In certain cases of a facility sale, restructuring or cessation, recently released information by the Pension Benefit Guaranty Corporation (PBGC) leaves many unanswered questions about plan sponsor liability for single-employer defined benefit plans. Given the lack of clarity, these plan sponsors should continue to consult their lawyer in any type of transaction, restructuring or cessation that approaches a 15 percent demographic change in a plan sponsor’s controlled group over a three-year period.
On September 16, 2014, the United States Senate unanimously approved Senate Bill 2511, which would amend Section 4062(e) of the Employee Retirement Income Security Act of 1974, as amended (ERISA), to clarify the definition of substantial cessation of operations. ERISA Section 4062(e) enables the Pension Benefit Guaranty Corporation to require that employers financially guarantee pension obligations based on a plan’s underfunded termination liability when an employer that maintains a pension plan shuts down operations at a facility, and as a result, more than 20 percent of the employer’s employees who are plan participants incur a separation from employment.
The bill revises ERISA Section 4062(e) to clarify that a “substantial cessation of operations” occurs when an employer permanently ceases operations at a facility and, as a result, there is a “workforce reduction” of more than 15 percent of all eligible employees at all facilities in the contributing employer’s controlled group. Under the amendment, a “workforce reduction” would mean the number of eligible employees at a facility who are separated from employment by reason of the permanent cessation of operations of the employer at the facility. Certain eligible employees would be excluded from the reduction analysis, including employees who, within a reasonable period of time, are replaced by the employer, at the same or another facility in the United States, by an employee who is a citizen or resident of the United States. In addition, employees would not be not taken into consideration for these purposes following the sale or other disposition of the assets or stock of the employer if the acquiring entity maintains the single-employer plan of the predecessor employer that includes assets and liabilities attributable to the accrued benefit of the employee and either (1) the employee is separated from employment at the facility, but within a reasonable period of time, is replaced by the acquiring entity by an employee who is a citizen or resident of the United States, or (2) the eligible employees continues to be employed at the facility of the acquiring entity.
The Congressional Budget Office estimates that Senate Bill 2511 would reduce the contributions that plan sponsors are required to make to their plans as a result of terminating operations at a facility, leading to increases in employer revenues and decreases in direct spending. The House of Representatives concluded its fall session on September 19, 2014 without acting on the bill. It remains to be seen whether the House will take up the Senate bill when it returns for a “lame-duck” session after the mid-term elections.