Reductions-in-Force, Layoffs and Furloughs Can Trigger Unexpected PBGC Reporting and Pension Plan Funding Obligations

Alerts / April 14, 2020

Many employers now are taking actions to reduce workforces, primarily by laying off employees, furloughing employees, or offering retirement or termination incentive programs. Some of these reductions are intended to be permanent, others temporary. In both cases, however, pursuant to two provisions of the Employee Retirement Income Security Act (ERISA), these actions can inadvertently trigger obligations to notify the PBGC within a short period of time, and also require the employer to provide additional funding or security to their plans, beyond the minimum funding normally required under the Internal Revenue Code.

A. Active Participant Reductions.

The first notification requirement stems from ERISA Section 4043, which lists 11 sets of events; if one or more of such events occur, an employer must report such event(s) to the PBGC within 30 days (each, a Reportable Event). An employer looking to downsize should be particularly wary of the Reportable Event known as the “Active Participant Reduction.” On February 4, 2020, PBGC issued final regulations covering this type of Reportable Event under Section 4043.

An Active Participant Reduction Reportable Event occurs when the number of active participants under a plan is reduced below 80% of the number of active participants at the beginning of the plan year. The event can occur either as a result of a “single-cause event” or an “attrition event,” as defined below.

1. Single-cause event. A single-cause event occurs when, as a result of a new single cause, the ratio of (a) the aggregate number of individuals who ceased to be active participants under a plan as a direct result of that single cause, to (b) the number of active participants covered by that plan at the beginning of such plan year, exceeds 20%. Notably, a single-cause event can occur at any time in a plan year, or multiple times in a plan year; accordingly, employers need to check for the presence of a single-cause event whenever such an event triggers the departure of a material number of active participants, and should not wait until the end of the plan year to do so.

Examples of single-cause events include a significant reduction in force, a reorganization of or restructuring of a business, the discontinuance of an operation or business, a facility closure, a natural disaster, a mass layoff, or an early retirement incentive program.

2. