Author, Sam Choy, Atlanta, +1 404 572 4633, schoy@kslaw.com, and Emily Meyer, Atlanta, +1 404 572 4609, emeyer@kslaw.com.

The 2015 omnibus appropriations bill (the "Omnibus Bill"), signed by President Obama on December 16, 2014, made significant changes to the "substantial cessation of operations" rules (also known as the "plant shutdown" rules) under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). The plant shutdown rules permit the Pension Benefit Guaranty Corporation (the "PBGC") to require employers to make additional funding contributions to their defined benefit plans if a significant number of employees are terminated in connection with a cessation of operations at a facility. Under the revised rules, the determination of whether a cessation of operations is substantial is based on the proportion of employees eligible to participate in any ERISA pension plan within the controlled group, rather than the proportion of employees eligible to participate in a single defined benefit plan, whose employment terminates as a result of the cessation.

Background

Before the Omnibus Bill, a cessation of operations at a facility was deemed substantial if more than 20% of the employees participating in a defined benefit plan lost their jobs as a result. In the event of such a cessation, the PBGC could require the defined benefit plan sponsor to make an additional contribution to the plan equal to the plan's termination liability multiplied by the percentage reduction in active employee-participants in the plan caused by the substantial cessation of operations.

During the recent financial crisis, the PBGC was criticized for heavy-handed enforcement of, and failure to provide clear guidance with respect to, the plant shutdown rules. In October 2012, the PBGC announced that it would not impose liability if the affected plan had fewer than 100 participants (before the cessation of operations) or the affected company was "financially sound." The PBGC subsequently announced that it would suspend all enforcement of the rules from July 8, 2014 until the end of 2014.

New Liability Trigger

Under the revised plant shutdown rules, a cessation of operations is deemed substantial if it is permanent and results in a 15% reduction in the total number of employees eligible to participate in any ERISA pension plan (including defined contribution plans) maintained by a controlled group member. In counting the number of employees eligible to participate in controlled group pension plans, plan sponsors must include all employees whose separation from employment was "related to" the cessation and occurred during the previous three years as well as all employees who were employed immediately before the decision to implement the cessation. However, any employees who are replaced "within a reasonable period of time" (which is not defined) by U.S. citizens or residents working at a U.S. facility do not need to be included in this count. Also, the buyer in a stock or asset sale may exclude such replaced employees from the count if it sponsors "within a reasonable period of time" a defined benefit plan that includes the assets and liabilities attributable to the accrued benefits of such employees at the time of their separation from employment with the seller.

Installment Payment Contribution Option

The revised rules permit plan sponsors to satisfy their additional contribution obligations in annual installment payments over seven years, with each installment equal to 1/7 of the plan's unfunded vested benefits multiplied by the percentage reduction in active employee-participants in the plan caused by the substantial cessation of operations. However, each installment is capped at 25% of the plan's unfunded vested benefits less the minimum required contribution for the plan year. Because the amount of a plan's unfunded vested benefits is typically much lower than its unfunded termination liability, this new contribution option lowers plan sponsors' total maximum liability in addition to lengthening the payment schedule.

Exemptions

The Omnibus Bill added two new exemptions from liability under the plant shutdown rules:

• The PBGC may not impose liability with respect to a plan if it has fewer than 100 participants with accrued benefits on the valuation date for the preceding plan year or an asset value to funding target ratio of 90% or greater for the preceding plan year (and a plan sponsor's obligation to make additional contributions in installment payments ceases if the plan's asset value to funding target ratio rises above 90%); and
• The PBGC must waive liability if the affected company meets the creditworthiness standards announced in October 2012.

Considerations for Defined Benefit Plan Sponsors

The new plant shutdown rules are generally more favorable to defined benefit plan sponsors than the old rules. However, determining whether a cessation of operations is substantial is now somewhat more complicated because it requires a controlled group analysis and consideration of whether terminated employees may be replaced "within a reasonable period of time." Employers considering a cessation of operations, and parties to corporate transactions, should carefully consider the new requirements.