Liability Pursuant to Section 4062(e) of ERISA, 34819-34822 [E6-9503]

Agencies

• Pension Benefit Guaranty Corporation

[Federal Register Volume 71, Number 116 (Friday, June 16, 2006)]
[Rules and Regulations]
[Pages 34819-34822]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-9503]


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PENSION BENEFIT GUARANTY CORPORATION

29 CFR Parts 4062 and 4063

RIN 1212-AB03


Liability Pursuant to Section 4062(e) of ERISA

AGENCY: Pension Benefit Guaranty Corporation.

ACTION: Final rule.

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SUMMARY: This rule provides a formula for computing liability under 
section 4063(b) of the Employee Retirement Income Security Act of 1974 
(``ERISA'') when there is a substantial cessation of operations by an 
employer as described by section 4062(e) of ERISA. That section 
provides, among other things, that when a section 4062(e) event occurs, 
liability arises under section 4063 of ERISA. However, the method 
described in section 4063 for determining liability is impracticable 
when applied to a section 4062(e) event. This rule, which is narrow in 
scope, provides a practicable and transparent formula for calculating 
employer liability when a section 4062(e) event occurs. This rulemaking 
is part of the PBGC's ongoing effort to streamline regulation and 
improve administration of the pension insurance program.

EFFECTIVE DATE: July 17, 2006. For a discussion of applicability of 
these amendments, see the Applicability section in SUPPLEMENTARY 
INFORMATION.

FOR FURTHER INFORMATION CONTACT: John H. Hanley, Director, Legislative 
and Regulatory Department, or James L. Beller, Jr., Attorney, 
Legislative and Regulatory Department, PBGC, 1200 K Street, NW., 
Washington, DC 20005-4026; 202-326-4024. (TTY/TDD users should call the 
Federal relay service by dialing 711 and ask for 202-326-4024.)

SUPPLEMENTARY INFORMATION: On February 25, 2005, (at 70 FR 9258), the 
Pension Benefit Guaranty Corporation (PBGC) published a proposed rule 
modifying 29 CFR parts 4062 (Liability for Termination of Single-
employer Plans) and 4063 (Withdrawal Liability; Plans under Multiple 
Controlled Groups). Six comment letters were received on the proposed 
rule and are addressed below. The regulation is being issued 
substantially as proposed with one clarification.
    Section 4062(e) of ERISA provides special rules that apply when 
``an employer ceases operations at a facility in any location and, as a 
result of such cessation of operations, more than 20 percent of the 
total number of his employees who are participants under a plan 
established and maintained by him are separated from employment'' (a 
``section 4062(e) event''). In the case of a section 4062(e) event, the 
employer ``shall be treated with respect to that plan as if he were a 
substantial employer under a plan under which more than one employer 
makes contributions and the provisions of Sec. Sec.  4063, 4064, and 
4065 shall apply.'' \1\
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    \1\ A section 4062(e) event is similar to an active participant 
reduction reportable under part 4043. Often (but not always), a 
facility closing that results in a section 4062(e) event also 
results in a reportable event described in 29 CFR 4043.21 (active 
participant reduction). The reporting requirements for these two 
types of events are separate.
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    Thus, if a section 4062(e) event occurs, the provisions of ERISA 
section 4063 (among other provisions) apply to the employer. Section 
4063(b) imposes liability upon a substantial employer that withdraws 
from a multiple employer plan. This section 4063(b) liability 
represents the withdrawing employer's share of the liability to the 
PBGC under section 4062(b) that would arise if the plan were to 
terminate without enough assets to pay all benefit liabilities. The 
section 4063(b) liability payment made by the employer is held in 
escrow by the PBGC for the benefit of the plan. If the plan terminates 
within five years, the section 4063(b) liability payment is treated as 
part of the plan's assets. If the plan does not terminate within five 
years, the liability payment is returned to the employer. The statute 
also provides that, in lieu of the liability payment, the contributing 
sponsor may be required to furnish a bond to the PBGC in an amount not 
exceeding 150% of the section 4063(b) liability.
    The statute also specifies a method of computing the amount of the 
section 4063(b) liability. Section 4063(b) provides that ``[t]he amount 
of liability shall be computed on the basis of an amount determined by 
the [PBGC] to be the amount described in section 4062 for the entire 
plan, as if the plan had been terminated by the [PBGC] on the date of 
the withdrawal, multiplied by a fraction (1) the numerator of which is 
the total amount required to be contributed to the plan by such 
contributing sponsor for the last 5 years ending prior to the 
withdrawal, and (2) the denominator of which is the total amount 
required to be contributed to the plan by all contributing sponsors for 
such last 5 years.''
    In sum, section 4063(b) imposes liability and provides a method for 
determining the amount of that liability--i.e., for determining the 
withdrawing employer's portion of the liability to the PBGC under 
section 4062(b) that would arise if the plan terminated.
    Section 4062(e) provides that, when a section 4062(e) event occurs, 
the employer is treated as a substantial employer under a multiple 
employer plan. Thus, section 4062(e) creates liability that is 
analogous to the section 4063(b) liability arising when a substantial 
employer withdraws from a multiple employer plan. Section 4062(e) does 
not, however, provide any details as to how this analogy is to be 
implemented--i.e., how the liability is to be apportioned with respect 
to the cessation of operations.
    As explained above, when a substantial employer withdraws from a 
multiple employer plan, section 4063(b) allocates liability to that 
withdrawing employer based upon the ratio of the employer's required 
contributions to all required contributions for the five years 
preceding the withdrawal. The PBGC has found, in general, that 
application of this statutory allocation formula is relatively 
straightforward when determining the liability of a withdrawing 
substantial employer from a multiple employer plan because it is 
generally easy to verify what contributions were required to be made by 
the withdrawing employer and what contributions were required to be 
made by all of the contributing employers.\2\
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    \2\ When there have been no required contributions for the plan 
for the past five years, the contribution method results in an 
undefined fraction of zero divided by zero. This presents a problem 
for determining liability under the contribution method of section 
4063 in the context of a section 4062(e) event.
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    In contrast, when there is a section 4062(e) event, there is by 
definition only one employer that contributes to the plan. When there 
is only one employer, the numerator and denominator used to determine 
the liability under section 4063(b) would always be equal. Thus, the 
literal application of the allocation method described in section 
4063(b) to determine the liability arising upon a section 4062(e) event 
is impracticable. Instead, the PBGC has been using the method 
prescribed in this rule to determine that liability on a case-by-case 
basis.
    Section 4063(b) of ERISA provides that ``in addition to and in lieu 
of'' the manner of computing the liability

