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Guest Article

(From the August 16, 2010 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

PBGC Proposes Rule Clarifying When "Substantial Cessation of Operations" Occurs For Single Employer Plans

Faced with several cases and numerous inquiries over the past few years regarding when an employer who maintains a single-employer plan has a cessation of operations involving more than 20 percent of its employees - thereby triggering the application of ERISA § 4062(e) that imposes notice and "withdrawal" liability on the employer - the Pension Benefit Guaranty Corporation (PBGC) is proposing rules to clarify how § 4062(e) operates.

Impact of a Substantial Cessation of Operations

The proposed regulations will create a new subpart B of the PBGC regulations on Liability for Termination of Single-Employer Plans to focus on ERISA § 4062(e), which provides:

If 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 his employees who are participants under a plan established and maintained by him are separated from employment, the employer shall be treated with respect to that plan as if he were a substantial employer under a plan under which more than one employer makes contributions and the provisions of 4063, 4064, and 4065 shall apply.

If ERISA § 4062(e) is triggered, among other things, the plan administrator must notify the PBGC within 60 days of the event and the employer must provide a bond or escrow for a period of five years that will be applied against the plan's underfunding if the plan terminates during that period. The PBGC can agree to arrangements other than a bond or escrow to satisfy the employer's liability.

PBGC regulations were issued in 2006 to provide the formula for determining the employer's liability as a result of a substantial cessation of operations under ERISA § 4062(e). The formula multiplies the plan termination liability by a fraction based on the number of participants affected by the cessation of operations. During the three years following the release of the 2006 regulations, the PBGC reports that it resolved 37 cases and regularly receives requests for interpretive guidance regarding ERISA § 4062(e).

The proposed regulations address this need for greater clarity regarding the operation of ERISA § 4062(e). The regulations focus on the applicability of ERISA § 4062(e) - that is, when a "§ 4062(e) event" occurs - by explaining each of the key terms in the statute. The regulations also focus on the enforcement of ERISA § 4062(e) by providing rules for notifying the PBGC of an event, explaining how the employer's liability is calculated and satisfied, and requiring the preservation of records concerning events that may constitute § 4062(e) events.

Identifying When a § 4062(e) Event Occurs

To enable employers and their pension professionals to determine whether a § 4062(e) event has occurred the regulations define the statute's key terms, including the following:

§ 4062(e) Event: Whether a § 4062(e) event has occurred is determined on an individual plan by-plan basis, and regardless of whether the event appears to pose a financial risk to the plan, the plan participants, or the PBGC. (However, the PBGC may consider the level of financial risk posed in making arrangements to satisfy the employer's liability.)
Operation: An "operation" refers to a set of activities that constitutes an organizationally, operationally or functionally distinct unit of the employer. Whether a set of activities constitutes an operation may depend on whether they are considered such in the industry, in the employer's organizational structure, in the collective bargaining agreements, by the employees or customers, or by the public.
Facility: A "facility" associated with an operation is the place or places where the operation is performed - typically a building or buildings. A facility can be associated with one or more operations.
Cessation: Different rules apply in determining whether an employer has ceased operations at a facility, depending on whether the cessation is voluntary or involuntary.
- In the case of an involuntary cessation (i.e., cessation caused by events outside the control of the employer) two rules apply. If the cessation is caused by employee action (e.g., a strike), the employer is considered to cease operations on the date the employee action ends (unless the employer resumes "significant activity" at the facility in furtherance of the operation within one week after that date) - or, if earlier, the date the employer decides not to resume significant activity. If the cessation is not caused by employee action (e.g., natural disaster), the employer is considered to cease operation on the date that is 30 days after the discontinuance (unless the employer has resumed "significant activity" at the facility in furtherance of the operation by that date) - or, if earlier, the date the employer decides not to resume significant activity.
- Cases that are not involuntary are voluntary. In voluntary cases, an employer ceases an operation at a facility when it discontinues all significant activity at that facility in furtherance of the purpose of the operation. (An employer might cease an operation at a facility even though insignificant activity at the facility in furtherance of the operation continues. For example, the continued processing of materials on hand would typically constitute significant activity in furtherance of an operation, but conducting desultory sales of left-over inventory would typically not.)
Follow-on operations are disregarded in determining whether a cessation has occurred. For example, a cessation is deemed to occur regardless of whether the operation is continued or resumed at another facility or by another employer, or whether a different operation is undertaken. As explained in the Preambles, a § 062(e) event is concerned with the cessation of one operation and the effect of that cessation on the employment of participants in the affected plan. Undertaking a second operation does not nullify the discontinuance of the first operation or the impact of that discontinuance on the participants (although, if enough participants are retained to avoid a drop of more than 20 percent in the active participant count, there would be no § 4062(e) event).
Result: An employee separates from employment as a "result" of the cessation of an operation at a facility if the separation would not have occurred but for the cessation. Several presumptions apply. An involuntary separation that occurs on or after an employer's voluntary cessation of the operation is presumed to result from the cessation. (Likewise, a voluntary separation that occurs on or after the date on which the employer's decision to cease operations becomes known is presumed to result from the cessation.) Where the cessation of the operation is involuntary, either a voluntary or involuntary separation after the date of the event which caused the cessation is presumed to result from the cessation. Also, an employee who becomes employed by a new employer that continues or resumes the operation is presumed to have separated from the initial employer as a result of the cessation.
Active Participant Base: The 20 percent test applies to the number of current employees, determined immediately before the cessation of operations, who are participants under the plan. To determine this "active participant base," the date on which the cessation of the operation begins must be identified. For voluntary cessations, the cessation begins on the date the employer makes the decision to cease the operation. For involuntary cessations, the cessation begins on the date of the event which caused the cessation (e.g., strike, flood, etc.). The active participant base is determined immediately before the cessation of the operation begins. The regulations explicitly provide that the determination of whether an individual is a participant in the plan is made without regard to whether he or she is accruing benefits under the plan at that time (i.e., a frozen pension plan will not exempt the employer from the ERISA § 4062(e) requirements).

