A recent decision by the Pension Benefit Guaranty Corporation Appeals Board (the “PBGC”) may have far-reaching implications for private equity funds. In its decision, the PBGC held that an unnamed private equity fund and its other portfolio companies were jointly and severally liable for the funding deficiency in a defined benefit pension plan sponsored by one of the portfolio companies. As such, the private equity fund was required to use its assets to fund the pension obligations of a bankrupt portfolio company.

Control group liability and testing is not controversial. However, prior to this decision, certain practitioners argued that a private equity fund should not be included in the same control group as their portfolio companies because a fund does not carry on a “trade or business” within the meaning of ERISA. In its decision, the PBGC found that the private equity fund was a “trade or business” and was, therefore, a member of the same controlled group as the portfolio company.

The PBGC decision highlights the significant ramifications for private equity funds of control group liability that extends beyond joint and several liability for underfunded pension funds. For example, portfolio companies may be placed in technical breach of credit agreements because credit agreements often prohibit pension plan underfunding for any members of a controlled group of corporations. In addition, control group liabilities exist under COBRA and with respect to certain excise taxes. Finally, nondiscrimination testing is required to be performed across all defined contribution retirement plans sponsored within a control group.