The PBGC’s Prior Application of ERISA Section 4062(e) Liability
Prior to the Act, an employer sponsoring a single-employer defined benefit plan was required to post security when it ceased operations at a facility in any location and, as a result of the cessation, 20 percent or more of the employees covered by the plan were separated from employment. The statute was clearly intended to address situations only where an employer permanently shut down operations at a location. Over the past five years, the Pension Benefit Guaranty Corporation (PBGC) aggressively interpreted the statute to assert liability when only a single operation was shut down at an employer’s facility, but others continued to run. Liability also was asserted when the operations were sold to another employer, moved to another location or temporarily suspended and did not result in actual job loss for affected employees.
Liability under ERISA Section 4062(e) was often disproportionate to the action triggering the shutdown event. The shutdown liability was based on the percentage of employees who participate in the plan who separated from service because of the shutdown, multiplied by the plan’s unfunded termination liability. This expansive interpretation of ERISA Section 4062(e) led to harsh results, such as requiring plan sponsors to increase the funding of their plans by millions of dollars as a result of otherwise routine business decisions.
The PBGC’s aggressive enforcement received criticism from a wide array of plan sponsors, government officials and lobbying groups. The PBGC reacted by issuing a moratorium on the enforcement of ERISA Section 4062(e) on July 8, 2014. The moratorium ran through the end of the 2014 calendar year and allowed for consideration of how to realign ERISA Section 4062(e) liability going forward.
ERISA Section 4062(e) as Revised by the Act
The new law returns to the original intent of ERISA Section 4062(e) by ensuring that liability does not arise unless there is a permanent cessation of all operations at a facility that results in a significant workforce reduction. Accordingly, under the Act, an ERISA Section 4062(e) event is triggered when an employer permanently ceases all operations at a facility and as a result there is a workforce reduction of more than 15 percent of all eligible employees at all facilities in the plan sponsor’s controlled group. The Act exempts plans from ERISA Section 4062(e) liability if, for the plan year preceding the plan year in which the cessation occurs, there are fewer than 100 participants with accrued benefits under the plan as of the valuation date or the plan’s funded status is at least 90 percent.
“Eligible employees” under the Act are now those persons eligible to participate in any defined contribution or defined benefit plan established and maintained by the employer. This significant change to ERISA Section 4062(e) greatly expands the denominator for determining whether a reduction triggers liability. The Act also provides special rules for excluding eligible employees in the computation of the workforce reduction percentage:
- Employees who are separated from employment and replaced (within a reasonable period of time) by the employer with a new employee at the same or another facility are excluded from the denominator (i.e., relocating operations to another facility does not trigger ERISA Section 4062(e) on its own).
- An eligible employee is not treated as having a separation from employment in conjunction with the transfer of all or a portion of the operations at a facility to another employer (by sale or other disposition of assets or stock) if the employee is employed or replaced within a reasonable time by the transferee company and the transferee company assumes the portion of the assets and liabilities of the transferor company’s defined benefit plan attributable to the employee.
The Act also imposes a new three-year look-back rule for determining whether a 15 percent workplace reduction occurs. The look-back rule takes into account any employee who was eligible to participate in a defined contribution or defined benefit plan maintained by the employer, who was separated from employment during the three-year period just prior to the cessation of operations at the facility, and whose separation was related to the permanent cessation at the facility.
The Act retains the prior rules for computing liability under ERISA Section 4062(e) and adds a new method by which employers may satisfy the liability. Employers can elect to contribute an amount equal to one-seventh of the plan’s underfunded vested benefits for the plan year preceding the year in which the cessation occurred, multiplied by the “reduction fraction.” The reduction fraction is equal to the number of plan participants counted in the workforce reduction divided by the total number of participants at the facility who had accrued benefits before the employer ceased operations.
The Act’s provisions are effective with regard to cessations of operations occurring on or after December 16, 2014. The PBGC is prohibited from taking actions inconsistent with the Act with respect to pending cases, and from initiating new enforcement actions that are inconsistent with its enforcement policy in effect on June 1, 2014. Employers should view these changes favorably, because the Act signals a return to the sensible application of ERISA Section 4062(e) enforcement.