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February 18, 2009

Downsizing Employers with Ongoing Pension Plans
May Face an Immediate and Significant PBGC Liability


The Pension Benefit Guaranty Corporation—relying on an obscure ERISA provision that had been largely ignored for decades—is aggressively pursuing liability against downsizing employers with ongoing pension plans. On the books since 1974, ERISA Section 4062(e) empowers PBGC to make an immediate demand that an employer provide an escrow payment or post a bond in the case of certain cessations of its operations that result in the separation from employment of more than 20 percent of its employees who are participants in its defined benefit pension plan. Until mid-2006, when PBGC issued a final rule that established a potentially workable liability formula under this provision, there was little effort on PBGC’s part to pursue this liability.

With the regulatory fix now firmly in place and with constant press reports of significant downsizings as employers grapple with an economy in turmoil by cutting back jobs or moving them overseas, this previously dormant provision has become a centerpiece of PBGC’s enforcement efforts:

  • According to PBGC’s 2008 Annual Report (at p. 23), in FY 2008 “PBGC negotiated five settlements that provide for additional pension contributions and other protections totaling $125 million, which will help to secure the benefits of over 13,000 participants.”

  • In a January 15, 2009, press release, Charles E.F. Millard, then PBGC’s Director, touted a recent (FY 2009) settlement for $55 million in additional protection as “an example of our continuing, aggressive efforts on behalf of workers and retirees in the pension plans we insure.”

  • A recent press report states that PBGC “is monitoring more than 1,100 companies” and has “roughly 50 active cases”; that PBGC’s use of this provision “is being kicked into high gear as the insurer is threatened by the possibility of millions in pension liabilities being added to its books”; that in the first quarter of FY 2009 (October through December of 2008), PBGC had “already secured $60 million worth of protections”; and that PBGC “is urging companies to come to it and negotiate changes to strained pension plans before plant closures.”

The statutory and regulatory framework sets forth what triggers Section 4062(e) liability, how the liability amount is to be determined, and how that liability is to be satisfied:

  • Liability trigger. Liability under Section 4062(e) is triggered when “an employer ceases operations at a facility in any location and, as a result of such cessation of operations, more than 20 percent of the total number of [its] employees who are participants under a plan established and maintained by [it] are separated from employment.”

  • Liability amount. Under PBGC’s regulation implementing Section 4062(e), the amount of the liability is the plan’s underfunding calculated (using conservative PBGC plan termination assumptions) as if the plan had terminated immediately after the cessation of operations multiplied by the percentage reduction in active participants. (Before PBGC’s regulatory fix, the liability under a literal reading of the statute was arguably 100 percent of the termination liability regardless of the percentage reduction in active participants.) For example, in the case of a plan that is underfunded by $200 million on a PBGC termination basis and that experiences a 25 percent reduction in active participants in connection with a Section 4062(e) event, the resulting liability amount is $50 million.

  • Methods of satisfying liability. Under the statute, PBGC can demand that the employer provide it with an escrow in the amount of the Section 4062(e) liability ($50 million in the above example) or purchase a bond for up to 150 percent of that amount ($75 million in the above example) to protect the pension plan in the event it terminates in a distress or involuntary (PBGC-initiated) termination within the next five years. If such a termination occurs, the escrowed funds or the bond proceeds are added to plan assets; otherwise, at end of the five year period, the escrowed funds are returned (but without any interest) or the bond is cancelled.