[[Page 34820]]

prescribed in that provision, the PBGC ``may also determine the 
liability on any other equitable basis prescribed by the [PBGC] in 
regulations.'' Pursuant to that authority, the PBGC is prescribing in 
this rule a simple, practicable, and equitable method for determining 
the liability for a section 4062(e) event. Specifically, under this 
rule, the section 4062(e) liability equals the liability under section 
4062(b) multiplied by a fraction (1) the numerator of which is the 
number of the employer's employees who are participants under the plan 
and are separated from employment as a result of the cessation of 
operations, and (2) the denominator of which is the total number of the 
employer's current employees, as determined immediately before the 
cessation of operations, who are participants under the plan. The 
liability under section 4062(b) is determined as if the plan had been 
terminated by the PBGC immediately after the cessation of operations 
rather than ``on the date of the withdrawal'' (as specified in section 
4063(b)), which does not literally apply in the case of a section 
4062(e) event.
    By providing a simple and transparent method for determining the 
amount of this liability, this rule will allow plan sponsors who 
experience a section 4062(e) event (or believe they may experience a 
section 4062(e) event) to more readily determine their liability (or 
expected liability). Although this final rule specifies a method for 
determining the amount of the liability imposed by statute, it does not 
affect the imposition of liability. Moreover, because this method has 
generally been followed on a case-by-case basis, the final rule will 
have little or no effect on the amount of liability.
    Nothing in this final rule affects the computation of liability 
incurred when there is a withdrawal of a substantial employer from a 
multiple employer plan under ERISA section 4063.

Comments

    Six comment letters on the proposed rule were received: two from 
associations of employee benefits professionals, two from employee 
benefits consulting firms, one from a large domestic corporation, and 
one from an individual. Two commenters commended the PBGC for proposing 
a method for calculating the liability for a section 4062(e) event. 
Commenters made four major recommendations, asking for:
    Clarification on how to determine the denominator of the fraction 
set forth in the proposed rule for determining employer liability 
pursuant to ERISA section 4062(e);
    Additional guidance on a variety of interpretive issues relating to 
ERISA section 4062(e);
    A regulatory exemption from ERISA section 4062(e) liability for 
small plans (generally, those with fewer than 500 participants); and
    A cap on liability in the formula for calculating the ERISA section 
4062(e) liability because the proposed formula could lead to 
unreasonable results.

Clarification of Liability Calculation

    The final rule clarifies that the denominator used for determining 
the employer liability pursuant to section 4062(e) equals the total 
number of the employer's current employees, as determined immediately 
before the cessation of operations, who are participants under the 
plan. The denominator does not include all participants in the plan, 
such as retirees and other former employees who separated from 
employment before the cessation of operations. In addition, the 
regulation includes an example for further clarification.

