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[author: Scott V. Wagner]
Executive Summary: The Pension Benefit Guaranty Corporation ("PBGC") has adopted a new pilot program to enforce section 4062(e) of the Employee Retirement Income Security Act ("ERISA") that targets at-risk pension plans. The change comes in response to President Obama's Executive Order No. 13563, which asked federal agencies to review existing and pending regulations for possible modification or elimination.
Under ERISA 4062(e), if more than 20% of the active participants of a defined benefit pension plan are separated from employment as a result of the cessation of operations at a facility, the employer becomes statutorily liable for that portion of the plan's unfunded benefit liability, calculated using PBGC's interest rates.
To satisfy the liability resulting from an ERISA 4062(e) event, the plan sponsor must contribute the total liability to an escrow account, or post of a bond or a letter of credit for up to 150% of the total liability. If the plan terminates within five years of the ERISA 4062(e) event, the amount escrowed or realized on the bond is contributed to the plan. If the plan does not terminate within five years, the funds, less any interest, are returned to the plan sponsor.
Commonly, PBGC will allow plan sponsors to satisfy ERISA 4062(e) liability by providing adequate protection to plan participants in lieu of requiring an escrow or a bond. For instance, PBGC may agree to additional cash contributions to the pension plan and an agreement by the plan sponsor to not elect a pre-funding balance for a subsequent plan year.
ERISA 4062(e) liability can be a trap for the unwary. Previously, PBGC has argued that a "cessation event" can arise from a plant closure; from discontinuing specific operations at a facility, such as shipping operations; or even from an asset sale.
Rather than applying a one-size-fits-all approach, PBGC's pilot program enforces ERISA 4062(e) only where pension plans are at risk. To determine whether a pension plan is at-risk, PBGC plans to rely on existing industry measures, such as credit ratings, credit scores, indebtedness, liquidity, and profitability. If a company is creditworthy, and there are no other indicators of financial weakness or other risks, PBGC has stated that it will take no action.
All employers, regardless of credit rating, that experience an ERISA 4062(e) event must still report the event to PBGC within 60 days. Failing to report an ERISA 4062(e) event can result in penalties of up to $1,100 per day if the delinquency causes substantial harm.
Ford & Harrison's employee benefits team has experience in handling ERISA 4062(e) and similar PBGC issues, and can help guide you and your plan through this process. If you have any questions about this Legal Alert, please contact the author, Scott Wagner at firstname.lastname@example.org or 404-888-3864, any member of FordHarrison's Employee Benefits Practice Group, or the FordHarrison attorney with whom you usually work.
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