After years of disuse, ERISA §4062(e) came to life a few years ago, when the Pension Benefit Guaranty Corporation began seeking settlements from defined benefit plan sponsors in cases where more than 20% of active participants separated from service as the result of a cessation of operations at a facility.  The statute provides that, in such a case, the employer must post a bond or escrow with the PBGC equal to a portion of the plan’s unfunded benefit liabilities.  The bond/escrow is paid to the PBGC’s insurance fund if the plan terminates within the next five years, to the extent of the underfunding at that time; otherwise, it is returned to the employer.

The statute is vague about how to calculate the amount of this quasi-liability, but a PBGC regulation issued in 2006 fixed it at the same percentage of underfunding as the percentage of employees covered by the plan who separated on account of the cessation.  In 2010, a set of proposed regulations offered expansive and highly controversial definitions of “cessation”, “operations” and “facility”, which were frequently applied by PBGC case officers, although the regulation was not adopted in final form and the PBGC promised employer groups that it would be reconsidered.

The number of §4062(e) cases grew rapidly after serious enforcement got underway:  from 40 new cases in FY 2008 to 105 in FY 2009, 129 in FY 2010 and 68 in FY 2011.  The PBGC exerted plenty of effort.  The results it achieved were more ambiguous.  The number of cases resolved is far below the number initiated – only 20 in FY 2010 and 40 in FY 2011.  And in most of those whose outcomes have been disclosed, the employer did no more than agree to make more than the minimum required contribution to the plan, without posting any bond or escrow.

A fair inference is that most companies targeted under §4062(e) refuse to comply, and the PBGC sees no benefit in taking them to court.  So far as is known, it has brought only one case, which was settled on terms that basically required the employer to do nothing.

On 11/2/2012, the PBGC announced a revamped enforcement approach.  It posted on its Web site (at a set of questions and answers describing what it calls a “pilot program.”  The key point is that it will in the future take no action when the plan sponsor is “creditworthy” or its plan has fewer than 100 participants.  The standards of credit worthiness are left vague:

PBGC will use the standards already used by businesses throughout the world: common financial measures of financial soundness such as credit ratings, credit scores, indebtedness, liquidity, and profitability.  If a company is creditworthy and there are no other indicators of financial weakness or other risks, PBGC will take no action.

Employers with cessations described in §4062(e) still must file reports with the PBGC within 60 days after the event occurs.  The 2010 proposed regulations included more specific rules, and the PBGC Web site has a draft Form 4062-E, which can be used as model.  (The form isn’t yet available for filing, so reports must be improvised.)  The Q&A’s state that creditworthy companies must file reports.  They are silent about small plans.

Given the PBGC’s financial condition, it’s no surprise that it pursues every avenue for reducing its exposure to underfunded plan terminations.  So far, though, §4062(e) has been an unproductive path.  The new enforcement policy suggests that the agency realizes that fact.