The Consolidated and Continuing Appropriations Act, 2015 (or “Cromnibus”) revamped the notification and funding requirements under § 4062(e) of ERISA.  As interpreted by the Pension Benefit Guaranty Corporation (“PBGC”), § 4062(e) often required an employer to make substantial contributions or provide other financial commitments to a defined benefit plan when the employer ceased operations at one or more of its facilities.  The new rules are important because they reduce the number of employers and plans that will be exposed to § 4062(e) liability and might also reduce enforcement uncertainty for employers that trigger § 4062(e) liability.

Under prior law, obligations under § 4062(e) arose if an employer ceased operations at a facility, and as a result more than 20% of the total number of the employees who were active participants in the employer’s defined benefit plan separated from employment.  If such an event occurred, the plan administrator was required to notify the PBGC; the PBGC calculated and assessed an amount based on the plan’s unfunded termination liability.  The PBGC could require the employer to provide additional financial security to the plan, either by making contributions to the plan or by obtaining a bond or placing funds in an escrow account.  However, the law granted the PBGC significant  discretion with respect to enforcing these rules.

In 2010, the PBGC issued a proposed regulation that would have substantially expanded the universe of corporate actions that could trigger § 4062(e).  The PBGC thereafter undertook an aggressive enforcement effort that was criticized by many in the employer community, because an affected plan’s unfunded liabilities often had little or no correlation with whether the plan was actually at risk of needing PBGC protection.  In 2012, the PBGC formally pared back its enforcement efforts by allowing healthier plans and employers to avoid liability, but the employer community continued to criticize its enforcement program.  In 2014, the PBGC announced a moratorium on enforcement efforts while it reviewed its practices and considered ways to better target its efforts.  Congress ultimately stepped in to revise the statute.

On December 16, 2014, President Obama signed the Cromnibus legislation, which significantly revised § 4062(e).  The new § 4062(e) rules reduce the number of employers that will be exposed to § 4062(e) liability, and provide an important new way for employers that trigger § 4062(e) to satisfy the liability.  Here are the highlights of the new rules:

  • Exemptions for Well-Funded Plans and Small Plans.  Plans that are 90% or more funded in the plan year before the cessation of operations occurs are exempt from § 4062(e) and are not required to notify the PBGC of the cessation of operations.  A full exemption also applies to plans with fewer than 100 participants.
  • New Threshold for Triggering § 4062(e) Liability.  Under the new law, an employer triggers liability under § 4062(e) if a permanent cessation of operations at a facility results in more than a 15% reduction in the total number of employees eligible to participate in any employee pension plan of the employer (including a Code § 401(k) plan).

Under prior law, liability was triggered if there was a 20% or more reduction in the number of active participants in the affected defined benefit plan.  The new rule effectively raises the bar for triggering § 4062(e) liability, because the lower 15% threshold is tested against what is likely to be, for most employers, a much larger population of employees.

For example, under the prior rules, some large employers would trigger § 4062(e) liability by significantly reducing operations at a small facility that participated in an old defined benefit plan with few active participants but with significant unfunded liabilities attributable to deferred vested participants.  Even if the size and finances of the sponsoring employer ensured that the plan was in no real financial danger, the reduction in operations could trigger § 4062(e) liability if 20% or more of the active participants in the plan were affected.  The new rules should prevent liability in this scenario, because the workforce reduction is tested against the population of employees eligible to participate in any of the employer’s defined benefit or defined contribution plans.

  • New Method for Satisfying § 4062(e) Liability.  The legislation establishes a new way for employers to satisfy § 4062(e) liability that is within the employer’s control and that removes the uncertainties associated with the PBGC’s prior enforcement policy.

The new rule allows the employer to satisfy its § 4062(e) liability by making additional contributions to the plan for seven years.  Each year, the amount contributed is equal to 1/7th of the unfunded vested benefits (as calculated for PBGC premium purposes) times the percentage reduction in active participants in the plan that occurred due to the cessation of operations.  If the employer fails to pay the additional contribution for any year in the seven-year window, the entire remaining obligation becomes due.

In addition, the amount of the annual installment payment is limited to the excess, if any, of: (i) 25% of the difference between the market value of the plan’s assets and the plan’s funding target for the preceding plan year, reduced by (ii) the plan’s minimum required contribution for the plan year.  Further, if the plan becomes 90% or better funded during the seven-year contribution window, the employer is no longer obligated to make the annual installment payments.

The PBGC believes the new additional contribution method will be less expensive for employers than complying with the PBGC’s prior enforcement policy.  This is good news for affected employers.  Employers must be careful, however, because the new method does not apply automatically.  Rather, the default rule remains the prior PBGC enforcement policy.  If an affected employer wishes to use the new additional contribution method, the employer must file a written election with the PBGC within certain time limits and abide by several continuing notice obligations.

The Cromnibus changes should prevent many employers from triggering § 4062(e) liability; however, they do not mean that employers should stop worrying about § 4062(e).  The PBGC has stated that its prior enforcement policy continues to apply and that its self-imposed moratorium on enforcement efforts is over.  Employers must continue to be vigilant in monitoring compliance with § 4062(e), because if § 4062(e) liability is triggered, the employer has only a limited time to elect the new additional contribution method.  If the employer fails to make a timely election, the PBGC is free to apply its existing, and likely more expensive, enforcement methods to the employer and its plan.

Email this postTweet this postLike this postShare this post on LinkedIn
Photo of William Woolston William Woolston

Will Woolston is a partner in the firm’s Washington office who advises employers large and small on all aspects of employee benefits and executive compensation.  Mr. Woolston’s practice focuses significantly on tax-qualified retirement plans, with a particular emphasis on “hybrid” defined benefit plans…

Will Woolston is a partner in the firm’s Washington office who advises employers large and small on all aspects of employee benefits and executive compensation.  Mr. Woolston’s practice focuses significantly on tax-qualified retirement plans, with a particular emphasis on “hybrid” defined benefit plans like cash balance and pension equity plans.  Mr. Woolston regularly represents clients on matters before the Internal Revenue Service and the Department of the Treasury, and has assisted many companies in resolving with the IRS operational and administrative errors in qualified plans.  In addition to his qualified plan work, Mr. Woolston also advises clients on the full spectrum of executive compensation matters, including equity compensation arrangements, employment agreements, and compliance with the deferred compensation requirements of Section 409A of the Internal Revenue Code.