On August 10, 2010, the PBGC proposed new regulations under Section 4062(e) of the Employee Retirement Income Security Act of 1974 (“ERISA”). ERISA Section 4062(e) provides for reporting of, and liability for, certain substantial cessations of operations by employers that maintain single-employer pension plans. The proposed regulations would amend current regulations and clarify key terms and expand rules for reporting and calculating liability by creating a new “Subpart B” to address the applicability and enforcement of Section 4062(e).
Section 4062(e) provides that when an employer ceases operations at a facility, and as a result of such cessation, more than 20% of the employees who are participants in a plan established and maintained by the employer are separated from employment (called a “Section 4062(e) Event”), the employer becomes subject to notice requirements and potential liability similar to those imposed on employers that have withdrawn from a “multiple employer plan.” Such requirements include notifying the Pension Benefit Guaranty Corporation (“PBGC”) within 60 days of an employer’s withdrawal, and making the withdrawing employer responsible for providing a bond or establishing an escrow in a specified amount for five years thereafter, which would be applied to the plan’s underfunding, if the plan terminated during that five-year period.
On June 16, 2006, the PBGC promulgated interim final rules which clarified the formula to compute the amount of liability (and hence, the amount required to be provided by a bond or in escrow) when there is a Section 4062(e) Event. However, the 2006 regulations did not provide guidance on the statutory terms used to describe when a Section 4062(e) occurs, nor did they provide guidance on the kinds of events to which Section 4062(e) applies. The new regulations provide guidance on both of these issues. By proposing to add the new Subpart B to the existing regulations under Section 4062, the PBGC has stated that it intends to reduce uncertainty about
its interpretation of Section 4062(e), encourage self-reporting of events, and permit more rapid resolution of cases.
Determining Whether a “Section 4062(e) Event” Has Occurred
Subpart B describes a Section 4062(e) Event as occurring when:
- an employer ceases an operation at a facility in any location; and
- as a result, the number of participants in the employer’s plan who are separated from employment (the “affected participants”) is more than 20% of the active participant base associated with the cessation.
Subpart B provides that the determination of whether a Section 4062(e) Event has occurred applies separately to each of the employer’s plans and is made without regard the plan’s funded status. A Section 4062(e) Event can include corporate reorganizations that involve relocating or selling an operation, or changing the type of work performed at a facility, in addition to an actual facility shutdown. Further, freezing a plan does not make an employer immune from Section 4062(e).
Insight. Because Subpart B requires the determination to be made without considering whether the transaction poses a risk to the pension plan, and further, because a Section 4062(e) Event can include transactions that would likely not bring about a plan termination, it is possible that an employer could be subject to the notice and bond/escrow requirements, even though the transaction that has been labeled a “Section 4062(e) Event” might actually result in an improvement in the plan’s funded status (e.g., where the acquiring company is in a better position to make contributions to the plan than the selling company previously was).
Definitions of Key Terms
Subpart B attempts to provide guidance on whether and when a Section 4062(e) Event has occurred by explaining each of the Section’s key terms, such as “operation,” “facility,” “cease,” “separate,” and “result,” and by adding a new term, “active participant base.” Subpart B’s explanations of these terms are discussed below.
Cessation of an operation at a facility. As mentioned above, in order to be considered a Section 4062(e) Event, an employer must “cease” an “operation” at a “facility” in any location.
- Operation is a set of activities that constitutes an organizationally, operationally, or functionally distinct unit of an employer.
- Facility is the place (e.g., a building) where an operation is performed. A facility may be associated with more than one operation.
Insight. Some commenters have noted that Subpart B’s use of the term “operation,” rather than Section 4062(e)’s term “operations,” indicates an expansion of the PBGC’s enforcement powers, as ceasing “operations” at a facility would generally require a shutdown of the entire facility. For example, where an employer has two manufacturing operations in the same facility and the employer ceases one of the manufacturing operations, the cessation of that one operation would cause the cessation to come under Section 4062(e)’s scope, even though the employer continues to maintain other operations at the facility.
- Cessation occurs when there is a determination that the employer has discontinued all significant activity in furtherance of the purpose of an operation. Subpart B distinguishes “involuntary” cessations from “voluntary” cessations for purposes of characterizing a discontinuance as a Section 4062(e) cessation, as follows:
- “Involuntary Cessation” results from an employee action (such as a strike or sickout) or a sudden and unanticipated event (such as a natural disaster), and occurs on the earlier of (i) the date the employee action ends, or 30 days after the operation was discontinued due to a sudden and unanticipated event, or (ii) the date the employer decides not to resume significant activity at the facility in furtherance of the purpose of the operation. An involuntary cessation will not occur if significant activities resume at the facility within a week after the employee action ends, or within 30 days after activities stopped because of the sudden and unanticipated event.
