PLAN SPONSOR BASICS: SECTION 4062(e) PLANT SHUTDOWN LIABILITY Presenters: April 29, 2015 Althea R. Day Brian J. Dougherty 2015 Morgan, Lewis & Bockius LLP
PBGC Plant Shutdown Liability Before 2015 Statutory Trigger Cessation of operations At a facility in any location As a result of cessation of operations, >20% of employees participating in a single DB plan are separated from employment PBGC Enforcement Under 2010 Proposed Regulations Cessation includes: Transfer of operations to another facility Sale of assets of ongoing operation Discontinuance of all significant activity in furtherance of purpose of operation 2
PBGC Plant Shutdown Liability Before 2015 Facility may be site of more than one operation Operation comprises organizationally, operationally, or functionally distinct unit of employer Separation Occurs on discontinuance of active performance (e.g., temporary layoff unless reasonable expectation of resumption within 30 days) of activities in furtherance of any of employer s operations (not just the ceased operation) May result from cessation but occur before, on, or after cessation Liability may be considered satisfied by continuation of operations and pension plan by new employer (e.g., asset sale) 3
PBGC Plant Shutdown Liability Before 2015 Reporting Notice to PBGC due within 60 days of event Separate requirement from active participant reduction reportable event PBGC Enforcement 4062(e) liability administrative determination Lawsuit file enforcement action in U.S. district court Lien filings under ERISA Section 4068 without lawsuit Liability disappears five years after event 4
PBGC Plant Shutdown Liability Before 2015 PBGC Enforcement Under 2012 Pilot Program Exceptions for: Small plans (<100 participants) Financially sound plan sponsors Moody s Baa3 rating S&P BBB- rating D&B Financial Stress Score 1477, and secured debt 10% of asset value No signs of financial weakness, e.g., lack of ongoing operations, change in business fundamentals like large drop in demand, pending transactions that would cause credit rating downgrade, or insignificant U.S. assets or operations 5
PBGC Plant Shutdown Liability Before 2015 Liability = plan termination liability x active headcount reduction percentage Satisfied by (i) escrow or (ii) bond up to 150% of liability, due on plan termination within five years July December 2014 enforcement moratorium Congressional backlash Consolidated and Further Continuing Appropriations Act, 2015, enacted December 16, 2014 Substantial overhaul and redesign of ERISA Section 4062(e) 6
PBGC Plant Shutdown Liability After 2014 Statutory Trigger Permanent cessation of operations at a facility in any location That results in separation from employment of >15% of all employees eligible to participate in any DB or DC plan maintained by any controlled group member Three-year lookback for employment separations resulting from cessation of operations Measurement date: earlier of (i) employer s decision date or (ii) earliest separation date for any employee affected by workforce reduction (including sale of business) New calculation metrics should be helpful in most cases 7
PBGC Plant Shutdown Liability After 2014 Separated employees disregarded in calculation A separated employee replaced, in a reasonable time, at the same facility or any other U.S. facility, by a U.S. citizen or resident In stock/asset sale Separated employee replaced by buyer with U.S. citizen or resident, if buyer maintains spinoff DB plan Employee who continues employment at sold facility, if (i) employee not a participant in seller s DB plan, or (ii) employee covered by buyer s spinoff DB plan No protection for transfer of operations overseas 8
PBGC Plant Shutdown Liability After 2014 Plans affected Any DB plan covering employees at facility where operations cease May trigger liability for plan with small headcount reduction, due to other aggregate employment separations Exemptions Plans with <100 participants Plans with VRP funding ratio (MV of assets to FT) 90% Reporting requirements Same reporting requirements (60 days after event), but event is determined taking into account the new exemptions 9
PBGC Plant Shutdown Liability After 2014 Statutory Liability Same as prior law Satisfaction of Liability Escrow or bond as under prior law Alternative method Alternative Method: Additional contributions (in addition to required minimum funding) for seven years Beginning earlier of (i) one year after notice to PBGC of cessation, or (ii) first due date for minimum required contribution after cessation Additional contribution amount = 1/7 of UVB for year prior to year in which cessation occurs x the Reduction Fraction Reduction Fraction = the number of plan participants with accrued benefits in the plan who were included in computing the workforce reduction/the number of eligible employees of the employer with accrued benefits in the plan Cap on annual payments under the alternative method Not to exceed 25% x (MV assets FT) 10
PBGC Plant Shutdown Liability After 2014 Alternative Method : Failure to pay additional contribution in the full amount due for any year in the seven-year period accelerates the aggregate unpaid amounts for remainder of seven-year period Liability ends if the plan reaches 90% VRP funded level with respect to any year in the seven-year period Must elect not later than 30 days after the date the employer notifies the PBGC of the cessation or, if earlier, the date the PBGC determines a cessation has occurred 11
PBGC Plant Shutdown Liability After 2014 Controversial interpretive issues under 2010 Proposed Regulations remain Cessation Facility in any location Operation Separation from employment Separation as result of cessation Transition rules Employer negotiating with PBGC about pre-2015 event, determined under prior law, can make seven-year payment election 12
PBGC Plant Shutdown Liability After 2014 PBGC Enforcement Enforcement for new and pending cases to be consistent with new rules regardless of whether cessation occurred before 1/1/2015 Except if settlement agreement is in place before 6/1/2014 13
QUESTIONS? Register for upcoming webinars in this series: May 20 Retirement Plan Administrative Compliance Calendar September 22 Retirement Plan Correction Issues October 14 Fiduciary Issues for Defined Contribution Plans https://morganlewisevents.webex.com 2015 Morgan, Lewis & Bockius LLP
Contact Information Brian J. Dougherty Partner Philadelphia +1.215.963.4812 bdougherty@morganlewis.com Althea R. Day Partner Washington, DC +1.202.739.5366 aday@morganlewis.com 15
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