PBGC finds out about these events through PBGC filings (both under its reportable events regulation and under ERISA Section 4063(a)) and its “early warning”/”risk mitigation” program.
There are many intricacies, including a number of unresolved interpretive issues, relating to the assertion of liability pursuant to Section 4062(e).  To get a partial sense of the issues that may arise in various factual settings, consider the following sampling:

  • Applicability to “going concern” asset sales. Under what circumstances, if any, can Section 4062(e) liability be triggered by a “going concern” asset sale: (1) where operations “cease” with the seller but continue with the buyer; and (2) where, similarly, more than 20 percent of a plan’s active participants are “separated from employment” with the seller but continue in employment (seamlessly in a “same-desk” situation) with the buyer? PBGC issued several opinion letters in the late 1970s and early 1980s concluding that there was no Section 4062(e) event in the context of various “going concern” asset sales then presented to it for consideration. Nevertheless, PBGC clearly has not given up on its ability to pursue Section 4062(e) liability for “going concern” asset sales.

  • Applicability to stock sales. Even a stock sale might lead PBGC to take the position that a Section 4062(e) event has occurred, based on the argument that the term, “employer,” under the ERISA Title IV definition, means the entire controlled group maintaining the pension plan before the sale, not just the subsidiary being sold.

  • “Facility in any location.” Can two or more buildings that are near each other together constitute a single “facility in any location”? How about two or more buildings that are far apart but that together perform a single set of fully integrated operations? Can a single building house two or more separate “facilities” for purposes of Section 4062(e)?

  • “Operations.” Can Section 4062(e) liability be triggered where only one of two or more discrete sets of “operations” at a single “facility in any location” have ceased? What is the test for determining whether two or more activities together constitute a single set of “operations”?

  • “Cessation.” How complete does the “cessation” have to be? What if a very small percentage of the “operations” continue indefinitely? What is the effect of the completion of work in progress, possibly over an extended time period?

  • Timing. What is the date of a “cessation” that occurs gradually, or in stages, over a period of months or even years?

  • “Separation from employment” as “result” of cessation. What if, at or near the time of the cessation, an employee retires as planned or decides to accept a job offer from another employer—or dies? How about an employee who is laid off with recall rights? Or an employee who never worked at the facility where operations are ceasing but who is arguably separated from employment as a “result” of that cessation? Consider the complete cessation of all operations at a factory with a consequent reduction in employment levels at a warehouse that had been servicing the shuttered factory and that continues to service several ongoing factories.

When PBGC becomes aware of a situation that may constitute a Section 4062(e) event, it needs to decide whether and, if so, how to pursue the matter. A negotiation will likely ensue, with the statutory and regulatory framework providing nothing more than a starting point for PBGC and the employer as they try to craft an appropriate settlement in light of the many intricacies associated with a particular factual situation. Ideally, the settlement will strike an appropriate balance that protects the pension plan while recognizing the business needs of the employer. Options for addressing any agreed-upon Section 4062(e) liability amount may include (in lieu of an escrow payment or bond) a letter of credit, additional contributions coupled with a waiver of any resulting prefunding balances, a grant of security (not necessarily a first position), or a guarantee by a foreign member of the sponsor’s controlled group or by a non-controlled group member.

There are many costs that an employer contemplating a significant downsizing needs to take into account as part of the planning process. One of those costs, and in some cases the largest one by far, may be the Section 4062(e) liability. Developing a reliable estimate of the likelihood and magnitude of this liability is critical, as is evaluating whether careful planning may be able to minimize or even eliminate it.

Downsizing employers or their professional advisors who would like to discuss issues relating to Section 4062(e) liability may contact Harold Ashner ( or Jim Keightley ( at 202-558-5150.

For further information, see “PBGC’s Final Rule on Liability for Facility Shutdowns Affects Downsizing Employers" by Harold J. Ashner (Pension & Benefits Reporter, BNA, June 23, 2006) and “Beware of PBGC Downsizing Liability!” by Harold J. Ashner (Journal of Pension Benefits, Aspen Publishers, Inc., Spring 2008). __________________________________________________________________________________

  © 2009 Keightley & Ashner LLP. All Rights Reserved. This article is provided as a service for the firm’s clients and friends. It is designed solely for informational purposes, is not intended to constitute legal advice, and should not be acted upon with respect to any specific matter without professional counsel.