Proposed changes to ERISA section 4062(e)

Last month, the Senate passed a bill (S. 2511), which would significantly revise ERISA section 4062(e) (the House is expected to take up the bill after the November election). As interpreted and applied by the Pension Benefit Guaranty Corporation, ERISA section 4062(e) is one of those obscure ERISA provisions that can trigger unexpected liabilities at awkward times – such as the middle of a corporate transaction.

In this article we review 4062(e) and how it has recently been applied by PBGC and then discuss the proposed Congressional fix.

ERISA section 4062(e)

ERISA section 4062(e) reads as follows:

Treatment of substantial cessation of operations

If an employer ceases operations at a facility in any location and, as a result of such cessation of operations, more than 20 percent of the total number of his employees who are participants under a plan established and maintained by him are separated from employment, the employer shall be treated with respect to that plan as if he were a substantial employer under a plan under which more than one employer makes contributions and the provisions of sections 1363, 1364, and 1365 of this title shall apply. [The latter provisions generally impose termination liability on a “substantial employer” that withdraws from a multiple employer plan.]

The language is a little vague, but it is clear that under 4062(e), in some circumstances, a plant shutdown (aka “cessation of operations at a facility”) will trigger some sort of liability. The statutory description of how that liability is to be calculated (treating the employer “as if he were a substantial employer, etc.”) is, as PBGC has said, “impracticable.”

PBGC enforcement practice

The PBGC solved the problem of calculating 4062(e) liability in 2006 by adopting a rule that a sponsor’s liability under 4062(e) would be calculated as the plan’s total termination liability multiplied by a fraction (1) the numerator of which is the number of active participants separated from employment as a result of the cessation of operations and (2) the denominator of which is the total number of active participants.

The adoption of this rule marked a change in PBGC’s 4062(e) enforcement practice and seemed to unleash a flurry of 4062(e) enforcement actions. According to PBGC, “over the next three-and-a-half years [after 2006], PBGC resolved 37 cases under section 4062(e) through negotiated settlements valued at nearly $600 million, providing protection to over 65,000 participants.” More recently, PBGC officials stated that in fiscal year 2013, under 4062(e), it “negotiated settlements with 12 companies for $155 million to protect about 10,000 participants.”

Critics argue that, since 2006, PBGC has aggressively applied 4062(e) in situations to which it was not intended to apply, calculated the resultant liability in a way that was not intended and demanded a remedy that is not authorized by the statute. They identify the following issues with respect to PBGC 4062(e) enforcement practice:

PBGC treats transactions in which operations are continued by a new employer (e.g., facility relocations and facility sales) and certain temporary shutdowns as “cessations of operations” triggering liability.

Because 4062(e) liability is based on a plan’s total termination liability multiplied by the ratio of active participants terminated to total active participants, in cases where a sponsor maintains a frozen plan with significant liabilities but few active participants, the termination of a small number of those active participants can trigger huge 4062(e) liabilities.

Funded status and 4062(e) liabilities are calculated under (generally very conservative) PBGC termination liability rules rather than regular plan funding rules. So that even a plan that is fully funded under the “regular” funding rules may have significant 4062(e) liabilities.

Rather than applying the statutory remedy, PBGC has negotiated to require sponsors with a 4062(e) “problem” to make significant additional plan contributions.

In response to criticism of its 4062(e) enforcement policy, PBGC announced guidelines in 2012 under which it would not initiate 4062(e) enforcement if the affected company is “financially sound” pursuant to PBGC’s definition. More recently, in July 2014, PBGC announced a moratorium on enforcement of 4062(e) cases through the end of 2014. According to PBGC, “The moratorium will enable PBGC to ensure that its efforts are targeted to cases where pensions are genuinely at risk. The six-month period will also allow us to work with the business community, labor, and other stakeholders. … During the moratorium, from July 8 to December 31, 2014, PBGC will cease enforcement efforts on open and new cases. Companies should continue to report new 4062(e) events, but PBGC will take no action on those events during the moratorium.”

Congressional fix — S. 2511

The critics of PBGC 4062(e) enforcement policy have bipartisan Congressional support, and this year Senator Harkin (D-IA) and Senator Alexander (R-TN), the Chairman and Ranking Member, respectively, of the Senate Health, Education, Labor & Pensions (HELP) Committee, introduced a bill, S. 2511, that would, in effect, compel PBGC to change its approach by re-writing the statute. The HELP Committee, in executive session, approved (with modifications) that bill on July 23, 2014, and the full Senate passed the bill unanimously on September 16.

S. 2511 goes a long way towards addressing the issues that have been raised with respect to current 4062(e) enforcement policy.

Triggering event

Under S. 2511, 4062(e) is not triggered unless there is:

[A] permanent cessation of operations at a facility which results in a workforce reduction of a number of eligible employees at the facility equivalent to more than 15 percent of the number of all eligible employees of the employer ….

