[Federal Register Volume 71, Number 116 (Friday, June 16, 2006)]
[Rules and Regulations]
[Pages 34819-34822]
From the Federal Register Online via the Government Publishing 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]
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