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May 28, 2014
 
CLIENT ALERT
 
 

Threat of Federal Tax Liens Looms Over PBGC 4062(e) Downsizing Liability Cases

   
 

In recent years, many employers who have downsized or sold businesses have faced a PBGC demand for liability under ERISA Section 4062(e). The demand is typically for a portion—or in some cases all—of the full liability that would be incurred if the employer’s pension plan terminated, even though the plan remains ongoing with no intention to terminate it. Because that number is determined using PBGC’s conservative actuarial assumptions, it can be a shock—particularly when the downsizing event has had an immaterial or even positive impact on the financial strength of the employer and, thus, on the financial soundness of the plan.

There is now the potential for an even greater shock: according to PBGC, PBGC has the
authority—where an employer does not pay the PBGC-asserted downsizing liability amount by a PBGC-established deadline—to assert and perfect federal tax liens on all of the employer’s property, before any judicial determination that the downsizing liability even exists.

Statutory Background

On the books since 1974, Section 4062(e) provides for the imposition of liability in the event of certain cessations of operations that result in the separation from employment of more than
20 percent of the active participants in any one PBGC-covered pension plan established and maintained by the employer. Section 4062(e) liability is determined by treating the employer “as if he were a substantial employer” in a multiple-employer plan who incurs withdrawal liability under ERISA Section 4063.

Liability under both Section 4062(e) and Section 4063 may be satisfied by payment of 100 percent of the liability to PBGC, with PBGC holding the funds in escrow until five years after the event. Alternatively, PBGC may require the employer to furnish a bond in an amount of up to 150 percent of the liability. If the plan terminates in a distress or involuntary termination during the five-year period following the event, the escrowed funds or bond proceeds are treated as plan assets, subject to certain limits; otherwise, at the end of the five-year period, the liability is abated and the escrowed funds are refunded to the employer (without interest) or the bond is canceled.

PBGC Regulatory and Enforcement Background

Since PBGC’s 2006 issuance of a final rule providing a Section 4062(e) liability formula, the provision has become a centerpiece of PBGC’s enforcement efforts. In August 2010, PBGC published a comprehensive proposed rule regarding Section 4062(e) liability. The proposed rule took many expansive positions on the circumstances in which downsizing liability could be triggered, including many routine business events and transactions. For example, under the proposed rule, an employer may face 4062(e) liability where:

  • operations are simply transferred to another location;
  • only one of two or more operations at a facility ceases (or is transferred to another location), with the facility otherwise remaining open and fully operational;
  • operations are (or an operation is) temporarily suspended (e.g., to retool a factory or to repair it because of hurricane damage); or
  • the employer sells an ongoing business unit, with operations and employment continuing seamlessly with the buyer.

There were many public comments urging PBGC to reconsider various positions it had advanced in the proposed rule. PBGC subsequently announced that, in light of industry comments, it would reconsider its proposed 4062(e) rule. Then, in November 2012, PBGC announced that it was implementing a 4062(e) Enforcement Pilot Program, under which the agency would “generally” not enforce the liability against companies that were “financially sound,” or in small plan situations based on a 100-participant threshold. PBGC explained, however, that its “decision to take no action will be based on PBGC’s analysis of a company’s financial strength and the circumstances of the case,” and that “[i]f the company is no longer creditworthy during the five-year enforcement period, PBGC will enforce the 4062(e) liability.”

The liability amount, under PBGC’s 2006 final rule, equals the active headcount reduction percentage times the plan’s full plan termination underfunding as of the day after the cessation date, and thus can be surprisingly large in relation to the circumstances surrounding the triggering event. For example, assume that a plan with 10,000 total participants has been frozen for many years, and thus has only 400 active participants, 100 of whom work at a particular facility; that the employer has 20,000 employees in its overall workforce; and that the plan is fully funded on an ongoing minimum funding basis, but has $400 million in underfunding on a PBGC plan termination basis. If a 4062(e) “cessation” at the facility with 100 active plan participants results in the separation of all 100 of them, the 4062(e) liability is $100 million, even though the total liability for the 100 active participants who were separated is only (e.g.) $5 million, and even though the 100 affected active participants represent only 0.5% of the overall workforce of the employer responsible for funding the plan.

PBGC ordinarily seeks a negotiated resolution of the liability rather than the provision of an escrow or the posting of a bond. A typical settlement provides for additional contributions to the plan over a period of several years, coupled with an agreement not to create or increase the plan’s prefunding balance as a result of the additional contributions. Settlements may instead or also include a letter of credit, 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.

