Liability calculations under Section 4062(e)

On September 16, the Senate passed legislation (S. 2511) by unanimous consent to clarify the definition of a “substantial cessation of operations” under Section 4062(e) of the Employee Retirement Income Security Act. Section 4062(e) allows the Pension Benefit Guaranty Corporation (PBGC) to require certain financial guarantees from some pension sponsors that undergo plant shutdowns. While the sponsor is generally required to provide a bond or escrow amount based on the plan’s termination liability, the PBGC typically uses the 4062(e) event as leverage to negotiate additional contributions, forfeiture of credit balances and other protections from the plan sponsor.

Under the proposal, a plant shutdown would trigger Section 4062(e) if it reduced the employer’s workforce by 15% or more. Small plans and plans that were at least 90% funded would not be subject to 4062(e). Where 4062(e) liability would apply, the legislation would give plan sponsors an alternative method of satisfying the liability by making plan contributions over a seven-year period.

The proposed legislation generally would apply to cessations of operations or other Section 4062(e) events that occurred on or after the date of enactment. However, if a 4062(e) event occurred before then but the sponsor had no settlement arrangement in place with the PBGC, the sponsor could opt to be covered by the legislation.

There is currently a moratorium on 4062(e) enforcement, which started July 8 and continues through 2014. The PBGC said it “… will use the moratorium to consider further targeting and to work with plan sponsors to minimize effects on necessary business activities.” Although plan sponsors must still report 4062(e) events, the PBGC will take no action on these filings for the remainder of 2014.

The legislation has bipartisan support, as well as support from the White House, but House approval is still required. The House may vote on the legislation during its post-election session. If so, the legislation could be enacted before the current moratorium on 4062(e) enforcement ends.

Nondiscrimination testing relief for closed pension plans

Under a bill cosponsored by House Ways and Means Committee members Pat Tiberi (R-Ohio) and Richard Neal (D-Mass.), a closed pension plan would be considered to comply with nondiscrimination and minimum participation requirements as long as the plan was in compliance when it was closed. As it now stands, after a defined benefit plan is closed to new entrants, participants continuing to accrue benefits tend to become more highly paid over time, causing many plans to eventually become discriminatory. Rather than fail the nondiscrimination tests, the plan sponsor usually decides to freeze the pension plan — thus eliminating pension accruals for all participants.