me under reg. sec. 4043.23 whether a greater than 20% active participant reduction reportable event occurred. The plan's amendment could be viewed as a "single cause" under 4043.23(a)(1)(ii), sort of like an early retirement incentive program, except that the participants didn't retire, they just cashed out their benefit, but 4043.23(a)(1)(i) defining a "single cause" greater than 20% active participant reduction refers only to a  greater than 20% reduction in the number of "active participants," without saying whether this is referring to a reduction in the number of "active participants" employed by the plan sponsor or covered by the plan, and the definition of "active participant" in 4043.23(b)(2) says it's someone working for, or on leave, etc., from the sponsor, again without referring to plan coverage. Thus, since all or most of the folks who took the in-service distribution are still working for the company, there was not, strictly speaking, a 20% reduction in the number of "active participants" as so defined. It's harder (maybe impossible) to wriggle out of the greater than 20% active participant reduction due to an "attrition event" [oxymoron?] definition in 4043.23(a)(2), because that definition does refer to the number of "active participants" covered by the plan at the end of the plan year as compared with at the beginning, but at least if I have an attrition event, the requirement for the reportable event notice is delayed.

Follow-on question: Assuming plan sponsor did, at least arguably, have a reportable event, does anyone have experience with reporting late to PBGC, voluntarily, with a "good cause" explanation? It does not appear that the PBGC has any guidance for obtaining a penalty waiver, but it seems likely that in a case such as the one described above they would likely waive or apply only a small penalty if the sponsor made a voluntary delinquent filing.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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My experience is the PBGC is pretty open to conversations.  I suggest you give them a call and ask how they they want you to proceed.    

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

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