PBGC gives some DB plan sponsors 4010 reporting relief 

August 11, 2023

Pension Benefit Guaranty Corp. (PBGC) Technical Update (TU) 23-1 provides sponsors of certain defined benefit (DB) plans a one-time waiver from filing actuarial and financial information required by ERISA Section 4010. The waiver is available to DB plans that are reasonably well-funded under a modified version of the 4010 funding calculation but otherwise subject to reporting under the usual rules. Sponsors of plans with valuation dates from Oct. 1, 2022, through March 1, 2023, may — but are not required to — recalculate their plans’ funding target attainment percentage (FTAP) using current market interest rates and market value of assets. If the resulting FTAP is at least 85% (rather than the customary 80%) and certain other conditions are met, the plan won’t trigger PBGC 4010 reporting. Sponsors can make a similar modification to the calculation of assets and liabilities under PBGC’s existing 4010 reporting waiver for controlled-group funding shortfalls not exceeding $15 million.

ERISA Section 4010 requires sponsors of certain underfunded DB plans to file controlled-group financial and plan actuarial information with PBGC. A plan’s underfunding level for 4010 reporting purposes is determined by its FTAP. Unless a waiver applies, sponsors must file reports if any plan in the controlled group has an FTAP below 80%.

FTAP calculation. The FTAP is calculated annually as the ratio of plan assets to the nonstabilized funding target:

• Assets. Assets reflect asset smoothing if the sponsor has elected to use asset smoothing or averaging for other aspects of funding calculations. The resulting amount is reduced by any carryover or prefunding balances (credit balances).
• Funding target. The funding target generally is calculated using nonstabilized interest rates, which reflect a 24-month average of the segment interest rates published monthly by IRS. (Unlike the funding target calculation for determining the minimum required contribution, these interest rates are not further restricted to a corridor tied to a 25-year average of these segment interest rates.)

Regulatory filing waivers. PBGC’s regulations waive filing for certain small plans and in cases where the aggregate underfunding for all plans in the controlled group is less than $15 million. For purposes of this $15 million funding shortfall waiver, underfunding is generally determined using the smoothed asset value without reducing it by the credit balance.

In a typical year, the 24-month average rate will be fairly close to current market rates. However, due to the rise in interest rates during 2022, the effective 24-month average rate could be as much as 150 basis points lower than the year-end rate. The resulting liabilities can be substantially higher than the amount using current market rates. As a result, plans reasonably well-funded at year-end 2022 for financial disclosure purposes may now fall well below the 80% FTAP threshold, triggering 2023 Section 4010 reporting (assuming a calendar-year information year) by April 15, 2024.

Modified FTAP calculation. Recognizing the recent disconnect between the average and market interest rates, PBGC is granting a one-time waiver from 4010 reporting to plans with a “market-based” FTAP of at least 85%. Under this approach, the FTAP is calculated using a funding target that reflects the one-month average rates for the month before the valuation date and assets that reflect market value rather than a smoothed asset value. If the resulting FTAP is at least 85% and the additional conditions discussed below are met, the plan won’t trigger Section 4010 reporting.

Modified $15 million funding shortfall waiver test. TU 23-1 also modifies the $15 million funding shortfall waiver test to let sponsors use the market-based measures of assets and liabilities. This means sponsors with aggregate funding shortfalls not exceeding $15 million, determined under the market-based calculation approach, can still avoid 4010 reporting even if the sponsor’s plan has a recalculated FTAP below 85%. This alternative may be particularly helpful for plans with large credit balances (as illustrated by the example below).

The change in interest rates will significantly lower the funding target for a majority of plans, raising the FTAP. However, for plans currently using a smoothed asset value, substituting market value into the calculation will lower the FTAP. For many plans, the net of these two changes is still likely to raise the FTAP, possibly from below 80% under the old rules to at least 85% on a market basis.

Example. Plan A uses two-year asset smoothing and a four-month lookback for interest rates. As of Jan. 1, 2023, the 24-month average segment rates are 1.41%, 3.09%, and 3.58% for the first, second, and third segments, respectively. By contrast, the one-month average rates for December 2022 are 4.84%, 5.15% and 4.85%, respectively. Due to poor asset performance during 2022, the market value of assets is well below the smoothed asset value, which is limited to the maximum permissible 110% of market value. The plan also has a significant prefunding balance. The table below compares the FTAP calculations under the normal rules and the market-based approach allowed by TU 23-1. Figures are in $millions.

In this example, the market-based rules under TU 23-1 increase the FTAP by almost 12 percentage points, despite the lower asset value. (Plans using a zero-month lookback or with shorter-duration liabilities will likely see a smaller change.) The FTAP increase is not enough to reach the 85% threshold to avoid 4010 reporting. However, if the sponsor elects to waive $2.6 million of PFB, the assets in row E will increase to $65.5 million, resulting in an FTAP of 85.1% — enough to avoid the 4010 filing. Under the regular rules, waiving PFB would not have increased the FTAP enough to reach the 80% threshold.

Alternatively, if Plan A is the sponsor’s only qualified DB plan, the sponsor can avoid the 4010 filing by relying on the modified $15 million funding shortfall waiver without waiving any PFB. This is because TU 23-1’s market-based approach reduces the plan’s unfunded liability from $22.2 million to just $6.1 million.

Plans using the full yield curve. Plans that use the full yield curve for minimum funding calculations already reflect current market-based rates. These plans won’t benefit from this guidance because the regular FTAP calculation (including the standard 80% threshold) will almost certainly produce better results. However, if a plan sponsor has another plan that would benefit from the TU 23-1 alternative, then the sponsor apparently must also use that alternative to recalculate the FTAPs of other plans currently using the full yield curve to evaluate whether the 4010 filing waiver applies.

The alternative market-based calculation is available only to sponsors to meet all of these conditions:

• All plans with an FTAP below 80% under the regular rules must have valuation dates from Oct. 1, 2022, through March 1, 2023.
• The sponsor cannot have been subject to 4010 reporting in any of the five previous information years.
• If the sponsor has multiple qualified DB plans, then all plans with plan years ending in the information year must have FTAPs of at least 85% using this market-based approach (even those with FTAPs exceeding 80% using the regular approach).
• If the sponsor has other DB plans with plan years ending in the information year but valuation dates that fall outside of the Oct. 1, 2022, through March 1, 2023, date range, those plans must also have FTAPs of at least 80% under the regular approach (and at least 85% under the market-based approach).
• For the controlled-group $15 million funding shortfall waiver, all plans must be measured using the market-based approach, including plans with valuation dates that fall outside of the applicable date range.

Sponsors that avoid 4010 reporting using the alternative approach under TU 23-1 must notify PBGC at least 15 days before the date the 4010 filing would have been due. The notice should be sent via email to ERISA.4010@pbgc.gov with “Technical Update 23-1 Waiver” in the subject line. The email should include the name of the highest-level parent in the controlled group and the last date of information year for which the waiver applies.

• Technical Update 23-1 (PBGC, Aug. 7, 2023)
• 4010 Reporting (PBGC)