If a settlement is not reached, PBGC typically issues an initial liability determination that is subject to review by the PBGC Appeals Board. In each of its three decisions issued to date regarding 4062(e) liability, the Appeals Board has upheld the initial liability determination.

After the first Appeals Board decision affirming 4062(e) liability was issued in August 2011, PBGC sought to enforce the agency’s final determination by bringing a civil action under ERISA Section 4003(e), which empowers PBGC to seek relief in the appropriate United States district court. The case had been pending without decision when a settlement was reached that provided protection for the several months that remained in the five-year statutory period.

The second and third Appeals Board decisions affirming 4062(e) liability were issued on December 31, 2013. Subsequently, PBGC began to assert the position that liens for 4062(e) liability may arise on all of an employer’s property and that PBGC may perfect those liens.

ERISA Section 4068 Lien Threat

ERISA Section 4068 provides for a lien in favor of PBGC that arises on the termination date of a plan and that covers all property and rights to property, whether real or personal, belonging to the plan’s contributing sponsor and to each member of the contributing sponsor’s controlled group. Section 4068(c) provides that the lien “shall be treated in the same manner as a tax due and owing to the United States” for purposes of bankruptcy or insolvency proceedings. For the most part, rules governing the priority and perfection of 4068 liens are set forth in Section 6323 of the Internal Revenue Code.

According to PBGC, the termination lien provisions of Section 4068 apply to liability under Section 4062(e)—a liability that arises in the context of a plan that that is ongoing and that thus has no termination date—notwithstanding that (among other things) the termination lien arises only upon a plan’s termination date, and is subject to a net worth limit that is determined as of (or in some cases within 120 days before) a plan’s termination date. In brief, PBGC interprets the termination lien provisions of Section 4068, in the context of Section 4062(e) liability, as pointing to the Section 4062(e) cessation date rather than to the plan’s termination date. The PBGC’s position is difficult to reconcile not only with the plain language of the statute, but also with the plain language of PBGC’s implementing regulations.

Unfortunately—despite the many arguments against the PBGC position and even if the courts ultimately hold that 4068 liens are inapplicable to downsizing liability—PBGC’s mere threat of the assertion of a Section 4068 lien may have an adverse impact on an employer’s business. And in many cases an asserted or perfected PBGC lien would, among other consequences, likely:

  • trigger defaults under existing loan or other agreements;
  • adversely affect pending or future transactions;
  • result in SEC or financial statement disclosure requirements;
  • negatively impact credit ratings; and
  • cause current or perspective lenders, investors, customers, and suppliers to conclude that it is necessary to adjust their relationships with the employer based on increased financial risk.

Conclusion

Earlier this year, nearly four decades after the 1974 enactment of Section 4062(e), PBGC developed a new enforcement strategy that uses the threat of statutory liens to obtain a favorable settlement of disputed downsizing liability. The potential for that threat is present even in cases in which the purported 4062(e) event strengthened the employer or involved only a de minimis portion of the employer’s operations or employees. Regardless of the merits of PBGC’s position and of the likelihood that a court would uphold it, PBGC’s assertion of federal liens would ordinarily have a significant adverse impact on an employer’s business. This development makes it more important than ever that an employer faced with downsizing liability issues carefully analyze those issues and develop an effective strategy for addressing them as early as possible in the planning process.

Keightley & Ashner LLP represents many employers in connection with matters that may implicate ERISA Section 4062(e) downsizing liability provisions. Employers or their professional advisors who would like to discuss issues relating to downsizing liability may contact any of our professionals at 202-558-5150.

For further information, see "PBGC Announces 4062(e) Enforcement Pilot Program: Who Will Qualify for Relief?” by Harold J. Ashner and Deborah G. West (Pension & Benefits Daily, BNA, November 9, 2012); "Stealth Liability Lurks for Employers with Ongoing Pension Plans Who Downsize or Sell Businesses” by Harold J. Ashner (Pension & Benefits Reporter, BNA, September 10, 2010); "Downsizing Employers with Ongoing Pension Plans May Face an Immediate and Significant PBGC Liability” (Keightley & Ashner LLP Client Alert, February 18, 2009); "Beware of PBGC Downsizing Liability!” by Harold J. Ashner (Journal of Pension Benefits, Aspen Publishers, Inc., Spring 2008); and "PBGC’s Final Rule on Liability for Facility Shutdowns Affects Downsizing Employers” by Harold J. Ashner (Pension & Benefits Reporter, BNA, June 23, 2006).

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  © 2014 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.