ERISA section 4062(e) addresses situations in which an employer ceases operations at a facility in any location and, as a result, separates more than 20% of its employees who participate in the employer’s defined benefit plan. If a 4062(e) event occurs, the employer is subject to a liability that equals the plan’s unfunded benefit liabilities (measured on a termination basis) at the time of the event times the percentage reduction in active plan participants. The liability is meant to provide financial protection for the plan if it terminates in a distress or involuntary termination within five years after the 4062(e) event. Employers and practitioners have been particularly concerned about these provisions over the last several years because the Pension Benefit Guaranty Corporation (or PBGC), which enforces this requirement, has taken an extremely expansive view of what constitutes a section 4062(e) event.
Last fall, the PBGC introduced a 4062(e) Enforcement Pilot Program under which the PBGC would not enforce 4062(e) liability against “creditworthy companies” or “small plans with 100 participants or less.” Although this was welcome news, reaction was tempered in part because it was unclear how the PBGC determined whether a company was “creditworthy.”
Recently, the PBGC posted on its web site (http://www.pbgc.gov/Documents/4062(e)-enforcement-of-guidelines.pdf) the guidelines it uses to determine whether a company is “creditworthy.” The posting states that the PBGC generally considers a company creditworthy if:
- The company has unsecured debt-equivalent ratings from both Moody’s and S&P, and the ratings are at least Baa3 by Moody’s and BBB- by S&P;
The company is rated by only one of those agencies, and the rating is at least Baa3 or BBB-; or (III) The company is rated by neither of those agencies, and:
- The company has a D&B Financial Stress Score of 1477 or higher; and
- The company’s secured debt (disregarding debt incurred to purchase real estate or equipment) does not exceed 10 percent of its asset value.
Creditworthy companies under existing section 4062(e) settlement agreements should consider contacting the PBGC and seeking a suspension of their obligations under the agreements. Companies involved in active section 4062(e) negotiations with the PBGC or contemplating transactions or other actions that may give rise to section 4062(e) liability should also carefully review the creditworthiness guidelines.