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PBGC Redefines "Gone"

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The Pension Benefit Guaranty Corp. (PBGC) wants to adopt new rules for deciding when a defined benefit pension plan sponsor has shut down part of its operations.

The PBGC, the entity that insures pensions covered by the Employee Retirement Income Security Act (ERISA), has proposed a rule concerning liability for termination of single-employer plans and treatment of “substantial cessation of operations” in a facility.

PBGC officials want to give themselves more flexibility to decide when a pension plan sponsor has shut down part of its operations and the PBGC ought to collect an extra assessment.

The proposed rule would help the PBGC implement ERISA Section 4062(e), which describes the rules for reporting of and responsibility for pension plan sponsor shutdowns.

Under the terms of that section, if an employer shuts down operations in a facility and lays off more than 20% of the employees who are pension plan participants, then the PBGC will handle calculations of fractional liability by treating the employer as if it were an employer participating in a multi-employer pension plan program. The PBGC then collects extra payments from the employer.

ERISA Section 4063(b) provides a method for implementing Section 4062(e) that never worked very well, officials say. The PBGC created another method in 2006, and the PBGC has used that method in 37 cases with about 65,000 participants.

The proposed rule would move the 2006 method into a new part of the PBGC’s regulations, polish the language, and make it clear that “evaluation of risk is not an element in deciding whether a Section 4062(e) event has occurred,” officials say.

An employer that ceases operations at a facility and lays off more than 20% of the employees in the pension plan is probably at risk for underfunding and shutting down the pension plan within 5 years, whether or not there are any other risk factors, officials write in a preamble to the proposed rule.

“In a recent Section 4062(e) case, an employer opposed the assessment of liability under Section 4062(e) on the ground that its financial resources eliminated any risk to the termination insurance program,” officials say. “But shortly after reaching accord with PBGC, the employer entered bankruptcy with its plan underfunded because of an economic downturn in the industry.”

PBGC officials also are fine-tuning the definition of “cessation of an operation.”

If, for example, a manufacturer stopped manufacturing in a facility but continued to process materials on hand, that might constitute significant activity, officials say.

If the same manufacturer shut down all manufacturing but continued to sell left-over inventory at the facility, that probably would not be treated as a significant continuation of operations, officials say.

“A cessation of such an operation could occur even though there was a continuance of maintenance and guard services,” officials say.

Comments on the proposed rule are Oct. 12.


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