April 21, 2014

PBGC Announces Formal Policy Reducing Impact of ERISA Section 4062(e) on Creditworthy Plan Sponsors

The Pension Benefit Guaranty Corporation (PBGC) has announced a new pilot program that should substantially modify its enforcement strategy regarding pension liability for facility closures under ERISA Section 4062(e).  Under this new program, PBGC will no longer assess liability against creditworthy companies or small plans, and instead will focus its enforcement efforts on larger companies in questionable financial health.

On November 2, 2012, the Pension Benefit Guaranty Corporation (PBGC) formally announced a new enforcement policy under ERISA Section 4062(e).  The formal announcement modifies the informal enforcement strategy the PBGC released in spring 2012, described in McDermott’s On the Subject  “PBGC Announces New Enforcement Approach that Reduces Impact of ERISA Section 4062(e) on Financially Sound Employers.”

ERISA Section 4062(e) generally applies when a pension plan sponsor ceases operations at a facility and the shutdown results in the separation of employment of more than 20 percent of plan participants (a Section 4062(e) event).  Upon the occurrence of a Section 4062(e) event, PBGC requires a plan sponsor to provide increased financial security for their pension plan in the form of a security bond, escrow amount or additional contributions.  In August 2010, PBGC released a proposed rule that substantially broadened the scope of ERISA Section 4062(e)’s applicability.  For more information, see McDermott’s On the Subject  “New Proposed PBGC Rule Has Potential to Greatly Expand Liability for Pension Plan Sponsors Contemplating Restructurings, Reductions in Force and Business Transactions.”  Under the proposed rule, many common business decisions, such as the sale of a business unit or moving operations to a new site, triggered liability under ERISA Section 4062(e) regardless of the business’s overall health.

In reaction to concerns expressed by both businesses groups and practitioners, PBGC announced that it would reconsider its proposed rule.  In spring 2012, PBGC informally adopted a policy that assessed Section 4062(e) liability based on whether it classified an employer-plan sponsor as a “strong company,” a “moderately strong company” or a “weak company.”  The latest guidance formalizes the PBGC’s policy of enforcing liability under ERISA Section 4062(e) only against plan sponsors that are financially risky.

Effective immediately, PBGC’s new program generally will take no action to enforce liability under ERISA Section 4062(e) against creditworthy companies and small plans.  A small plan is a plan with 100 or fewer participants.  For larger plans, PBGC will conduct an analysis of the plan sponsor’s financial strength and the underlying facts and circumstances.  In assessing the plan sponsor’s financial condition, PBGC will rely on common standards, such as credit ratings, credit scores, indebtedness, liquidity and profitiability.  No action under ERISA Section 4062(e) will be taken against a creditworthy company provided there are no other indications of financial weakness or other risks.

Although PBGC will no longer actively enforce ERISA Section 4062(e) liability against financially sound large companies, it continues to apply the expansive definition of a Section 4062(e) event as set forth in its proposed rule.  Therefore, all companies have an affirmative obligation to report Section 4062(e) events, although PBGC will no longer act on reports from creditworthy companies.  PBGC intends to use the pilot program to assess any further changes to its proposed ERISA Section 4062(e) regulations.

© 2014 McDermott Will & Emery

About the Author


Michael T. Graham is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Chicago office.  Michael has over 15 years of experience focusing on employee benefits litigation and controversy matters.  Michael has been selected as one of the top lawyers in the ERISA/Employee Benefits practice area by Illinois Super Lawyers magazine for his litigation and ERISA controversy practice in 2011 and 2012.


About the Author


Stephen Pavlick is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Washington, D.C. office.  He focuses his practice on the area of employee benefit matters for large multinational corporations.  His clients include several Fortune 100 companies, and a major trade association.  He is a member of the Tax Management Advisory Board for Compensation Planning and is a regular participant at their monthly luncheons with government officials.  Stephen is a Certified Public Accountant. 


Patrick D. Ryan is an associate in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Chicago office.  He focuses his practice on employee benefits matters related to pension plans, 401(k) plans, executive compensation arrangements, and cafeteria and welfare plans.


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