Benefits and Compensation

Congress Limits ‘Substantial Cessation of Operations’ Liability

Congress has come to the aid of single-employer defined benefit retirement plans concerned about the U.S. Pension Benefit Guaranty Corp.’s power to assert liability on them when changing business operations affect their plan participants.

As part of the Multiemployer Pension Reform Act of 2014 (within the Consolidated and Further Continuing Appropriations Act 2015, known as the “CRomnibus”), Congress included significant revisions to ERISA Section 4062(e) that limit PBGC’s ability to impose liability when plan sponsors retool facilities, reorder operations or sell of business segments to other entities.

Historically, such changes were associated with higher risk of pension default by PBGC, but employers argued that they were being penalized too harshly for what they consider to be common business activities.

The revised law changes the definition of a “substantial cessation of operations” at a plant to mean a permanent cessation at a facility that results in a work-force reduction of more than 15 percent of eligible employees. Previously, PBGC could set liability for plan sponsors when an operations cessation produced a reduction in force of more than 20 percent of all plan participants. Such an event could lead to PBGC’s seeking a bond or other collateral from a pension plan sponsor.

Loud Complaints Since 2010

DB plan sponsors complained loudly about PBGC allegedly reaching beyond what ERISA intended when it proposed regulations about operations cessations in 2010; the agency in 2014 announced a moratorium (see July 2014 story) on new enforcement efforts tied to operations ceasing, although employer reporting of such events was required to continue. Employer and trade organization lobbying of Congress led to the recent change, which read the rule more narrowly.

The new definitions of operations cessations and their effect on an employer’s work force took effect Dec. 16, 2014. In addition, Congress has instructed PBGC to observe its enforcement policy on the matter that was in place June 1, 2014. All employees of a plan sponsor who are eligible to participate in any ERISA-covered defined contribution or DB plan at the company are considered eligible under the new guidelines, so the pool of affected employees grows, but several new limitations for eligibility are set.

The new law limits the determination of what constitutes a 15-percent reduction in several ways, including:

  • separated employees are not included if they are replaced in reasonable time by other employees who are U.S. citizens or residents working at a U.S. facility;
  • eligible employees are not counted in an asset or stock sale of business operations if replaced and the new employer provides retirement ongoing coverage via a spun-off plan, or if the eligible employee had not participated in the original employer’s plan; or
  • separated employees are not taken into account even when replaced at another U.S. facility.

PBGC said it will no longer pursue Section 4062(e) liabilities for small plans or at creditworthy sponsors.

Under the new rules, plans with fewer than 100 participants with accrued benefits and plans funded at 90 percent or more (using market value of plan assets and liabilities determined with PBGC premium assumptions) in the year before the cessation happens are excused from the PBGC collateral requirements.

To read the complete story on Thompson’s HR Compliance Expert, click here.

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