Last Friday, the Pension Benefit Guaranty Corporation officially announced a change in enforcement under ERISA § 4062(e) that had been encountered some time ago by practitioners.  This is the “Third Act” in the unfolding saga of 4062(e) enforcement.

In broad terms, 4062(e) gives the PBGC the authority to seek protection for a defined benefit pension plan by forcing an employer to fund, or post security to fund, a pension plan if there is a substantial cessation of operations at one or more facilities covered by the plan.  Essentially, if there was a 20% or greater reduction in headcount at a facility, the PBGC could force the employer to fund the pension plan with respect to the terminated employees.   This provision has been in the law since 1974, but was rarely enforced until the mid-2000s. The thinking was that by forcing employers to fund their plans in these situations, it would reduce the likelihood that the plan would be turned over to the PBGC or would ease the burden on the cash-strapped PBGC (which is funded only by premiums from companies that sponsor pensions) if it did eventually get turned over.  When the PBGC began enforcing it in earnest it would, in most cases, negotiate with sponsors to either put money in escrow, post a bond, get a letter of credit, or make an additional contribution to the plan.

Act I.  The PBGC proposed regulations in 2010 that expanded the scope of the statute even further, to include items like the sale of a facility, even where operations at the facility did not cease.  This was widely viewed as a significant expansion of the statute and arguably beyond the PBGC’s authority.  In response, the practitioner community fought the PBGC’s rule, and ultimately got the PBGC to reconsider the proposed rule as part of its regulatory review plan under President Obama’s directive for agencies to engage in a review of their regulations.

Act II. However, apparently word that the proposed 4062(e) regulations were under consideration did not get around at the PBGC as fast as practitioners would have liked because even after the PBGC announced it was reconsidering the proposed rule, practitioners complained that the PBGC was enforcing the rule as if it was current law.

Act III. After the backlash from enforcing a proposed rule under reconsideration, the PBGC said it would adopt a different enforcement approach.  The PBGC began to raise, in individual cases, the issue of the creditworthiness of the plan sponsor and this eventually culminated on Friday in the form of FAQs.  The brief FAQ basically confirms two important points.  First, the PBGC will not assess 4062(e) liability against plans with 100 or fewer participants.  Second, in pursuing any 4062(e) enforcement action, the PBGC will consider the creditworthiness of the plan sponsor.  If the plan sponsor is sufficiently creditworthy, the PBGC will not assess 4062(e) liability and force the sponsor to fund the plan for the terminated participants.

While the guidance is helpful to many plan sponsors, it does not deal with the statutory expansion that the PBGC engaged in as part of its proposed regulations.  That said, the guidance is practical in some respects.  By not pursuing smaller plans and those of creditworthy sponsors, the PBGC is recognizing that, even under the statutory framework, it may not make sense in all circumstances to force a funding of a plan where the risk that the plan sponsor will turn the plan over to the PBGC is minimal.  This is responsive to some practitioner concerns that 4062(e) liability was being assessed in some circumstances where the plan in question posed little to no risk to the PBGC.

However, the enforcement position could backfire if it forces employers who are less financially stable to use their potentially dwindling assets to fund pension plans.  In doing so, it could increase the likelihood that those sponsors will subsequently fail and turn their plans over to the PBGC.  In some cases, those assets might have been better served to stay in the company and keep it afloat.  Therefore, the guidance creates a delicate balancing act where the PBGC has to choose whether the money is better served to stay with the sponsor or be put in the plan. While the PBGC may receive relief in the form of better-funded plans, it may also cause some plans to become the PBGC’s responsibility due to a plan sponsor failure that would not otherwise become so.  It remains to be seen whether this new enforcement approach creates a better or worse situation for plan sponsors and the PBGC.