Additional Guidance

    Several commenters asked for additional guidance on a number of 
issues relating to section 4062(e) that were not addressed in the 
proposed regulations. For instance, commenters asked for guidance on 
what constitutes a ``cessation of operations,'' whether a sale of 
assets constitutes a cessation of operations, what is meant by a 
``facility in any location,'' which employees are treated as separated 
as a result of the cessation, how to provide notice, and other issues. 
One commenter opposed the imposition of 4062(e) liability pending 
further guidance.
    The PBGC agrees that additional guidance in this area is warranted. 
However, this rule is narrow in scope and is intended to address one 
overarching aspect of ERISA Sec.  4062(e)--the formula for calculating 
employer liability. As commenters point out, there are other 
interpretive issues that may arise under ERISA Sec.  4062(e), but these 
issues remain outside of the scope of this rulemaking. The PBGC plans 
to issue additional guidance as appropriate, recognizing that such 
guidance would provide valuable assistance to plan administrators, 
employers, and participants, especially in determining whether and when 
a section 4062(e) event has occurred. When formulating guidance related 
to ERISA Sec.  4062(e), the PBGC will take these commenters' concerns 
into consideration. In the interim, these issues will continue to be 
resolved on a case-by-case basis.

Small Plan Exemption

    One commenter asked for a regulatory exemption from ERISA section 
4062(e) liability for small plans (generally, those with fewer than 500 
participants). This request also is beyond the scope of this 
rulemaking. As discussed above, this rule addresses only the formula 
for calculating the section 4062(e) liability. The PBGC will consider 
this request as it formulates additional guidance in this area.

Cap on Liability

    Two commenters expressed concern that the proposed formula for 
determining the section 4062(e) liability could result in an 
``unreasonable'' outcome. Both commenters noted that the liabilities of 
separated participants might represent a small percentage of all 
liabilities, yet the section 4062(e) liability imposed by the rule 
could be substantially larger. For instance, if the facility that 
closed had recently been opened with all newly hired employees, the 
benefit liabilities associated with those separated employees could be 
quite small. If those separated employees represented 25% of the 
employer's employees participating in the plan, the liability 
determined using the fraction prescribed in the proposed rule would be 
25% of the plan underfunding. Both commenters asked that the final rule 
provide that the section 4062(e) liability be limited to a fraction of 
the unfunded liability based upon benefit liabilities attributable to 
participants who separated as a result of the cessation of operations.
    The PBGC considered a number of approaches, including ones based on 
the liabilities associated with the separated participants. It rejected 
a liabilities-based approach primarily because it found that employers 
had great difficulty separating liabilities by employee group--thus, 
this sort of liabilities-based approach would not provide a simple, 
predictable formula for determining section 4062(e) liability. 
Moreover, the liabilities-based approach would not necessarily provide 
a result more in line with statutory intent than would the headcount 
approach prescribed in this rule.
    These comments assume that there is in fact a theoretically exact 
amount of section 4062(e) liability that should arise in each case and 
from which a large deviation would be ``unreasonable.'' One comment 
also seems to assume that the section 4062(e) liability amount should 
never include amounts that are not directly attributable to unfunded 
benefit liabilities of the participants who

[[Page 34821]]

separated from service as a result of the cessation of operations. This 
is contrary to what Congress prescribed for determining liability for a 
substantial employer under ERISA section 4063, the section under which 
section 4062(e) liability is to be determined.
    The method prescribed by Congress for calculating liability for a 
substantial employer that withdraws from a multiple employer plan 
establishes the underfunded liability for which the withdrawing 
employer is responsible. It is not an exact calculation of the unfunded 
benefit liabilities for all of the employer's employees or former 
employees that participated in the plan. As explained before in the 
proposed rule and above, the substantial employer's liability under 
section 4063 is based on the employer's required contributions for the 
last five years. Obviously, this 5-year contribution method only 
approximates the unfunded liabilities attributable to all of the 
substantial employer's participants. Moreover, in a multiple employer 
plan, there may be unfunded benefit liabilities not attributable to the 
withdrawing substantial employer's participants for which the 
substantial employer is nevertheless partially responsible. The 
substantial employer's liability is a portion of the plan's total 
unfunded liability. This total unfunded liability, for instance, may 
include unfunded liabilities attributable to employees of employers who 
have withdrawn from the plan but owed no section 4063(b) liability 
because they were not substantial employers.
    The headcount method in this rule provides a simple, practicable, 
and equitable method for determining employer liability under section 
4062(e). The headcount method attributes to the employer responsibility 
for an appropriate amount of plan underfunding upon the cessation of 
operations in much the same way that ERISA section 4063 attributes to a 
substantial employer responsibility for a portion of plan underfunding 
upon withdrawal. Moreover, the liability amount (whether pursuant to a 
section 4062(e) event or withdrawal of a substantial employer) goes to 
the plan if the plan terminates within 5 years; otherwise the liability 
amount is returned to the employer.

