PBGC Releases Enforcement Guidelines for ERISA Section 4062(e) Financial Assurance Program | Practical Law

PBGC Releases Enforcement Guidelines for ERISA Section 4062(e) Financial Assurance Program | Practical Law

The Pension Benefit Guaranty Corporation (PBGC) has released enforcement guidelines that implement its recent changes to the financial assurance program under Section 4062(e) of the Employee Retirement Income Security Act of 1974 (ERISA). 

PBGC Releases Enforcement Guidelines for ERISA Section 4062(e) Financial Assurance Program

by PLC Employee Benefits & Executive Compensation
Published on 03 May 2013 • USA (National/Federal)
The Pension Benefit Guaranty Corporation (PBGC) has released enforcement guidelines that implement its recent changes to the financial assurance program under Section 4062(e) of the Employee Retirement Income Security Act of 1974 (ERISA).
On November 2, 2012, the Pension Benefit Guaranty Corporation (PBGC) announced that it would start a pilot program that changes the way it enforces ERISA Section 4062(e) (see Legal Update, PBGC Announces Change to ERISA Section 4062(e) Enforcement Practices).
ERISA Section 4062(e) requires companies with pension plans to notify the PBGC when they stop operations at a facility causing a substantial number of plan participants to lose their jobs. In these cases, the companies must provide financial security to protect the plan, typically in the form of additional plan contributions or a letter of credit guaranteeing future contributions.
In the past, the PBGC enforced the Section 4062(e) requirement against all companies, regardless of the size of the plan or the financial soundness of the company. However, as part of the pilot program, the PBGC will generally not take any action to enforce Section 4062(e) liability against:
  • Creditworthy companies.
  • Plans with fewer than 100 participants.
Recently, the PBGC posted guidelines that specify which companies will be considered creditworthy or have plans with fewer than 100 participants for purposes of the pilot program.

Creditworthy Companies

New Cases

In new cases, a company will be considered creditworthy ("financially sound," for purposes of the guidelines) if it:
  • Has unsecured debt-equivalent ratings from both Moody's and S&P, and the ratings are at least Baa3 by Moody's and BBB- by S&P.
  • Is rated by either Moody's or S&P and the rating is at least Baa3 or BBB-.
  • Is rated by neither Moody's nor S&P, and:
    • the company has a D&B Financial Stress Score of 1477 or higher; and
    • the company's secured debt (disregarding debt incurred to purchase real estate or equipment) does not exceed 10% of its asset value.
A company is not financially sound in a new case if in the judgment of the Office of Negotiations and Restructuring (ONR) and the Chief of Negotiations and Restructuring, it has signs of financial weakness, including, but not limited to:
  • A lack of ongoing operations.
  • Existing or imminent:
    • changes in business fundamentals, such as a large drop in demand; or
    • transactions that would result in a credit ratings downgrade.
  • An insignificant amount of assets or operations in the US.

Existing Cases

In existing Section 4062(e) settlements, the PBGC will offer to suspend the company's obligations under the settlement agreement:
  • If the company is financially sound at any time during the five-year protection period.
  • On condition that the obligations will be reinstated if the company ceases to be financially sound. For example:
    • any bond or escrow could be discontinued; or
    • excess contributions could not be refunded, although they might be the basis for a credit balance.

Small Plans

The guidelines indicate that in new cases involving small plans the PBGC will not initiate enforcement of Section 4062(e) if the plan's participant count for purposes of the flat-rate premium is less than 100:
  • On the most recent participant count date.
  • Before the beginning of the cessation of operations giving rise to the Section 4062(e) event.
Furthermore, the PBGC will rescind a Section 4062(e) settlement in existing small plan cases if the settlement involves a plan that would have had a participant-count of less than 100.

Practical Implications

The PBGC notes that the guidelines are general rather than precise, and are subject to change. Employers and plan sponsors should be familiar with these guidelines before initiating transactions that could create liability under ERISA Section 4062(e). Employers and plan sponsors with existing Section 4062(e) settlement agreements that meet the requirements in the guidelines should consider seeking a suspension or rescission of the settlement.