Two things to note about this proposed new definition of the 4062(e) triggering event. First, unlike current law (which simply identifies a “cessation”), under S. 2511 the cessation would have to be permanent.

Second, rather than, as under current law, a reduction in plan participants of 20%, S. 2511 requires a reduction of 15% in all eligible employees, including, e.g., employees who are not and never were covered by the plan. This solves the problem, under current 4062(e) enforcement policy, that a reduction in the small number of active participants in a frozen plan can trigger large liabilities.


S. 2511 includes a 3-year lookback provision. In determining whether there has been a 15% reduction, “any separation from employment of any eligible employee at the facility … which is related to the permanent cessation of operations of the employer at the facility, and occurs during the 3-year period preceding such cessation,” is generally taken into account.

Transfer of a facility

Under current 4062(e) enforcement policy, a transfer of a facility from one location to another, in conjunction with the termination of employment for some participants, may trigger 4062(e) enforcement. Under S. 2511, termination of a participant in connection with a facility transfer would not trigger 4062(e) so long as “within a reasonable period of time, the employee is replaced by the employer, at the same or another facility located in the United States, by an employee who is a citizen or resident of the United States.” The chance that 4062(e) would be triggered by a facility relocation is thus reduced.

Change of ownership

Under current 4062(e) enforcement policy, the sale of a facility may trigger 4062(e) enforcement. Under S. 2511, termination of a participant in connection with a facility sale would not trigger 4062(e) so long as the participant either continues in employment with the buyer or within a reasonable period of time “is replaced by the [buyer] by an employee who is a citizen or resident of the United States.” In addition, if a participant in a plan of the seller is either terminated or transferred to the buyer in connection with the sale, the assets and liabilities with respect to that participant under seller’s plan generally must be transferred to a plan of the buyer.

Exemption for well-funded plans

Under current 4062(e) enforcement policy, because of more conservative PBGC liability valuation rules, a sponsor can have 4062(e) liability even with respect to a plan that is, for regular plan funding purposes, well funded. S. 2511 provides an exemption from 4062(e) where a plan is at least 90% funded. For this purpose the plan’s funded percentage is determined based on the fair market value of plan assets and liabilities as determined under the variable-rate premium rules. Under those rules, liabilities are valued using a variation of the regular funding rules – spot (that is, 1-month) first, second and third segment rates for the month preceding the month in which the plan year begins and only taking into account vested benefits.

We expect that many plans that are well-funded based on ‘regular’ plan funding assumptions but that, on the basis of PBGC’s more conservative plan termination assumptions, would have significant 4062(e) liabilities, would be able to take advantage of this exemption.

Alternative method of satisfying liability

Under S. 2511, a sponsor with a 4062(e) event would be able to satisfy its ‘4062(e) obligations’ as in the past or, alternatively, elect to make additional contributions that (oversimplifying a lot) fund the plan’s shortfall attributable to the affected participants over 7 years.

Here’s the long version: Sponsors that elect the funding alternative would have to contribute, over 7 years, a yearly amount equal to:

(1) 1/7 of the plan’s unfunded vested liabilities (determined in the same way as they are determined in calculating the variable-rate premiums) times

(2) A “reduction fraction” equal to:

The number of participants with accrued benefits in the plan who were included in computing the work force reduction … as a result of the cessation of operations at the facility; divided by

The number of eligible employees of the employer who are participants with accrued benefits in the plan …

Note that, unlike the determination of the 15% reduction trigger, the reduction fraction denominator only includes participants in the relevant plan, not all eligible employees of the employer.

The required contribution is limited to the excess of:

25% of the difference between (1) the market value of the assets of the plan and the (2) funding target of the plan for the preceding plan year, over

The minimum contribution determined under the regular funding rules.

And, once the plan is 90% funded, no further contributions are required under this alternative, even if fewer than 7 years of installments have been made.

Effective date

S. 2511 would generally be effective with respect to events that occur on or after the day of enactment. But there are several additional rules that, in effect, provide for retroactive application:

Sponsors that had a 4062(e) event prior to enactment of S.2511 but did not enter into a settlement agreement with the PBGC before June 1, 2014 may apply the provisions of S.2511.

PBGC may not take any enforcement action inconsistent with S. 2511, even with respect to an event that occurred before enactment, unless that action is in connection with a settlement agreement in place before June 1, 2014.

PBGC may not initiate a new enforcement action inconsistent with its enforcement policy in effect on June 1, 2014. This rule seems to write into law PBGC’s current “financially sound” exemption from 4062(e) enforcement.

* * *

As noted at the beginning of this article, there is as we understand it a real possibility that S. 2511 could pass the House this year. If it does, it will go a long way towards stopping PBGC enforcement practice that has produced, for affected sponsors, significant and unexpected funding liabilities with respect to what are, in many cases, seemingly inconsequential events.

We will continue to follow this issue.