Are You Selling Or Downsizing A U.S. Business? Plant Closing Liability Relief May Be Coming

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A long overlooked and long unenforced provision of ERISA sometimes referred to as the “plant closing rule” has caused a stir in recent years as the U.S. Pension Benefit Guaranty Corporation (PBGC) began aggressively pursuing defined benefit plan sponsors to enforce it.

Section 4062(e) has been in ERISA since it was enacted. It was intended to protect the PBGC and the plan if a defined benefit plan sponsor terminated an underfunded plan within five years of a “substantial cessation of operations” at a facility, resulting in termination of the employment of at least 20% of plan participants. Essentially, it was to cover situations in which the plant closing signaled a deterioration of the plan sponsor’s financial condition that might place a plan in jeopardy. However, the PBGC has interpreted this provision broadly so that it potentially impacts insignificant reductions in force, shutdown of facilities for repairs, transfers of operations and even sales of ongoing businesses where the employees continue to work at their pre-sale jobs.

Owners of U.S. businesses with ongoing defined benefit plans could be required to secure the full amount of termination liability if there is a “4062(e) event”, and they ignore this liability exposure at their peril. Apart from the direct financial impact, acquisition agreements today typically contain representations that there is no existing or anticipated 4062(e) liability, and no PBGC liens exist. An untrue representation may trigger purchaser indemnification under the agreement. Credit agreements may have similar representations and default events triggered by PBGC liability, and even in the absence of credit agreements, 4062(e) liability may affect a business’ credit rating. PBGC liability is imposed on the entire controlled group, not just the U.S. plan sponsor, so affiliates of U.S. companies that have had “4062(e) events” located outside the U.S., such as Canadian parent companies, might also be pursued by the PBGC.

What Happens If There Is a 4062(e) Event?

The technical rules provide that the plan sponsor must put an amount in escrow or purchase a bond for 150% of the potential termination liability for a five year period, with liability calculated using unfavorable PBGC assumptions. In the event that the plan does not terminate within five years, the escrow is returned without interest and the bond may be cancelled. As originally proposed by the PBGC, this security requirement affected financially sound as well as financially weak employers, though that was modified by later PBGC enforcement policies. However, in practice, the PBGC has used the prospect of escrow/bond requirements as leverage to negotiate for additional plan contributions.

If the plan sponsor cannot reach an agreement with or ignores the PBGC, the PBGC has reportedly even taken the position that it has a lien on all of the employer’s property under Section 4068 of ERISA for unpaid 4062(e) liability. This would give the lien the status of a federal tax lien in bankruptcy, though the statutory basis for this position appears questionable.

Relief on the Horizon?

In response to vociferous complaints from businesses about the aggressive enforcement positions taken by the PBGC, two recent developments may provide relief to plan sponsors.

PBGC Enforcement Moratorium

On July 8, the PBGC announced a moratorium on enforcement of Section 4062(e) through December 31, 2014. The intent is to allow the PBGC to better target its enforcement efforts to focus on risky plans. Plan sponsors are still required to report Section 4062(e) events to the PBGC, and we do not know whether the moratorium will be extended.

Pending Legislation

On July 23, the Senate Health, Education, Labor and Pensions (HELP) Committee approved by bipartisan vote a bill (S. 2511) amending the procedures under Section 4062(e) to limit the situations in which liability may be imposed. The changes that would become law if S. 2511 is enacted include a requirement that cessation of operations at a facility must be permanent before Section 4062(e) can apply, and measuring the necessary workforce reduction by reference to whether at least 15% of eligible participants at all facilities in the controlled group have been terminated. S. 2511 would also alter the rules to reduce employer liability if there is a Section 4062(e) event.

Defined benefit plan sponsors, their controlled group members and industry groups should make their views about the need for these changes known, and keep up the pressure for more rational rules under Section 4062(e).

Topics:  Canada, Cross-Border, Employee Benefits, ERISA, PBGC, Pensions

Published In: General Business Updates, Finance & Banking Updates, Labor & Employment Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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