Section 4026(e) of the Employee Retirement Income Security Act of 1974 (ERISA) requires that certain actions must be taken when a defined benefit plan experiences a substantial cessation of operations. If there is a cessation of a business operation and as a result more than 20 percent of the active participants in a defined benefit plan have separated from employment, an ERISA § 6042(e) event occurs. The employer is then required to deposit a calculated amount into an escrow account with the Pension Benefit Guaranty Corporation (PBGC) for five years or obtain a bond in favor of the PBGC for up to 150 percent of the amount for five years. The requirement to post this security is imposed even if there is no intent to terminate the defined benefit plan and even if the plan has satisfied all existing contribution requirements and would otherwise be viewed as well funded.

In recent years, the PBGC has greatly increased its use of ERISA § 4062(e) to obtain additional protections in situations where a substantial cessation of operations has occurred. The PBGC has proposed regulations defining some of the essential terms under the statute. The PBGC said it is proposing these regulations because of numerous inquiries they have received and in order to provide better guidance to plan sponsors. The proposed regulations greatly expand the number of situations in which a substantial cessation of operations would occur. Some comments have been filed with the PBGC indicating that the proposed regulations extend far beyond what is intended under ERISA § 4062(e) and would be disruptive to regular business operations. The PBGC recently indicated that it is extending to November 12, 2010, the period for receiving comments on the proposed regulations.

We will provide further updates when the PBGC takes additional action. In the meantime, sponsors of defined benefit plans that cease operations at a facility, sell subsidiaries, or otherwise reduce the number of active employees covered under a plan should review whether ERISA § 4062(e) may apply and whether notice needs to be given to the PBGC about a potential substantial succession of operations. (75 Fed. Reg. 48283)