Liability of former controlled group member in distress termination

[AndyH]

Company A had underfunded DB plan and is a member of a controlled group with Company B, which has no employees. Company B is not a signatory to the plan.

Most employees are shifted to Company B which is more financially viable and Company B is sold to Company C. Shaky Company A still has pension plan.

After 1 year Company A is insolvent and PBGC takes over pension plan. Can they claim assets of Company C?

Would the answer be different if the time frame were 6 months, 2 yeare, 5 years? In other words, if there is a lookback period, how long does it last?

[SoCalActuary]

My experience with distress terminations is limited, so I will give you anecdotal advice.

1. The stockholders of A will be held responsible. PBGC will try to look for their other assets as well.

2. Transfer of employees to B could be looked upon by PBGC as an attempt to subvert the intent of PBGC rules, so they can get their attorneys involved if the dollars are worth it.

3. Sale of B to C was a stock sale, implied in your posting. Thus C assumes the liabilities of B. Was the stock sale fully disclosed to owners of C, including the potential of pension termination liability? If not, then owners of C will probably have a general liability claim against owners of A who sold B. If so, then owners of C may have liability to PBGC.

We had a similar plan termination some years ago, where A was sold twice in a year, attempting to get away from PBGC liability. We advised client that the sellers of A were still responsible, even into the estates of the deceased former owner. They eventually paid up and took a standard termination with all non-owners paid in full.

As always, see ERISA counsel for a better opinion.

[AndyH]

Thanks for the feedback.

I cannot elaborate on the nature of the sale without risking identifying the company. Let's just say it is not a regular corporation so some different rules may apply.

Your comment about ERISA Counsel is always valid. It is just that in my world ERISA counsel often looks to actuarial firm that employs ERISA counselors (although not acting in such capacity on behalf of clients) among other specialists for guidance, which of course always points back to ERISA counsel, and the client is stuck in the middle of the circle.

[david rigby]

Andy,

if you need additional counsel, even for a second opinion, I can recommend very good ERISA attorneys from several firms, in at least 3 states.

[AndyH]

Thank you. Some day I may take you up on that. I know there are also some good ones on these boards as well.

On this subject, I cannot say how frustrating it was to work with several very high priced ERISA attorneys including some from the biggest oufits in Boston, DC and NYC on the last GUST restatement process and find that they had NO CLUE relative to many DB plan document issues in plans that they drafted and we were asked to review/advise on.

A minor example is a setback for females in an actuarial equivalency definition. Another is a provision allowing a lump sum (over 5K) but not monthly payments. Another is major errors in top heavy language that was drafted in 1984 but never caught. And that's not even getting into the 415 and 417(e) stuff.

[Kirk Maldonado]

Section 4069 of ERISA provides that to have liability:

1. the transaction must have been entered into in an attempt to avoid or evade liability;

2. that intent was a principal purpose of the transaction; and

3. the plan must be terminated within five years of the date of the suspect transaction.

If all of those conditions are met, then the employer's liability is determined as if the transaction hadn't occurred.

In this case, the plan was terminated within the time period. Accordingly, the only issue is whether the transaction was undertaken with a principal purpose to avoid or evade liability. Assuming that can be proven, then Company B would be treated as if it were still part of the controlled group that includes Company A at the time the pension plan was terminated. (This can get a bit messy if Company B is no longer a separate entity because it has been assimilated into Company C.)

Unfortunately, the application of this provision requires a very fact-specific analysis, and the facts are usually susceptible to more than one interpretation. I know of a situation where the employer entered into a very sizeable settlement because of those risks in facts strikingly similar to yours. While the employer paid a fortune to settle the case, that amount was only a small fraction of its potential liability.

The ultimate disposition of the case will likely depend on the risk tolerance level of the employer. Few employers are willing to subject themselves to the risk of being on the hook for the full amount, so they settle. That is particularly true if the maximum amount of exposure is in the millions or tens of millions of dollars.

Another factor that shouldn't be discounted is the potential visbility of the case. Being sued for trying to "avoid or evade" liability to the PBGC doesn't make for particularly favorable press, particularly given the PBGC's current financial woes. This is especially true in light of all of the recent corporate scandals like Enron. I could easily imagine an article on such a lawsuit appearing on the front page of the Wall Street Journal.

The portion of the total liability that the employer will have to pay to settle depends on how good are their facts, determined from the perspective of the PBGC, not from the perspective of the employer.

[AndyH]

Thank you, Kirk. Outstanding analysis.