Proposed PBGC Rule Has Potential to Expand Liability of Pension Plan Sponsors

By on November 10, 2010

by Joseph S. Adams, Michael T. Graham, Diane M. Morganthaler, Maureen O’Brien, David E. Rogers and Patrick D. Ryan

The Pension Benefit Guaranty Corporation (PBGC) has issued proposed guidance interpreting Section 4062(e) of the Employee Retirement Income Security Act of 1974, as amended (ERISA), which requires defined benefit pension plan sponsors to notify the PBGC when more than 20 percent of plan participants are separated from employment when a facility or operation is shut down or ceased by an employer.  The PBGC’s latest proposed rule greatly expands the universe of potential Section 4062(e) event triggers, reiterating the PBGC’s recent aggressive pursuit to monitor underfunded defined benefit pension plans. 

The proposed rule reverses prior PBGC guidance suggesting that asset sales were immune from Section 4062(e)’s reach. The proposed rule also stretches the terminology in Section 4062(e) to provide the PBGC with discretion to impose Section 4062(e) liability on a wide variety of employer business decisions that were once thought exempt from that section. For example, the proposed rule’s definitions and interpretations of key terminology in Section 4062(e) including terms and phrases like “operation,” “facility,” “cessation,” “separation,” “result,” and “Active Participant Base,” grants the PBGC broad powers to assert that Section 4062(e) events have occurred. 

The PBGC determines Section 4062(e) liabilities by multiplying (a) the liability that would have occurred if the defined benefit plan had been terminated by the PBGC immediately after the cessation date multiplied by (b) the ratio of the number of affected participants to the Active Participant Base (as newly defined under the proposed regulations). Depending on the funded status of the defined benefit plan, this liability can be significant.

Employers that sponsor defined benefit plans and that are considering layoffs, sales, product line discontinuances, plant closings or similar workforce restructurings should contact employee benefits counsel to determine if such actions could result in a Section 4062(e) event. 

Click here for a MWE White Paper containing a detailed analysis of the new proposed regulations.

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