- “Voluntary Cessation” refers to any discontinuance that is not an “involuntary cessation,” including, for example, an employer’s discontinuance of activity in response to an economic downturn.
Subpart B clarifies that cessation of an operation is determined without regard to “follow-on operations,” such as whether the operation is continued or resumes at another facility, or at the same facility by another employer, or when a different operation is undertaken instead of the discontinued operation. In addition, the continuance of insignificant activity in furtherance of the operation’s purpose (such as sales of left-over inventory after discontinuance of manufacturing) or any activity that does not further an operation’s purpose (such as maintenance and security activities) would be disregarded.
Cessation results in the separation of more than 20% of the active participant base. A cessation of an operation at a facility in a location will only be considered a Section 4062(e) Event if, as a “result” of such cessation, more than 20% of the total number of the employer’s employees who are participants under the affected plan are “separated” from employment. Subpart B’s explanations of these terms are discussed below.
- Separation happens when an employee participant discontinues the active performance of activities in furtherance of any of the employer’s operations, unless it is reasonably certain that the participant will resume such active work for the employer within 30 days (such as a two-week holiday shutdown).
Insight. Subpart B notes that its discussion of separation is “couched in terms of the employment relationship between the employer and the employee.” Therefore, the “separation” requirement would not be met where employees are transferred to a different operation or facility of the same employer, even if they accrued no further benefits under the plan as a result of such transfer, but the “separation” requirement would be met where a ceased operation is continued or resumed by a new employer, even if the same employees continue to work at the operation thereafter.
- Result - An employee’s separation “results” from the cessation of an operation at a facility if his or her separation would not have happened when it did, had the cessation not occurred. Whether a separation occurs before, on, or after the cessation is not determinative of whether the separation is the “result” of the separation, since oftentimes an operation does not cease instantaneously. Further, the separation may “result” from a cessation even if the participant’s employment has been in another operation or facility of the employer, such as when an employer’s cessation of a fabrication operation reduces demand for the employer’s assembly operation, requiring layoffs that would “result” from the cessation of the fabrication operation.
Given the inherent difficulty in trying to make a determination as to whether an employee’s separation “results” from a cessation (such as ascertaining an employee’s motivation for his or her voluntary separation), Subpart B provides four “presumptions” that should be applied, any of which could be rebutted by appropriate evidence.
- Voluntary Cessation -
- If an employee is employed in an operation at a facility, and involuntarily separates from employment on or after the date when the employer decides to cease the operation at the facility, the employee is presumed to have separated from employment as a result of the cessation.
- If an employee in an operation at a facility voluntarily separates from employment after the earliest date that the employer’s decision to cease the operation at the facility becomes known to the employee, employees generally, or the public, the separation is presumed to result from the cessation.
- Involuntary Cessation - If a cessation is involuntary, and an employee in the operation voluntarily or involuntarily separates from employment on or after the date of the event that caused such cessation, the separation is presumed to result from the cessation.
- New Employer - If an employee employed in an operation becomes employed by a new employer who continues or resumes the operation, the employee is presumed to have separated from employment with the original employer as a result of the cessation.
- Active participant base - Because a Section 4062(e) Event only occurs if more than 20% of the total number of employees who are participants under the affected plan are separated from employment as a result of the cessation of an operation, to determine if the required 20% threshold has been met, the base number of participants must be measured against the number of separated employees. Subpart B defines this base number as the “active participant base.” In a voluntary cessation, the active participant base is determined as of immediately before the employer’s decision to cease the operation. In an involuntary cessation, the active participant base is determined as of immediately before the event that caused the cessation.
Reporting and Penalties
Once a Section 4062(e) Event has occurred, the plan administrator must notify the PBGC within 60 days of the later of the cessation date or the date on which the 20% threshold discussed above is met. For purposes of deciding (i) whether notice of a Section 4062(e) is required, (ii) the due date for the notice, and (iii) the number of affected participants to be reported on the notice, the plan administrator is permitted to disregard affected participants who were not employed at the facility associated with the affected operation. Filing the notice constitutes a request for the PBGC to calculate Section 4062(e) liability with respect to the event.
