New Proposed PBGC Rule Has Potential to Greatly Expand Liability for Pension Plan Sponsors Contemplating Restructurings, Reductions in Force and Business Transactions
08/13/2010Under Section 4062(e) of ERISA, if an employer that maintains a defined benefit pension plan ceases operations at a facility in any location and more than 20 percent of participants are terminated as a result, the employer has a duty to notify the Pension Benefit Guaranty Corporation (PBGC) within 60 days of the cessation, and potentially increase the funding of the plan. Although this provision has been in effect for decades, focus on this provision increased in 2006 when the PBGC issued some Section 4062(e) guidance and subsequently resolved 37 cases through negotiated pension plan contributions valued at nearly $600 million.
Despite the recent, heightened enforcement of Section 4062(e), the PBGC had not previously issued guidance defining many key terms necessary to determine whether a Section 4062(e) event had occurred. However, on August 10, 2010, the PBGC issued a proposed rule intended to clarify many terms used in ERISA Section 4062(e), such as what will qualify as an “operation,” a “facility in any location,” a “cessation” and a “separation” as a “result” of such cessation. Further, the proposed rule introduces the term “Active Participant Base” and provide guidelines for computing the threshold active participant number for purposes of measuring whether a 20 percent reduction has occurred.
If adopted, the proposed rule could greatly expand the reach of Section 4062(e), for example:
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The most important effect of the proposed rule is to extend the applicability of Section 4062(e) to asset transactions. As a result, if an employer sells assets used in a manufacturing operation to another employer, the new employer subsequently continues or resumes the manufacturing operations and the seller maintains the pension plan in which the employees participated, the transaction could potentially be covered by Section 4062(e).
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The newly proposed definitions of “operation” and “facilities” could mean that an employer could operate multiple operations at a single facility, and the elimination or significant reduction of one of those operations could potentially trigger Section 4062(e) liability, even if the overall facility continues in operation.
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Under the proposed rule, ceasing operations at one facility may result in employee separations at other facilities that could need to be included in the Section 4062(e) analysis.
The proposed rule would displace and supersede all prior PBGC opinion letters regarding Section 4062(e). The PBGC also would develop new forms for employers to use when notifying the PBGC of a Section 4062(e) event.
More guidance about the proposed Section 4062(e) rule will be provided in subsequent McDermott publications. However, any pension plan sponsor considering a proposed facility closing, restructuring or asset transaction will want to carefully review the proposed rule and perhaps submit comments to the PBGC. Comments must be submitted on or before October 12, 2010.
