Since ERISA was first enacted in 1974, it has included a provision, Section 4062(e), that generally applies when the cessation of operations at a facility results in separation from employment of more than 20 percent of active employees covered by a pension plan.  When a 4062(e) event occurs, the plan administrator is required to notify the Pension Benefit Guaranty Corporation, and the employer is required to provide a bond or escrow for a five-year period following the cessation of operations.  If the plan does not terminate within that period, the escrowed amount is returned without interest or the bond is canceled.  In practice, PBGC has typically used Section 4062(e) to extract additional cash contributions or other value for the plan instead of a bond or escrow.
From time to time in the past, PBGC has been aggressive in interpreting and enforcing Section 4062(e).  PBGC recently announced, however, a new “4062(e) enforcement pilot program” that should provide some relief to plan sponsors.  Under the pilot program, PBGC would no longer seek to enforce 4062(e) against plan sponsors that are financially sound or whose pension plans cover not more than 100 participants.  PBGC estimates that, as a result of this new policy, 92 percent of plan sponsors will not face 4062(e) enforcement efforts.  This represents a significant departure from the agency’s enforcement efforts following the release of its proposed 4062(e) regulation in 2010.

Under the announced enforcement policy, PBGC will use established business standards to determine a company's creditworthiness and financial strength.  These standards include credit ratings, credit scores, indebtedness, liquidity, and profitability.  Where there are no indicators of financial weakness or other risks, PBGC says, it will take no enforcement action.

PBGC notes, however, that sponsors must still report all events triggering 4062(e) (using a 2010 proposed PBGC regulation to determine whether an event has occurred).  After notice is given, PBGC will then assess whether the reported case is exempt from enforcement because the plan has no more than 100 participants or the sponsor is financially sound.  

I understand that sponsors that have entered into 4062(e) agreements with PBGC prior to this announcement may petition the agency to amend or modify these agreements based on the pilot program, and that PBGC also will be contacting sponsors that appear to qualify for a suspension of their obligations under a 4062(e) agreement.  If these companies are judged financially sound, PBGC will offer to suspend their agreements.  If any company ceases to be financially sound during the statutory period, however, PBGC will again seek to enforce Section 4062(e).  I understand that PBGC is rescinding prior 4062(e) agreements where the affected plan had no more than 100 participants.  

PBGC notes that the proposed regulation and the pilot program itself are subject to change based on the agency's experience.  PBGC's news release is at http://www.pbgc.gov/news/press/releases/pr12-32.html.  PBGC's Q&A is at http://www.pbgc.gov/about/faq/pg/frequently-asked-questions-4062.html.


Gary M. Ford is a principal in Groom Law Group, where he practices before Congress, the federal agencies, the federal courts, and arbitrators. He is a leading expert on issues relating to the treatment of employee benefit plans in bankruptcies, and he has represented both debtors and creditors in bankruptcy cases involving substantial benefit liabilities and assets. In addition, he represents a number of the nation's largest plan sponsors, service providers, multiemployer plans, and fiduciaries in a variety of areas, including litigation, planning, and advice. Prior to coming to Groom, Ford served as ERISA Counsel to the Senate Committee on Labor and Human Resources, where he had staff responsibility for the Multiemployer Pension Plan Amendments Act of 1980. He joined Groom in 1981, but took leave from the firm in 1987 to serve as general counsel to the Pension Benefit Guaranty Corporation from 1987 to 1989, where he represented the agency in the development of the Pension Protection Act of 1987. Ford returned to Groom after his stint at PBGC. Ford serves as pro bono president and chief executive officer of MicroCredit Enterprises (www.mcenterprises.org), a pioneering private sector program that leverages private capital in the developed world to provide microloans to women in the developing world living on $1 per day or less, so they can start sustainable, cottage businesses, and feed their families. Ford is a charter fellow of the American College of Employee Benefits Counsel and is a member of the Bloomberg BNA Benefits Practice Resource Advisory Board. Ford received an A.B., magna cum laude, from Harvard University, and a J.D. from Boston University.