Insight. Because the determination of a Section 4062(e) Event is based on both timing and headcount factors, particular attention should be given to restructuring activities that are conducted in phases in order to properly track the cessation date, plan participation data, and notice deadline.
Employers failing to timely notify the PBGC could be assessed penalties of as much as $1,100 per day. Although the PBGC generally assesses much lower penalties for reporting failures ($25 per day for the first 90 days and $50 per day thereafter), the preamble to the proposed regulations notes that the PBGC expects to impose higher penalties for Section 4062(e) reporting failures, due to the likelihood for substantial harm to participants.
Section 4062(e) Liability and Security
The PBGC’s 2006 interim final rules provided guidance on the calculation of Section 4062(e) liability, which remain essentially unchanged by Subpart B. Specifically, the liability is determined by multiplying the unfunded plan termination liability as of the date of cessation, determined using PBGC assumptions, multiplied by the ratio of affected participants to the active participant base. Any changes in the plan’s assets or benefit liabilities after the cessation date are disregarded for purposes of the liability calculation.
Insight. For plans with large unfunded liabilities due to benefits owed to retirees and deferred vested participants, this calculation method could result in a determination of Section 4062(e) liability that is greater than the actual pension benefit liabilities of affected participants.
In general, liability for a Section 4062(e) Event must be satisfied either by (i) paying the liability amount into an escrow account, or (ii) furnishing a bond in an amount not exceeding 150% of the liability, for five years from the date of the Section 4062(e) Event, to be used toward the payment of termination liability, if any, if the pension plan terminates during that five year period. However, the PBGC may make other arrangements for satisfying the liability, such as (i) requiring the employer to make one or more additional plan funding contributions that would not be added to the plan’s prefunding balance, or (ii) where a new employer continues or resumes the affected operations and employs the original employer’s workers, considering the original employer’s liability satisfied by the new employer’s adoption of the original employer’s plan. Subpart B also authorizes the PBGC to grant waivers where warranted by the circumstances.
Insight. The benefit to the PBGC of requiring liability for a Section 4062(e) Event to be held in a bond or escrow is that, if the plan sponsor files for bankruptcy within five years of the Section 4062(e) Event, the PBGC’s insurance fund will generally get preferential creditor status, potentially increasing its entitlement to the bankrupt plan sponsor’s assets. The drawback to the plan sponsor, of course, is that no matter its financial condition, it must tie up cash or credit capacity for five years to comply with Section 4062(e)’s requirements.
Recordkeeping and Deadline for Comments
The proposed regulations require plan sponsors and administrators to keep all records regarding potential (and actual) Section 4062(e) Events that tend to show whether a Section 4062(e) Event in fact occurred and if so, how much the resulting liability is, for five years from the date of the potential Section 4062(e) Event. If the PBGC finds that a plan sponsor or administrator has failed to retain sufficient records, the PBGC may make its own determination, on the basis of reasonable assumptions, as to whether a Section 4062(e) Event occurred and the amount of associated liability.
The preamble to the proposed regulations also makes clear that there are no exceptions to Section 4062(e)’s reporting and liability obligations for small plans, well-funded plans or plans undergoing a standard termination (out of a concern that the termination process might not be completed). However, the PBGC might not pursue Section 4062(e) liability when a standard termination is in process and, if the plan is closed out before the Section 4062(e) notice deadline, generally would not enforce the notice requirement.
Notwithstanding the new reporting requirements, the PBGC expects to continue its Section 4062(e) investigatory activity. The regulations apply prospectively to Section 4062(e) Events triggered by cessations of operations occurring on or after the regulations’ effective date, and displace and supersede all of PBGC’s prior opinion letters addressing Section 4062(e). The PBGC extended the period during which it will accept comments on the proposed regulations until November 12, 2010 (the original comment period ended on October 12, 2010).
Things to consider
As a result of recent economic events, many pension plans have large unfunded liabilities on a plan termination basis. Since a Section 4062(e) liability assessment could be costly, pension plan sponsors considering downsizing or relocating operations and/or facilities should (i) become familiar with the proposed regulations, (ii) set up procedures for tracking key dates and participant counts and (iii) establish a five-year record retention system for information on discontinued operations. In some cases it may be worthwhile to explore strategies to avoid a Section 4062(e) Event or reduce Section 4062(e) liability, such as through a plan merger or transfer of participants to other operations or facilities within the controlled group.