Enforcement of ERISA § 4062(e)

Notice of a § 4062(e) event must be given by the plan administrator to the PBGC within 60 days after the later of the cessation date or the date the number of active participant separations resulting from the cessation exceeds 20 percent of the active participant base. (In addition to the regulations, the PBGC also released a draft § 4062(e) Event Notice Filing.) In determining whether a § 4062(e) event has occurred, the due date of the notice, and the number of affected participants, the plan administrator is permitted to disregard affected participants who were not employed at the facility associated with the affected operations.

Liability for a § 4062(e) event is based on a computation of the plan's termination liability performed as if the plan had been terminated by the PBGC immediately after the cessation date (not taking into account changes in assets or liabilities after the cessation date). That amount is multiplied by a fraction, the numerator of which is the number of affected participants and the denominator of which is the active participant base.

The PBGC will decide how the liability for the § 4062(e) event will be satisfied. Generally, this will be by paying the amount of the liability into an escrow account, by furnishing a bond in an amount not exceeding 150 percent of the liability, or by making other arrangements (e.g., additional funding contributions to the plan that would not be added to the plan's prefunding balance, a successor employer's adoption or maintenance of the plan, etc.).

New recordkeeping obligations would be imposed under the regulations. Each employer that maintains a single-employer plan, and the plan administrator, must maintain records for five years regarding any discontinuance of significant activity in furtherance of an operation of the employer at a facility, including records that bear on whether there was a § 4062(e) event, and on the calculation of liability with respect to the event.

More Information

The preamble points out that certain provisions are not in the rule. Notably, the rule does not include an exception for small plans. Nor does it include an exception for well-funded plans (although the better funded a plan is, the lower will be its liability for a § 4062(e) event). Further, the fact that a plan is undergoing a standard termination is also not a factor taken into account under the rule (although the PBGC may forbear to pursue ERISA § 4062(e) liability where a standard termination is in progress).

The regulations are not yet effective. They will apply to cessation dates that occur on or after the effective date of the final regulations, and will displace and supersede all of the PBGC's prior opinion letter pronouncements regarding ERISA § 4062(e). Comments are requested on or before October 12, 2010.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.

If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact:

Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955.

BenefitsLink is an independent national employee benefits information provider, not formally affiliated with the firms and companies who kindly provide much of the content and advertisements published on this Web site, including the article shown above.