On August 10, the Pension Benefit Guaranty Corporation (PBGC) issued proposed regulations that would clarify – and generally expand – the circumstances in which section 4062(e) of ERISA will apply when significant numbers of participants in an underfunded plan terminate employment in connection with the closure or sale of a facility. Section 4062(e) provides that if a plan sponsor "ceases operations at a facility" and, as a result, more than 20% of the participants in the plan are "separated from employment" with the plan sponsor, the plan sponsor is treated as if it were a substantial employer withdrawing from a multiple-employer plan, the result being that it must notify the PBGC of the event and must provide a bond or fund an escrow for the portion of the plan's underfunding that is attributable to those participants. The bond or escrow is used to cover the plan's underfunding if the plan is terminated in a distress or involuntary termination within five years after the event. Often, the PBGC and the plan sponsor will negotiate some alternative form of security, such as additional contributions from the plan sponsor or a guarantee from a third party, in lieu of the bond or escrow.

Relevant points from the proposed regulations and preamble are as follows:

  • A 4062(e) event may occur in connection with a wide range of events, such as the cessation of an operation at one facility even if the employer continues or resumes the same operation at another facility or continues to maintain other operations at the same facility.
  • In the context of an M&A, section 4062(e) will apply to an employer's cessation of an operation at a facility even if the operation is continued or resumed by the buyer at the same or another facility. This position is contrary to several opinion letters that PBGC issued in the late 1970s and early 1980s. However, the proposed regulations provide that if a financially sound employer continues the affected operation, and the original employer's workers are employed by the new employer, the PBGC could consider the original employer's liability under 4062(e) to be satisfied through the new employer's adoption of the original employer's plan (or the portion of the plan covering the affected operation).
  • "Evaluation of risk" will not be relevant in deciding whether a 4062(e) event has occurred. If the numerical test for a 4062(e) event is satisfied, the plan administrator must self-report the event. The PBGC may take into consideration the level of risk to the plan in making arrangements for the satisfaction of liability arising from the 4062(e) event.

Once a 4062(e) event occurs, the plan sponsor has a 60-day period within which to notify the PBGC. The penalty for non-compliance is a fine of up to $1,100 per day under section 4071 of ERISA. In the preamble, the PBGC emphasized that the potential harm to plan participants from a failure to properly notify the PBGC of 4062(e) events may result in the PBGC assessing penalties up to the full amount of the $1,100 per day limit.

If these regulations become effective in their proposed form, employers that sponsor defined benefit pension plans will have to carefully evaluate their restructuring activities to ensure they do not inadvertently trigger a 4062(e) event.