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The battle over 4062(e) 'facility closure' liability

Michael Lane January 26, 2015

Reprinted with permission from Employee Benefit Review - January 2015

Employers who sponsor defined benefit plans, or who are involved in a corporate transaction involving defined benefit plans, should be aware of developments in Washington concerning Section 4062(e) of ERISA. The Pension Benefit Guarantee Corporation (PBGC), industry groups and Congress have locked horns in a saga that has seen proposed regulations, official changes in enforcement practice, an enforcement moratorium, and proposed legislation that has sailed through one house of Congress.


Section 4062(e) applies if an employer ceases operations at a facility in any location and more than 20 percent of the total number of the employer’s employees who are participants under a pension plan are separated from employment as a result (a “4062(e) event”). A plan sponsor is required to notify PBGC upon the occurrence of a 4062(e) event. When a 4062(e) event occurs, the employer becomes subject, by analogy, to liability under separate sections of ERISA that apply to withdrawal from or termination of a plan maintained by more than one employer. The statute is very unclear on how the sanctions prescribed by those sections might apply to a reduction in participants resulting from ceasing operations at a facility.

Perhaps because of the disconnect in applying provisions designed for multiple employer plans to a single employer plan, Section 4062(e) was not enforced by the PBGC for many years. However, the PBGC stepped up enforcement after promulgating regulations in 2006 on calculating liability under 4062(e). Under PBGC Reg. §4062.8, liability is computed by multiplying the plan’s total termination liability (determined using conservative PBGC assumptions) immediately after the date of cessation of operations by a fraction that is based on the percentage of covered employees separated as a result of the event. The liability is satisfied through payment of an escrow to the PBGC, or by furnishing a bond up to 150 percent of the liability amount. The escrowed amount is returned (or the bond is cancelled) if the plan does not terminate within five years. In practice, PBGC often would accept additional plan contributions in lieu of the escrow or bond.

The 2010 proposed regulations

The PBGC proposed further regulations under Section 4062(e) in 2010. The 2010 proposed regulations superseded all previous informal guidance under Section 4062(e) (primarily in the form of opinion letters). In addition, the 2010 proposed regulations defined terms such as “cessation,” “operation,” “result,” and “facility,” potentially broadening the scope of Section 4062(e). For example, the proposed regulations define an “operation” and “facility” as follows:

  • An operation is a set of activities that constitutes an organizationally, operationally, or functionally distinct unit of an employer. Whether a set of activities is an operation may depend on whether it is (or similar sets of activities are) so considered or treated in the relevant industry, in the employer's organizational structure or accounts, in relevant collective bargaining agreements, by the employer's employees or customers, or by the public.
  • The facility (or facility in any location) associated with an operation is the place or places where the operation is performed. A facility is typically a building or buildings. However, a facility may be or include any one or more enclosed or open areas or structures. The same facility may be associated with more than one operation.

Thus, under the proposed regulations, an employer may be faced with a 4062(e) event if it discontinues a distinct activity at a facility, even if the facility continues to house other substantial business activities.

For example, consider an employer with a defined benefit plan that has been frozen to new participants since 2000. The employer’s primary employment location is a single plant, where raw materials used in the employer’s product are processed and where the company’s product is manufactured and assembled. As a result of hiring and retirement patterns, employees in the raw materials business constitute more than 20 percent of the plan’s active participants, but only 5 percent of the overall employment at the plant. The employer decides to move its raw material processing to a lower cost location (perhaps overseas). The employer could face substantial facility closure liability under Section 4062(e), even though the plant continues to employ the vast majority of employees prior to the “event” and there is no reduction of the workforce or the business as a whole. The employer may be subject to 4062(e) liability even if the plan is fully funded on an ongoing basis, because of the conservative termination liability actuarial assumptions.

Industry groups (including the ERISA Industry Committee, the U.S. Chamber of Commerce, the American Benefits Council, the American Society of Pension Professionals & Actuaries, and the Financial Services Roundtable) provided numerous comments to the PBGC objecting to potential inequities that could result from the proposed regulations. The industry groups noted that prior guidance from PBGC exempted certain transactions (including certain asset transactions where the buying company assumes the pension plan and continues all operations of the seller), while no similar exemption would be automatically available under the proposed regulations. Further, the industry groups noted that there were no exceptions for transactions that posed little risk to the PBGC, such as events impacting well-funded plans or financially sound employers.

Reconsideration of proposed regulations

In May of 2011, in response to industry concerns and an executive order issued to all federal agencies regarding regulatory review, the PBGC announced that it would reconsider the 2010 proposed regulations. Nevertheless, PBGC continued enforcement actions under Section 4062(e). PBGC’s continued enforcement prompted a December 2011 letter from several industry groups questioning why PBGC would announce a reconsideration of the proposed regulations, while at the same time continuing an enforcement position based on those proposed regulations. The group, which included many of the same organizations that commented on the proposed regulations, called for a complete cessation of enforcement activity based on the proposed regulations.

In the fall of 2012, the PBGC formally announced a “pilot program” that would assist PBGC in determining how to revise the 2010 proposed regulations. Under the pilot program, small plans and strong companies would be exempted from 4062(e) enforcement. A small plan would include any plan with fewer than 100 participants. A strong company would include any company with unsecured debt ratings of at least Baa3 (Moody’s) and BBB- (S&P). The PBGC would look to other financial measures if the company’s debt was not rated. The strong company waiver was subject to PBGC discretion.

Although the relief was welcomed by the plan sponsor community, the pilot program did not address many of the major concerns raised by industry groups with respect to the proposed regulations. The pilot program did not address PBGC’s view of the circumstances in which 4062(e) liability would be imposed (such as the definition of “facility” or “operation”), nor did it exempt plans that are well funded on an ongoing basis.

The enforcement moratorium and beyond

In July of 2014, the PBGC announced a moratorium on all enforcement actions relating to Section 4062(e). The PBGC promised to work with industry groups and other stakeholders to “ensure that its efforts are targeted to cases where pensions are genuinely at risk.” The moratorium, which applies to active cases as well as future events, extends through the end of 2014. Employers are not exempted from the reporting requirements during the moratorium period.

In September of 2014, the U.S. Senate unanimously passed S. 2511, a bill sponsored by Senator Tom Harkin (D-IA) (retiring at the end of this session). The bill, which was introduced before the announcement of the PBGC moratorium, would substantially revise Section 4062(e) of ERISA. Highlights of the bill include:

  • Revising the circumstances that would be considered a Section 4062(e) event. Such an event would occur only if a permanent cessation of operations at a facility resulted in a workforce reduction of more than 15 percent of all employees participating in all defined benefit plans maintained by the employer (not just those covered by a specific plan).
  • Exemptions for certain domestic relocations and corporate sales. Employees replaced by the employer at another U.S. facility are not considered to be subject to a workforce reduction. Operations that continue in the U.S. following a corporate transaction are exempted if the buyer maintains the defined benefit plan following the sale.  
  • Exemptions for small plans and well-funded plans. Plans with fewer than 100 participants, or with a funding ratio of 90 percent or greater are exempted.
  • Satisfaction of liability over a seven-year period. Employers could elect to contribute 4062(e) liability to the plan over time. Future contributions would be waived if the plan reached a 90 percent funding ratio.

There are several special rules relating to lookback periods for prior separations, lodging facilities, and enforcement actions by the PBGC.

While the changes in S. 2511 would be viewed favorably by the employer community, it remains to be seen if the House of Representatives will take up the bill. The fact that the bill unanimously passed the Senate in the current political environment certainly bodes well. This will be one item to watch before the next Congress convenes.