Section 4062(e) of ERISA was a forgotten and largely unenforced provision of ERISA until the PBGC (the U.S. agency that insures unfunded pensions) issued regulations and began aggressively pursuing plan sponsors for liability during routine corporate transactions.

What the Statute Said

The statutory section was deceptively simple. It required a plan sponsor of a defined benefit plan that suffered a 20% reduction in participants as a result of cessation of operations at a facility to post a bond or escrow funds based on the plan’s unfunded termination liability (though the calculation method really wasn’t clear.) The intent was to shore up plans where the sponsor might be in financial difficulty, as evidenced by a related event such as closing a plant. These events were thought to be warnings that a plan might be headed for takeover by the PBGC. However, if the plan didn’t terminate within five years of the “plant closing”, the bond was no longer required and any escrow could be returned.

The PBGC’s Position

However, the PBGC interpreted 4062(e) broadly, maintaining that it could apply to asset sales in which the buyer continued to employ the plan participants, temporary shutdowns for repairs, and even when a plan was fully funded on an ongoing basis. And, as we explained last year, the PBGC typically negotiated for additional contributions to a plan up to the full amount of unfunded termination liability rather than asking for a bond or security. Those additional contributions aren’t returned if the plan does not terminate within the five year period. The PBGC did modify its position along the way so that it would not pursue creditworthy plan sponsors.

Congress’ Fix

Plan sponsors complained vigorously about the aggressive PBGC enforcement policy, and Congress responded by amending Section 4062(e) as part of the recently-passed “CRomnibus” bill. CRomnibus fixed the following problems:

  • The cessation must be permanent, and 4062(e) will generally not apply where the buyer takes on the employees in an asset or stock sale (provided that accrued benefits of participants are transferred) or relocates with the same or replacement U.S. employees.
  • A 20% participant reduction in one plan could be a minor event if the plan was frozen or if the employer maintained multiple plans. The trigger is now whether 15% of all eligible participants in any pension plans of the controlled group have ceased to be participants at the facility. Insignificant reductions will no longer result in 4062(e) liability.
  • Due to differences in the way liability was calculated, plans that were well or even fully-funded on an ongoing basis could have unfunded termination liability and 4062 (e) liability under the PBGC’s rules. Now plan underfunding will be measured under the ongoing rules used to determine whether variable rate premiums are due, and plans that are at least 90% funded under those rules are exempt.
  • Instead of disproportionate funding of termination liability, a plan sponsor that has a Section 4062(e) event may elect to make additional contributions over those required by the minimum funding rules to fund unfunded vested benefits over seven years. These contributions will be multiplied by the ratio of terminated participants in the affected plan over total participants in the plan and are subject to caps. The additional contributions may stop if the plan becomes at least 90% funded.

The new rules are effective now and even have a retroactive effect, as the PBGC may not apply its old rules to prior events that were not settled by agreement before June 1, 2014. The PBGC has now ended its 2014 moratorium on 4062(e) enforcement, but it will still not pursue creditworthy sponsors.

All-in-all, this seems to be a much needed rationalization of a provision of ERISA that was being enforced in a way that led to disproportionate and irrational results.