Termination Liability Update: PBGC Enforcement in connection with a Substantial Cessation of Operations

Posted on 10-27-2016 by
Tags: labor and employment , Lexis Practice Advisor , cessation of operations , business

By Summer Conley, Drinker Biddle & Reath LLP and Lexis Practice Advisor Attorney Team

Upon a distress or involuntary termination of a single-employer ERISA Title IV defined benefit plan, the plan sponsor (or a member of the plan sponsor’s controlled group) generally incurs liability to the PBGC and the trustee.  Plan sponsors of defined benefit plans should also be aware that they may incur similar liabilities in the event of a substantial cessation of operations resulting in the termination of employment of a threshold percentage of retirement-plan-eligible employees under ERISA § 4062(e).

ERISA § 4062(e). Section 4062(e) contains a special rule affecting large (i.e., 100+ participant), single-employer defined benefit plans that are less than 90% funded as of the first day of the plan year in which a substantial cessation of operations occurs. Employers maintaining such plans may face the following consequences in the event of a cessation or potential cessation of operations:

  • A reporting requirement –and–
  • Termination liability –or–
  • Contribution liability and additional related reporting requirements (as an alternative to termination liability)

Substantial cessation of operations. A substantial cessation of operations occurs when a facility has a permanent cessation of operations that results in a 15% or greater reduction in the number of employees eligible for ERISA pension (including defined contribution plan) benefits. Certain exceptions apply. For example, employees are excluded from the calculation when an employer relocates its operations or when a purchaser assumes benefits in a business transaction, if the employees are replaced by U.S. citizens or residents.

Reporting requirement. If an employer triggers ERISA § 4062(e), the employer must notify the PBGC of the cessation and include a request for the determination of the amount of termination liability for which it is responsible within 60 days after the later of (1) the date the cessation occurs, and (2) the date when the percentage of affected participants is 15% or more. This notice requirement is separate from the reportable events notice requirement that applies under ERISA § 4043(c)(3) in the event of a substantial reduction in active participants.

Termination liability. In the event of a cessation of operations, ERISA § 4062(e) generally requires affected plans to pay termination liability to the PBGC as of the date of the cessation, for the percentage of participating employees actually terminated. The PBGC will work with the responsible employer, but may require such employer to pay an amount to the PBGC to be held in escrow as a guarantee in case the plan is terminated following the cessation. The PBGC will return this escrow amount to the employer (without interest) if the plan is not terminated during the five-year period following the cessation. Alternatively, the employer can purchase a bond for the guarantee.

Contributions in lieu of termination liability. In 2014, Congress amended Section 4062(e) to provide an alternative method for satisfying liability to the PBGC under ERISA § 4062(e). Under this option, the employer may elect to contribute annual installments to the plan over a seven-year period (in addition to making any required minimum funding contributions) in lieu of satisfying plan termination liability imposed under the existing rule. As of January 1, 2015, the PBGC announced its intention not to renew its moratorium on enforcement of ERISA § 4062(e) termination liability, which the agency had issued pending the effective date of the amendment to the provision.

If the employer does elect annual contributions, each installment equals one-seventh the unfunded vested benefit (as of the valuation date of the plan year prior to the plan year of the substantial cessation of operations), multiplied by the percentage of employees with accrued benefits in the plan who were actually terminated in connection with the substantial cessation of operations. Nevertheless, each such annual contribution amount is capped at the excess of:

  • Twenty-five percent of the underfunding amount (i.e., the difference between the market value of plan assets and the plan’s funding target for the prior plan year (determined in accordance with ERISA § 4006)), over
  • The minimum required contribution under the minimum funding rules of ERISA § 303

An employer electing the contribution method must notify PBGC of the election. Following such notification, it must also provide additional notices, including (1) notice of payment of each contribution, (2) notice of the failure to pay any contribution, (3) notice of a waiver, and (4) notice that the obligation to make any annual contribution has terminated (e.g., if the plan reaches 90% funded status).

PBGC Enforcement Policy Exception. The PBGC took the position in a 2015 FAQ that, going forward, it will generally take no action to impose Section 4062(e) liability on companies that are financially sound. The PBGC will determine whether a company is financially sound by applying its October 2012 enforcement policy. This FAQ remains good guidance despite the PBGC’s end to its moratorium on enforcement of the amended Section 4062(e)—at least until PBGC issues yet additional guidance (as promised by the agency following the 2014 changes to the provision).

Summer Conley is a partner in Drinker Biddle & Reath’s Employee Benefits & Executive Compensation Practice Group. Her practice covers a variety of employee benefit areas, including qualified plan work, executive compensation, and health and welfare issues such as HIPAA, COBRA, Section 125, and healthcare reform. Summer assists plan sponsors and fiduciaries in complying with ERISA and the Internal Revenue Code, and she advises plan service providers (e.g., RIAs, investment managers, record-keepers, broker-dealers, etc.) with respect to their ERISA obligations.

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