The Pension Benefit Guaranty Corporation (“PBGC”) recently announced a change to its enforcement policy under ERISA § 4062(e) and issued answers to frequently asked questions on the subject. The new enforcement policy would impose § 4062(e) liability only on large employers who are not “financially sound.” As discussed below, however, the new policy does not provide complete relief.
ERISA § 4062(e) applies if an employer ceases operations at a facility and the cessation of operations results in 20% of the employees participating in the employer’s pension plan terminating employment. If a § 4062(e) event occurs, the company must report the event to the PBGC and becomes responsible for a withdrawal liability. The withdrawal liability is based on the plan’s underfunding on a termination basis times the percentage reduction of the active participants. For most employers, the dollar amount can be quite significant.
Although § 4062(e) has been in effect since the passage of ERISA, the PBGC has stepped up enforcement in the last ten years. In August 2010, the PBGC issued a controversial proposed regulation that would expand the applicability of § 4062(e). For example, the proposed regulation states that “facility” could include more than one building, without any geographic restrictions. The proposed regulation also states that the cessation of a single operation within a facility could be treated as a cessation of operations. Under the proposed regulation, therefore, § 4062(e) could be triggered by relatively small events in different parts of the company, if they result in an aggregate reduction of 20% of active participants.
Plan sponsors have objected to the proposed regulations and requested that they be withdrawn. In connection with those requests, sponsors noted that, in many cases, cessations of operations pose little risk of default.
In response to those objections, the PBGC is implementing a pilot program under which a company will not have § 4062(e) withdrawal liability if–
- The company is financially sound during the five years after the § 4062(e) event, or
- The plan has 100 or fewer participants.
The PBGC’s announcement does not define how it will determine financial soundness. A FAQ states that financial soundness will be determined by “common financial measures . . . such as credit ratings, credit scores, indebtedness, liquidity, and profitability.” The PBGC expects that 92 percent of companies will be exempt from § 4062(e) liability under this pilot program.
Although the new enforcement policy is a favorable development for employers, it is incomplete in two respects:
- First, the PBGC has not withdrawn the 2010 proposed regulation. Accordingly, the PBGC has left open the possibility that a series of small cessations could trigger § 4062(e) liability if the employer does not satisfy the financial soundness test.
- Second, the new enforcement policy does not include relief from § 4062(e)’s reporting requirement.
The PBGC has stated that it is still considering changes to the proposed regulation and that it will consider the pilot program in its decision process.
In the meantime, employers that undergo significant reductions in force should consider whether the reduction triggers any obligations under § 4062(e). In addition, although not discussed in this post, employers should also consider other reporting obligations and whether the reduction might result in a partial termination.