PBGC announces end of moratorium on enforcement of 4062(e) cases

The Pension Benefit Guaranty Corporation (PBGC) has announced that it is ending the six-month moratorium on the enforcement of 4062(e) cases that it announced in July 2014 (see Pension Plan Guide Newsletter, Report No. 2048, July 22, 2014). Now that Congress has addressed the cessations to which ERISA Sec. 4062(e) should apply and the amount and manner of satisfying the liability in the Consolidated and Further Continuing Appropriations Act, 2015 (P.L. 113-235), the PBGC has decided that there is no need to continue its enforcement moratorium.

Substantial cessation of operations

ERISA Sec. 4062(e) covers liability requirements when a single-employer plan is terminated in a distress termination or is terminated by the PBGC. Under ERISA Sec. 4062(e) prior to passage of the Consolidated and Further Continuing Appropriations Act, 2015, a company was required to report to the PBGC when it ceased operations at a facility and more than 20% of the workers participating in the pension plan lost their jobs. The PBGC required such a company to provide financial security to protect the plan, typically by making additional contributions to the plan or by providing a financial guarantee. The requirement to provide financial security had been enforced regardless of the size of the plan or the financial health of the sponsoring company.

In 2012, the PBGC began targeting its 4062(e) enforcement, focusing on those cases where there was real risk of substantial plan failure (see Pension Plan Guide Newsletter, Report No. 1965, November 12, 2012). This change exempted more than 90% of plan sponsors from 4062(e) enforcement, including cases where the plan had fewer than 100 participants or the employer was financially sound. Despite these changes, some businesses reported uncertainty about whether and how the PBGC enforced the law and companies raised objections about specific cases. When the PBGC announced the moratorium, it said that it would use the moratorium to consider further targeting and to work with plan sponsors to minimize effects on necessary business activities. Thus, during the moratorium, from July 8 to December 31, 2014, the PBGC ceased enforcement efforts on open and new cases. However, companies were required to continue to report new 4062(e) events.

Congress amends ERISA Sec. 4062(e)

The PBGC explains that Congress has largely rewritten ERISA Sec. 4062(e), and that it is examining the provisions of the new law and will provide further guidance and information as that effort continues. The PBGC notes that the amendments are complex, but highlights in a simplified description some of the major changes:

  1. Small-plan exemption. Plans with fewer than 100 participants are exempt from section 4062(e) (consistent with PBGC’s 2012 enforcement policy).
  2. Exemption for plans better than 90% funded. Plans that were 90% or better funded in the plan year before the cessation occurred are also exempt. The funded level is measured by comparing the plan’s assets to the plan’s unfunded vested benefits, as determined for purposes of paying PBGC premiums.
  3. Liability trigger if no exemption applies. Upon a permanent cessation of operations at a facility, liability is triggered if the cessation results in more than a 15% reduction in the total number of employees eligible to participate in any employee pension plan, including a 401(k) plan, maintained by members of the controlled group. (This replaces the old trigger based on a 20% reduction in the number of active participants in the affected defined benefit plan.)
  4. New way of satisfying liability if no exemption applies and the cessation meets the 15% trigger. The employer has a new, additional way of satisfying the 4062(e) liability that will usually be less expensive. It may contribute to the plan, in seven annual installments, an amount equal to 1/7 of the unfunded vested benefits (as measured for premium purposes) times the percentage reduction in active participants. The annual installments are also capped at an amount designed to limit the amount by which the 4062(e) additional contribution will increase the plan’s minimum funding contributions. Furthermore, the annual installments cease entirely if in any year the plan becomes 90% funded for unfunded vested benefits (as measured for premium purposes), even if the plan later falls below the 90% level.
  5. Cessations to which the new rules apply. The new rules apply to cessations of operations occurring on or after December 16, 2014. In addition, PBGC must apply the new rules to prior cessations, except where a settlement agreement was entered into before June 1, 2014.
  6. PBGC’s enforcement policy continued. For both past and future cessations, PBGC must apply its prior enforcement policy. This means that PBGC will not enforce ERISA Sec. 4062(e) against companies that are financially sound (except, again, in cases of a pre-June 1, 2014 settlement).
  7. Reporting requirements. If a plan is exempt under the fewer-than-100-participants rule or the 90%-funded rule, no reporting of a cessation of operations is required. Otherwise, the employer must report the event to PBGC if the 15% reduction described above is triggered.

The PBGC emphasizes that the above is only a simplified description of some of the law changes. The above description does not constitute its official interpretation of the new law, which the PBGC continues to review. The PBGC states that employers that had or have a cessation of operations on or after December 16, 2014, that is not exempt and that meets the 15% reduction trigger described above, should report the event to the PBGC. In addition, employers that had a cessation before that date should report it to the PBGC, if they have not already done so. The PBGC may be contacting employers that previously reported a cessation for additional information to determine whether and how the new rules apply to that event.

Source: PBGC Announcement, January 22, 2015.

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