ERISA 4010 Filing Relief

By Bolton August 16th, 2023

On August 7, 2023, PBGC released Technical Update 23-1 offering relief to certain plan sponsors who might otherwise be required to report to PBGC under the requirements of ERISA 4010. This reporting, which includes financial and actuarial information about the plan sponsor and all defined benefit plans in the plan sponsor’s controlled group, may require a substantial effort to collect the required information for plan sponsors that are not regularly subject to this reporting requirement.

Plans that would be required to report to PBGC under ERISA 4010 for a single year are typically not plans that pose a significant risk to the single employer insurance system. Recognizing this, as well as the unusual market conditions prevalent in the reference period, PBGC is granting a one-time waiver of the 4010 reporting requirements with respect to an “information year” for plans and plan sponsors that meet all of the following criteria:

  • ERISA 4010 reporting was not required for any of the five consecutive years immediately preceding the waiver year;
  • Either (a) none of the plans otherwise includable for reporting purposes have a “market-based 4010 FTAP” below 85%, or (b) the “market-based aggregate 4010 funding shortfall” for the controlled group does not exceed $15 million; and
  • Every includable plan whose 4010 FTAP would otherwise be below 80% has a valuation date on or after October 1, 2022 but no later than March 1, 2023.

For purposes of determining eligibility, the “market-based 4010 FTAP” and the “market-based aggregate 4010 funding shortfall” are calculated in the same manner as the regular measures, except that:

  • Asset smoothing is disregarded, and
  • Liabilities are determined using spot segment rates that would be used by the plan for determining PBGC variable rate premiums under the Standard Method for the same plan year.

While this one-time reporting waiver does not help all plans avoid the triggering criteria for ERISA 4010 reporting, it does provide welcome relief for some plan sponsors who are caught in a temporary, asset/liability timing mismatched decline in funded status. Plan sponsors using this waiver must notify PBGC at least 15 days before the 4010 filing due date (absent relief) that they are eligible for and taking the one-time filing waiver.

The remainder of this article provides more background on how the need for this one-time waiver developed over the last year.

Background and Commentary

With the rising interest rate environment over the last two years, plan sponsors have been keeping a close eye on how the interest rate and asset volatility smoothing mechanisms in the PPA minimum funding rules will affect contributions. When interest rates fell into a persistently low pattern shortly after the PPA funding requirements took effect in 2008, Congress enacted funding relief in the form of “interest rate stabilization” that allowed plan sponsors to defer funding through the use of above-market interest rates averaged over a 25-year period. This stabilization was originally designed to phase out over time. However, with the persistence of the low interest rate environment, the phase out was deferred with successive legislation and expanded to include a floor of 5.00%. With market rates below 3.00% at the time, this was heralded as significant contribution relief.

Congress also provided asset stabilization by allowing three-year smoothing of investment experience in the original PPA legislation which, together with the interest rate stabilization, helped plan sponsors buy time to prepare for the increased contributions that were to come as the stabilized interest rates began to slowly decline and converge to current market rates.

Stabilization does not apply to all funding-based measures affecting plan administration. One such exception is the criteria for determining if plan sponsors are required to report to PBGC the information required under ERISA 4010. Reporting is required if the Plan’s 4010 Funding Target Attainment Percentage (FTAP) is below 80% without interest rate stabilization. PBGC grants a waiver of the reporting requirements if the aggregate 4010 funding shortfall for all defined benefit plans in a controlled group is $15 million or less. In determining the FTAP and shortfall, smoothed assets are used if that is the method used to determine the minimum funding requirements and plan assets are offset by funding balances.

Normally, rising interest rates would be a good thing for plan sponsors looking to avoid ERISA 4010 reporting to PBGC, as (all other things being equal) the Target Liability will decrease with higher interest rates and the resulting 4010 funding shortfall will also decrease. However, some plans that use the three-year asset smoothing method are finding that all other things are not equal as interest rates rise. PBGC explained the situation well in the Technical Update:

“Given the atypical and almost unprecedented interaction of market conditions of late 2022/early 2023, and the way those conditions impact the liability and asset measures used to determine the 4010 FTAP (e.g., smoothed discount rates, smoothed assets capped at 110% of market value), PBGC expects that many plans with valuation dates during that time will, for the first time in a long time (or perhaps ever), have a 4010 FTAP well below 80%. PBGC also expects that the 4010 FTAP for many of those plans would be significantly higher, even over 100% in some cases, if the 4010 FTAP was required to be determined without regard to asset or discount rate smoothing (i.e., using a market-based approach).”

Recognizing these unique circumstances, PBGC is granting a waiver to impacted plans if, essentially, ERISA 4010 reporting would not be required if liabilities and assets were measured using current market values without smoothing. The funding threshold to be eligible for the waiver is slightly higher than the standard threshold (85% instead of 80%) and there are limitations for eligibility, in particular if the controlled group includes plans with valuation dates outside of the eligible waiver period.

This waiver offers a temporary solution based on PBGC’s interpretation of a temporary problem. If your plan’s valuation date falls within the waiver period (October 1, 2022 through March 1, 2023, inclusive), you should consult with your actuary about your need for ERISA 4010 reporting and potential eligibility for the waiver.