Art by June Kim
Defined benefit (DB) plan sponsors contemplating the sale or
shutdown of a facility need to be aware of recently enacted changes to Section
4062(e) of the Employee Retirement Income Security Act (ERISA). Until President
Barack Obama signed the amending legislation on December 16, 2014, this
provision, in less than 90 words, created potential sponsor liability when
cessation of operations at a facility resulted in loss of jobs by more than 20%
of the employees covered by the sponsor’s pension plan.
As interpreted by the Pension Benefit Guaranty Corporation
(PBGC), the old law provided a formula by which this liability was determined
under conservative agency termination liability rules. Termination liability
determined in this manner was multiplied by the ratio of terminated active
participants to all active participants. This created significant liability for
many pension plans, but frozen plans were particularly affected, as a large
ratio resulted from those plans’ small number of active participants.
Under the amended section, a cessation of operations at a
facility triggering liability occurs if it results in more than a 15% reduction
in the total number of employees eligible to participate in any employee
pension benefit plan sponsored by the company. While the old trigger was a
fraction greater than 20%, its denominator consisted only of defined benefit
plan participants and was therefore much narrower. A larger denominator means
it will be harder to trigger liability.
Calculation of the work force reduction under the new
statute excludes separated employees who have been replaced by another employee
at a new location, as long as the new work location is in the U.S. Further,
employment reductions resulting from the sale of a facility will not be counted
if the new owner retains or replaces separated employees.
The amended version of Section 4062(e) also incorporates two
significant exemptions. First, small plans with fewer than 100 participants are
not subject to liability, even if there is a cessation of operations at a
facility. In addition, plans that were at least 90% funded in the plan year
before the cessation occurred are exempt.
If liability under Section 4062(e) is triggered, it can be
met, as before, by providing financial security to protect the plan in the form
of a bond or escrowed funds placed with the PBGC. The amended statute adopts
existing PBGC enforcement policy by giving plan sponsors the option to satisfy
this liability through additional plan contributions determined under rules
similar to the regular funding rules. The methodology for determining the
amount of these contributions is designed to reduce the sponsor’s cost.
Accordingly, the sponsor may contribute seven annual installments equal to
one-seventh of the plan’s unfunded vested benefits. These payments are capped
so they will not increase the plan’s minimum funding contributions. The annual
installments are discontinued if the plan attains a 90% funding level, even if
it subsequently falls below that threshold.
If the 15% reduction described above occurs, thereby
triggering liability under Section 4062(e), the plan sponsor must report the
event to the PBGC. This does not apply if the plan qualifies for the small plan
or 90% funding exemption. Plan sponsors that wish to meet their Section 4062(e)
liability by making plan contributions must notify the PBGC of their election
no later than 30 days after the earlier of: 1) the date the sponsor notifies
the agency that a 15% work force reduction has occurred, or 2) the date the
PBGC makes such a determination. Further, the sponsor must notify the PBGC of
each of the seven additional plan contributions, no later than 10 days after
the payment, and also of a failure to make any of these contributions by the
10th day after the due date.
The PBGC’s enforcement policy since 2012 has been that it
will not initiate action under Section 4062(2) against financially strong plan
sponsors. This policy is being carried forward. The test for a company’s
financial strength is: 1) unsecured debt-equivalent ratings from both Moody’s
and Standard & Poor’s (S&P) of at least Baa3 by Moody’s and BBB- by
S&P; 2) a company rating by Moody’s or S&P of Baa3 or BBB-,
respectively; or 3) if the company is not rated by Moody’s or S&P, a
D&B Financial Stress Score of at least 1,477 and secured debt—other than
debt incurred to purchase real estate and equipment—not exceeding 10% of its
Provided the conditions therein are satisfied, the new
legislation and the PBGC’s enforcement policy with respect to financially
strong companies should eliminate much of the uncertainty plan sponsors have
had over whether a plant closing or sale may result in liability under Section
Marcia S. Wagner is an
expert in a variety of employee benefits and executive compensation issues,
including qualified and non-qualified retirement plans, and welfare benefit
arrangements. She is a summa cum laude graduate of Cornell University and
Harvard Law School and has practiced law for 28 years. Wagner is a frequent
lecturer and has authored numerous books and articles.