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PBGC Announces Change to ERISA Section 4062(e) Enforcement Practices
Practical Law Legal Update 2-522-2702 (Approx. 3 pages)
PBGC Announces Change to ERISA Section 4062(e) Enforcement Practices
by PLC Employee Benefits & Executive Compensation
| Published on 06 Nov 2012 • USA (National/Federal) |
The Pension Benefit Guaranty Corporation (PBGC) announced changes to its financial assurance program under Section 4062(e) of the Employee Retirement Income Security Act of 1974 (ERISA). Under the new program, a company that is financially sound or whose plan has fewer than 100 participants will not be required to make additional contributions or provide a financial guarantee to the plan when the company ceases operations at a facility, causing a substantial share of workers in the plan to lose their jobs.
On November 2, 2012, the Pension Benefit Guaranty Corporation (PBGC) announced that it would start a pilot program, changing the way it enforces ERISA Section 4062(e). The goal of the program is to preserve pension plans by:
- Targeting enforcement where plans are at risk.
- Reducing requirements where plans are not at risk.
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.
The decision whether to take or not take action will be based on the PBGC's analysis of a company's financial strength and the circumstances of the case. In making its determination, the PBGC will use common financial measures accepted around the world such as:
- Credit ratings.
- Credit scores.
- Indebtedness.
- Liquidity.
- Profitability.
The PBGC made these changes in response to a presidential directive to review and reconsider regulatory requirements. By targeting its enforcement efforts, the PBGC hopes to respond to industry concerns and direct its resources to preserve at-risk plans more effectively. As a result of this change, 92% of companies that sponsor pension plans will not face enforcement efforts.