Other Comments

    One commenter expressed concern about the hardship on employers 
arising from the imposition of section 4062(e) liability, noting that 
``the PBGC's proposal to calculate and assess pension liability when a 
facility shuts down may have the unintended consequence of making 
defined benefit plans more difficult and costlier to maintain or 
continue.'' Another commenter opposed the proposed rule on similar 
grounds, noting that it could unnecessarily restrict business 
decisions. That commenter also suggested that the PBGC should study 
what impact the rule would have had if it had been implemented several 
decades ago.
    This final rule will have little effect on either the imposition or 
amount of section 4062(e) liability. As stated in the preamble to the 
proposed rule (70 FR at 9259), this rule simply provides a method of 
calculating the section 4062(e) liability and does not affect the 
imposition of such liability, which is statutorily imposed. Moreover, 
because historically 4062(e) cases have generally been resolved on a 
case-by-case basis using the method set forth in this rule, the rule 
will have little or no effect on the amount of liability.
    One commenter asked the PBGC to communicate its current practice 
with respect to the many substantive and interpretative questions 
related to ERISA section 4062(e) before changing that practice. The 
PBGC has no generally applicable practice with respect to section 
4062(e). As stated above, the PBGC currently handles ERISA section 
4062(e) liability on a case-by-case basis. However, in these cases, it 
has generally imposed liability based on headcount, often as part of a 
negotiated settlement.
    One commenter said that the proposal would ``exacerbate incongruity 
between congressional intent, legislation, and regulation,'' since it 
would apply one form of liability calculation in the multiple employer 
context and another form of liability calculation (i.e., ERISA Sec.  
4062(e) liability under this rule) to plans with one employer. As 
explained above and in the proposed rule, it is impracticable to use 
the allocation method described in section 4063(b) (which applies to a 
withdrawal from a multiple employer plan) to determine the liability 
arising upon a section 4062(e) event. Moreover, while withdrawal from a 
multiple employer plan and a section 4062(e) event are analogous 
events, they are not equivalent. As explained, the headcount method 
provides a simple, practicable, and equitable method for determining 
ERISA Sec.  4062(e) liability, which is analogous to the method used 
for determining liability for a substantial employer that withdraws 
from a multiple employer plan.
    One commenter asked for clarification of the effective date of the 
regulation and, in particular, clarification that it does not apply 
retroactively. The preamble to this rule contains a section on 
applicability.

Applicability

    This rule applies to section 4062(e) events occurring on or after 
July 17, 2006. However, as noted in the proposed rule (and above), the 
rule will have little or no effect on the imposition or amount of 
liability-the liability is statutorily imposed and the amount of 
liability is generally determined on a case-by-case basis using the 
method prescribed in this rule.

Compliance With Rulemaking Guidelines

    The PBGC has determined, in consultation with the Office of 
Management and Budget, that this final rule is a ``significant 
regulatory action'' under Executive Order 12866. The Office of 
Management and Budget, therefore, has reviewed this notice under 
Executive Order 12866.
    The PBGC certifies under section 605(b) of the Regulatory 
Flexibility Act that this final rule would not have a significant 
economic impact on a substantial number of small entities. A section 
4062(e) event is generally not relevant for small employers. Most small 
employers sponsoring defined benefit plans tend not to have multiple 
operations. For these small employers, the shutdown of operations 
almost always would be accompanied by plan termination. Section 4062(e) 
protection is only relevant when the plan is ongoing after the 
cessation of operations. Thus, the change will not have a significant 
economic impact on a substantial number of small entities. Accordingly, 
sections 603 and 604 of the Regulatory Flexibility Act do not apply.

List of subjects

29 CFR Part 4062

    Employee Benefit Plans, Pension insurance, Reporting and 
recordkeeping requirements

29 CFR Part 4063

    Employee Benefit Plans, Pension insurance, Reporting and 
recordkeeping requirements


0
For the reasons set forth above, the PBGC amends parts 4062 and 4063 of 
29 CFR chapter LX as follows:

PART 4062--LIABILITY FOR TERMINATION OF SINGLE-EMPLOYER PLANS

0
1. The authority citation for Part 4062 continues to read as follows:

    Authority: 29 U.S.C. 1302(b)(3), 1362-1364, 1367, 1368.

