In the 2002 futuristic sci-fi movie Minority Report, Tom Cruise plays the chief of a police unit dedicated to identifying and stopping crimes before they have actually been committed. Cruise does this in between chase scenes with the help of three prescient beings (called “precogs”) floating in a sensory deprivation tank. Through electrodes on their heads, the precogs report future felonies to the police through a complex machine that inexplicably carves the perpetrators’ names on technologically incongruous wooden balls.
OK, when you summarize it in print this doesn’t sound like one of Cruise’s best. The point, however, is that identifying potential crises in advance increases the probability of preventing them from occurring.
As the governmental corporation backstopping employee pension promises, the Pension Benefit Guaranty Corporation uses a similar approach to preemptively identify defined benefit pension plans potentially at risk of a future underfunded termination. And though to date they lack semi-submerged psychics, PBGC does have fairly broad powers under Section 4010 of ERISA to collect financial and actuarial information from DB sponsors that pose sufficient risks to their balance sheet. (Section 4010 is vaguely and ominously titled, “Authority to Require Certain Information.”)
This annual collection of this certain information for underfunded plans is called a “4010 filing” (or simply a “forty-ten” if you’re a hardcore DB wonk). Sponsors falling under the 4010 reporting requirements must supply a fairly extensive packet of information to the PBGC, including financial statements and details about the liability characteristics of the plan. The process consumes a significant number of hours and usually generates thousands of dollars of actuarial consulting fees.
All in the family
4010 filings become exponentially more inconvenient when a sponsor is part of a larger ownership controlled group. In these circumstances, the failure of a single plan to satisfy 4010 exemption requirements can trigger reporting for every plan and sponsoring entity within the entire controlled group. Think of it as being audited by the IRS because they had concerns about your brother-in-law’s filing. So one bad apple can spoil an HR director’s weekend.
The financial reporting requirement applies to all controlled group members whether or not they sponsor DB plans, since they are seen by the PBGC to have financial responsibility for the pension liabilities of the entire group. So the filing can get fairly voluminous.
Financial information may even need to be filed for controlled group members outside the U.S., although any overseas DB plans are excluded from the actuarial calculation and reporting requirements of 4010.
If you sponsor a DB plan (or are currently sitting through the second hour of Minority Report) you’re probably thinking, “How can I get out of this?” Fortunately, there are several ways that plan sponsors can be exempt from filing under 4010:
Fewer than 500 lives in all DB plans within the controlled group All plans in the controlled group have funding ratios of at least 80% Total funding shortfall of all plans in the controlled group is less than $15 million.
Funding shortfall clarification
Larger sponsors and those within controlled groups, however, need to be aware of a small tweak to the regulations that may impact them this year. On March 23, 2016, the PBGC published final 4010 rules which redefined the liability used to determine whether a plan satisfies the $15 million exemption.
Since 2012, Congress has passed three laws providing interest rate relief to plan sponsors for minimum funding purposes. (See
As of January 2016, stabilized rates for an average plan were around 6.2% versus actual corporate bond rates closer to 4.5%. This means that liabilities using the stabilized rates can be 15% to 25% lower than they would be without relief for a typical plan.
PBGC has been permitting the use of the stabilized rates in determining whether plans satisfy the $15 million exemption. But starting this year, use of the non-stabilized rates is required for this purpose (see chart).
The result? Many sponsors who haven’t had to file 4010 for several years due to the $15 million exemption will again be required to do so as the liability used in the measurement will be significantly higher. (Note the 80% funding ratio measurement has always used the non-stabilized rates.)
Avoidance options
The good news here is that 4010 filing for 2016 calendar plan years isn’t due until April 15, 2017, so sponsors inclined to avoid the filing can still act to do so. The bad news is that the options are fairly limited and can be prohibitively expensive, especially for very large plans.
Two options available to avoid 4010 filing are:
1) Contribute enough to reduce the funding shortfall of the controlled group to less than $15 million.
2) Increase the funding ratios of all plans within the controlled group to at least 80% through additional contributions and/or waiving prefunding and carryover balances.
(Note that these must be completed by Sept. 15, 2016, for calendar-year plans.)
Members of complex controlled groups will spend a fair amount of time collecting enough information to even consider these options, so time is of the essence. Immediately submitting valuation census data to your actuary is a good first step.
Unfortunately, many formerly exempt sponsors will weigh the financial costs against inconvenience and decide to once again join the minority reporting under 4010.
A version of this blog originally ran on
The subject matter in this communication is provided with the understanding that Principal is not rendering legal, accounting or tax advice. You should consult with appropriate counsel or other advisers on all matters pertaining to legal, tax or accounting obligations and requirements.
Insurance products and plan administrative services are provided by Principal Life Insurance Company, a member of the Principal Financial Group (Principal), Des Moines, IA 50392.
