September 1, 2010

Proposal Would Expand PBGC Power to Impose Liability in Asset Sales/Restructuring

Here is news culled from this Wachtell Lipton memo by Michael Segal and Ian Levin:

The Pension Benefit Guaranty Corporation has published a proposed regulation under Section 4062(e) of ERISA which, if adopted, would provide the PBGC with greater opportunities to compel plan sponsors to increase the funded status of their pension plans when engaging in asset sales or restructuring operations.

In general, Section 4062(e) of ERISA requires a company that sponsors a single-employer defined benefit pension plan to notify the PBGC within 60 days if the company ceases operations at a facility in any location and, as a result, more than 20 percent of the company’s employees participating in the pension plan separate from employment (referred to as a “Section 4062(e) Event”). If a Section 4062(e) Event occurs, the PBGC has discretion to require the company to either provide an escrow for a pro-rata portion of the plan’s underfunding (generally, as if the entire plan had been terminated) or purchase a bond for up to 150% of such amount for five years to protect the plan in the event that it terminates during such period. The escrow is returned after five years if the plan has not been terminated, but without interest, and the bond can be expensive to purchase. Section 4062(e) has been interpreted and applied by the PBGC narrowly, but with more frequency in recent years. In those limited situations, the PBGC has used the threat of the escrow or bond to force plan sponsors to increase the funding of their pension plan in excess of legal requirements.

Under the proposed regulation, the definition of a Section 4062(e) Event would be greatly expanded to include more events, many of which occur in the ordinary course of business, such as the cessation of a single operation at a location even if the company continues other operations at the same location (e.g., discontinuance of one type of manufacturing or administrative operation at a location) and the relocation of an operation from one facility to another. In addition, a Section 4062(e) Event would include an asset transaction in which 20 percent or more of the employees participating in the selling company’s pension plan terminate employment — regardless of whether affected employees are hired by the buyer, all or a portion of the plan is transferred to the buyer, the funding status of the plan or the financial strength of the selling employer. The PBGC may permit the Section 4062(e) liability to be satisfied by the buyer’s hiring of the affected separated employees and maintaining all or a portion of the seller’s plan attributable to those employees.

If the PBGC’s proposed regulation is adopted, companies will have greater risk of incurring a Section 4062(e) Event in the ordinary course of business and becoming subject to the financial burdens of Section 4062(e) or a negotiated settlement with the PBGC that increases the funding requirements otherwise applicable to the affected plans. Any company contemplating a sale of assets involving a significant number of employees or a restructuring of its operations should consider whether a Section 4062(e) Event may occur and its possible ramifications. Companies should also review their credit agreements, which may reference Section 4062(e) in representations and warranties, covenants, notice requirements and default events, to ensure that a Section 4062(e) Event will not cause unintended and adverse consequences.