[[Page 34822]]

Sec.  4062.1  [Amended]

0
2. Amend Sec.  4062.1 by adding the following sentence after the first 
sentence of the paragraph:


Sec.  4062.1  Purpose and Scope

    * * * This part also sets forth rules for determining the amount of 
liability incurred under section 4063 of ERISA pursuant to the 
occurrence of a cessation of operations as described by section 4062(e) 
of ERISA. * * *


Sec.  4062.3  [Amended]

0
3. In paragraph (b) of Sec.  4062.3, remove the references to ``Sec.  
4062.8(c)'' and ``4062.8(b)'' and add the references to ``Sec.  
4062.9(c)'' and ``Sec.  4062.9(b)'' in their places, respectively.


Sec.  4062.7  [Amended]

0
4. In paragraph (a) of Sec.  4062.7, remove the reference to ``Sec.  
4062.8'' and add in its place the reference to ``Sec.  4062.9''.


Sec.  4062.8 through Sec.  4062.10  [Redesignated]

0
5. Redesignate Sec. Sec.  4062.8, 4062.9, and 4062.10 as Sec. Sec.  
4062.9, 4062.10, and 4062.11, respectively.
0
6. Add new Sec.  4062.8 to read as follows:


Sec.  4062.8  Liability pursuant to section 4062(e).

    (a) Liability amount. If, pursuant to section 4062(e) of ERISA, an 
employer ceases operations at a facility in any location and, as a 
result of such cessation of operations, more than 20% of the total 
number of the employer's employees who are participants under a plan 
established and maintained by the employer are separated from 
employment, the PBGC will determine the amount of liability under 
section 4063(b) of ERISA to be the amount described in section 4062 of 
ERISA for the entire plan, as if the plan had been terminated by the 
PBGC immediately after the date of the cessation of operations, 
multiplied by a fraction--
    (1) The numerator of which is the number of the employer's 
employees who are participants under the plan and are separated from 
employment as a result of the cessation of operations; and
    (2) The denominator of which is the total number of the employer's 
current employees, as determined immediately before the cessation of 
operations, who are participants under the plan.
    (b) Example. Company X sponsors a pension plan with 50,000 
participants of which 20,000 are current employees and 30,000 are 
retirees or deferred vested participants. On a PBGC termination basis, 
the plan is underfunded by $80 million. Company X ceases operations at 
a facility resulting in the separation from employment of 5,000 
employees, all of whom are participants in the pension plan. A section 
4062(e) event has occurred, and the PBGC will determine the amount of 
employer liability under section 4063(b) of ERISA. The numerator 
described in paragraph (a)(1) of this section is 5,000 and the 
denominator described in paragraph (a)(2) of this section is 20,000. 
Therefore, the amount of liability under section 4063(b) of ERISA 
pursuant to section 4062(e) is $20 million (5,000/20,000 x $80 
million).

PART 4063--LIABILITY OF SUBSTANTIAL EMPLOYER FOR WITHDRAWAL FROM 
SINGLE-EMPLOYER PLANS UNDER MULTIPLE CONTROLLED GROUPS AND OF 
EMPLOYER EXPERIENCING A CESSATION OF OPERATION

0
7. The authority citation for part 4063 continues to read as follows:

    Authority: 29 U.S.C. 1302(b)(3).


0
8. Revise paragraph (a) of Sec.  4063.1 to read as follows:


Sec.  4063.1  Cross-references

    (a) Part 4062 of this chapter sets forth rules for determination 
and payment of the liability incurred, under section 4062(b) of ERISA, 
upon termination of any single-employer plan and, to the extent 
appropriate, determination of the liability incurred with respect to 
multiple employer plans under sections 4063 and 4064 of ERISA. Part 
4062 also sets forth rules for determining the amount of liability 
incurred under section 4063 of ERISA pursuant to the occurrence of a 
cessation of operations as described by section 4062(e) of ERISA.
* * * * *

    Issued in Washington, DC, this 13th day of June, 2006.
Elaine L. Chao,
Chairman, Board of Directors, Pension Benefit Guaranty Corporation.
    Issued on the date set forth above pursuant to a resolution of 
the Board of Directors authorizing its Chairman to issue this final 
rule.
Judith R. Starr,
Secretary, Board of Directors, Pension Benefit Guaranty Corporation.
 [FR Doc. E6-9503 Filed 6-15-06; 8:45 am]
BILLING CODE 7708-01-P