The Pension Benefit Guaranty Corporation (PBGC) announced it has modified its informal enforcement strategy regarding potential ERISA Section 4062(e) events to provide relief to financially strong companies that sponsor defined benefit pension plans. By way of background, ERISA Section 4062(e) generally applies when a pension plan sponsor ceases operations at a facility and the shutdown results in the separation of employment of more than 20 percent of plan participants (a 4062(e) event). When a 4062(e) event is triggered, the PBGC requires the plan sponsor to provide additional financial security for the pension plan in the form of a security bond or escrow amount. PBGC has significantly increased its enforcement of ERISA Section 4062(e) in recent years, often negotiating significant cash contributions and other concessions (e.g., waiver of credit balances) from plan sponsors.
On August 10, 2010, PBGC issued a proposed rule (the Proposed Rule) that substantially broadened the scope of ERISA Section 4062(e)’s applicability. Under the Proposed Rule many general business decisions, such as the sale of a business unit, movement of operations to a different site and the temporary shutdown of a facility for repairs, resulted in a potential 4062(e) event occurring, even if an entire facility or all operations at a facility were not shut down. As an indication of its expansive approach, the Proposed Rule’s preamble stated, “The proposed regulation would provide explicitly that evaluation of risk is not an element in deciding whether a Section 4062(e) event has occurred.” That statement suggested that the PBGC would not consider the financial health of a company in determining whether a 4062(e) event occurred.
As noted in our previous newsletter and by several industry groups, the Proposed Rule had the potential to impose unexpected and extensive liability for employers who undertake routine corporate actions. In June 2011, the PBGC announced it would reconsider the Proposed Rule in light of public comments, and it confirmed last month that it will re-propose the Proposed Rule this year, reportedly as early as summer 2012. In addition, recently proposed legislation would also impose restrictions on the PBGC’s ability to characterize certain events as a 4062(e) event.
Although the rules for determining what constitutes a 4062(e) event are in flux, the PBGC’s new informal enforcement approach will include a risk assessment as a mitigating factor in assessing how to proceed with respect to a 4062(e) event. According to February 2, 2012, testimony from PBGC Director Joshua Gotbaum before the Health, Employment, Labor, & Pensions Subcommittee of the House Education & the Workforce Committee:
PBGC is also being more responsive to companies and plans in enforcing ERISA section 4062(e)—a statutory provision that imposes liability in certain situations when plan sponsors downsize. In light of comments, the agency plans to issue a re-proposed regulation on 4062(e). We have also begun to consider changes in how resources are directed within the 4062(e) enforcement program, in order to focus on the real threats to the retirement security of people in traditional pension plans.
The new approach apparently categorizes plan sponsors into three classes based upon their financial strength. After determining that a 4062(e) event has occurred, the PBGC will now classify the employer-plan sponsor as a “strong company,” “moderately strong company” or a “weak company.” The company’s status determines the extent of its funding liability as follows:
- Strong companies are not required to post security, and PBGC will not make further demand of the employer concerning funding practices. The employer has an ongoing obligation to report to PBGC if certain (yet undefined) features change.
- Moderately strong companies are required to post some security, though the amount will be less than that imposed under a strict interpretation of ERISA Section 4062(e). Presumably, moderately strong companies are subject to the same ongoing reporting obligation as described above, though this also remains unclear.
- Weak companies remain subject to PBGC’s strict application of ERISA Section 4062(e), and will be required to make a contribution, post a bond or pay an amount into escrow if a 4062(e) event is determined to have occurred.
Even though the PBGC will not be actively enforcing ERISA Section 4062(e) for financially strong companies, it has stated it will continue to apply the expansive definition of a 4062(e), as set forth in the Proposed Rule. As a result, though the rules for determining whether a 4062(e) event has occurred remain the same, certain employers that are financially strong may now eliminate or substantially reduce potential liability under ERISA Section 4062(e). It is unclear what metrics the PBGC will consider in assessing an employer’s financial condition. However, the PBGC has stated it will rely on existing measures, excluding the company’s credit rating.
Sponsors of defined benefit pension plans must continue to consider what impact ERISA Section 4062(e) will have on all business decisions, including asset sales and transfers of operations, in order to avoid inadvertently creating a 4062(e) event and triggering extremely significant contributions for underfunded pension plans. Once the PBGC issues new guidance under ERISA Section 4062(e), sponsors will need to understand whether that new guidance limits their business flexibility. In the interim, certain employers that are financially strong may now eliminate or substantially reduce potential liability under ERISA Section 4062(e).