United States: Clear As Mud: Defined Benefit Plan Liability With Facility Sales, Restructurings And Cessations

In certain cases of a facility sale, restructuring or cessation, recently released information by the Pension Benefit Guaranty Corporation (PBGC) leaves many unanswered questions about plan sponsor liability for single-employer defined benefit plans. Given the lack of clarity, these plan sponsors should continue to consult their lawyer in any type of transaction, restructuring or cessation that approaches a 15 percent demographic change in a plan sponsor's controlled group over a three-year period.

In Depth

The Pension Benefit Guaranty Corporation (PBGC)—the quasi-governmental agency that insures defined benefit pension plans—recently released new website information for sponsors of single-employer defined benefit plans in certain cases of a facility sale or cessation under Section 4062(e) of the Employee Retirement Income Security Act of 1974 (ERISA). However, many important questions remain unanswered about the PBGC's interpretation and enforcement of plan sponsor liability under ERISA Section 4062(e).


ERISA Section 4062(e) protects defined benefit pensions in situations where workers lose their jobs when operations cease at a facility, whether it be in the form of a facility shutdown, an asset or stock sale, or some other restructuring or transaction. In 2014, Congress enacted a significant change to a plan sponsor's liability under ERISA Section 4062(e). Under the revised ERISA Section 4062(e), a pension plan sponsor incurs statutory liability only if both: (1) a permanent cessation of operations occurs at a facility, and (2) the cessation results in a workforce reduction of more than 15 percent in the total number of employees eligible to participate in either a defined benefit plan or a defined contribution plan maintained by members of the plan sponsor's controlled group, including and excluding certain employees based on a three-year lookback period.

This statutory change provided welcome relief for plan sponsors, by modifying the definition of an ERISA Section 4062(e) event to ensure that liability only arises when there has been a major demographic downsizing, by creating exemptions from liability for small and well-funded plans, and by providing an alternative option for satisfying ERISA 4062(e) liability. Although the PBGC has been relatively silent on its interpretation of the new law for several years, the PBGC recently updated its website information on potential liability under ERISA Section 4062(e).

Guidance Details

The PBGC's new website information lists several of the types of actions that will and will not initiate ERISA Section 4062(e) liability, closely paraphrasing the statutory language. The new guidance also provides a basic calculation example of how to determine the above 15 percent workforce reduction. Finally, the new guidance also indicates that the PBGC is developing a new reporting form for an ERISA Section 4062(e) event. In the meantime, a plan sponsor should report to the PBGC—via mail, email or fax—by listing the name of the affected defined benefit plan and its sponsor, and by providing a statement that a cessation of operations triggered an ERISA Section 4062(e) event.

Issues Requiring Further Clarification to Determine Liability

While somewhat helpful in providing a fundamental overview of the revised ERISA Section 4062(e), the additional PBGC guidance fails to address many significant open questions about how this section applies in different scenarios. Although the mathematics appear straightforward in calculating whether the 15 percent reduction in eligible employees in the controlled group occurs and triggers statutory liability, many open issues remain in determining both the numerator and denominator in this calculation. Some of these open issues include the following:

  • Which employees are included and excluded in the calculations? For example, in an asset sale, are employees who participate in a seller's tax-qualified retirement plan—and who terminate employment with a seller but continue employment with a buyer—counted in the calculation unless retirement assets are transferred to the buyer? Are sales, work at home, disabled and recalled employees included or excluded in the calculation?
  • What is the definition of a facility? For example, does a single facility include only site buildings connected by similar operations? Can a single facility include buildings across town?
  • What is a cessation of operations at a facility? For example, must all or substantially all facility operations stop for a permanent cessation to occur? What is the cessation date if operations diminish in stages and over an extended period of time?
  • How is the three-year lookback applied? For example, are voluntary service terminations within the three-year lookback included or excluded in the calculation? Does the amount of time separating the service termination and the permanent cessation affect the analysis of whether the separation is sufficiently related?

Issues Requiring Further Clarification to Pay Liability

The statute now includes an alternative method to satisfy Section 4062(e) liability, by allowing a plan sponsor to make additional contributions to its defined benefit plan over a seven-year period. Although the alternative liability method is likely to be more favorable for a plan sponsor than the original statutory method, the PBGC's recent guidance fails to address many of the open questions related to this alternative method, including questions related to election and payment timing. To use the alternative liability method, a plan sponsor must make an election no later than 30 days after the earlier of: (1) the date the sponsor notifies the PBGC of the substantial cessation of operations, or (2) the date the PBGC determines that a substantial cessation of operations occurred. Questions related to these rules include:

  • When does the PBGC determine that a cessation has occurred? For example, is the cessation date the date of an initial determination, which is subject to internal review, or is it the date of a final determination that can be appealed to a US district court?
  • Can or should a plan sponsor make a conditional election under the alternative liability payment method? For example, to ensure compliance with the 30-day election period, can a sponsor of a defined benefit plan make a conditional election of the alternative method while the sponsor further investigates facts, or make a precautionary election in case its defined benefit plan funding later falls below the ERISA Section 4062(e) exemption level?
  • How does the seven-year payment obligation apply? For example, how does the seven-year payment obligation apply when an employer begins alternative liability payments, and it is later determined that the payment amount should be higher? Does a plan sponsor need to continue making alternative liability payments after it has appealed the matter to a district court and the matter is being litigated?

Planning Considerations in Transactions, Restructurings and Cessations

Given the complexity of ERISA Section 4062(e) and its potential liabilities for defined benefit plans, plan sponsors should engage in transaction or restructuring pre-planning and post-planning with counsel to avoid liability surprises. Some of the ways to avoid such liability could include: (1) making additional contributions to the defined benefit plan, (2) changing the plan year in which a cessation of operations occurs, (3) considering ways to preserve jobs and to reduce the number of separated employees included in the ERISA Section 4062(e) calculation, or (4) transferring retirement plan assets and liabilities to a buyer. In addition, plan sponsors should consider whether an ERISA Section 4062(e) liability event triggers reporting under its line of credit or other loan agreements.


New information on PBGC's website is helpful but does not provide quite as much insight under ERISA Section 4062(e) as plan sponsors and practitioners had hoped. Unfortunately, many significant questions about PBGC's interpretation and enforcement of the statute remain unanswered. In light of the complexity and potential liabilities of ERISA Section 4062(e) for sponsors of defined benefit plans, pre-planning and post-planning with experienced employee benefit counsel remains critical for any restructurings, downsizings or transactions.

Clear As Mud: Defined Benefit Plan Liability With Facility Sales, Restructurings And Cessations

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