Congress Overhauls Plant Closing Pension Liability

PBGC Promises Renewed Enforcement

Background. In the event of certain plant closings, Section 4062(e) of ERISA provides that plan sponsors make additional contributions to their defined benefit pension plans or take other steps to reduce the risk to the PBGC that the plan could be terminated with insufficient assets.

For many years, this provision of ERISA was largely ignored. Several years ago, however, the PBGC began aggressive enforcement actions and proposed regulations that would greatly expand the types of events that could trigger liability. The proposed regulations met with tremendous industry backlash, and the PBGC backed off and initiated a temporary moratorium on enforcement.

As part of the Consolidated and Further Continuing Appropriations Act, 2015, Congress has reworked this portion of ERISA. Now, the PBGC has indicated that it will be aggressively enforcing these new provisions.

New Framework. The newly enacted statute greatly expands on the rules that were previously in place. Although the threshold for triggering Section 4062(e) is nominally lowered, there are several important new exceptions that will cover many plans and many common situations.

Basic Rule. Plant closing liability is triggered with respect to a defined benefit pension plan if there is a “substantial cessation of operations” at a facility that employs participants in that plan.
A substantial cessation of operations occurs if a plant closing results in the termination of more than 15% of the plan sponsor’s active employees covered by any retirement plan. The new threshold is lower than the previous threshold (15% as opposed to 20%), but the new test looks at employees covered by any qualified retirement plan maintained by the plan sponsor (including 401(k) plans). The test previously focused on just the participants in a single pension plan.
Important Exceptions:

Workforce Relocation. Employees are not counted toward the 15% threshold if they are replaced within a reasonable period of time by another U.S. employee at the same facility or another of the employer’s facilities in the U.S.
Corporate Disposition. Employees are not counted toward the 15% threshold if they are hired by a successor employer (e.g., a company that purchases operations from the plan sponsor) that assumes, or takes a transfer of assets and liabilities from, the retirement plan that covers these employees.
Small Plans. Plant closing liability does not apply to plans with less than 100 participants.
Well-Funded Plans. Plant closing liability does not apply to plans that are at least 90% funded. This determination is made on the same basis as the plan’s funding status is determined for purposes of calculating PBGC premiums.

Voluntary Increased Funding for 7 Years. In lieu of the general plant closing liability or negotiating with the PBCG over a specific settlement, a plan sponsor may voluntarily choose to make additional contributions to its plan for 7 years. The amount of the additional contributions due each year is (i) 1/7 of the plan’s unfunded vested benefits at the time of the plant closing, multiplied by (ii) the fraction of actively employed plan participants affected by the plant closing. Also, if the plan attains 90% funding during this 7-year period, no future contributions are required.

PBGC Enforcement. The PBGC has announced that it will again pursue enforcement of plan closing liability. However, it will apply the new rules described above; and, consistent with its directive from Congress, it will not enforce liability against plan sponsors that are financially sound.

Contact Information. For more information on plant closing liability, please contact Don Mazursky (404.888.8840), David Putnal (404.888.8836), or Toby Walls (404.888.8870).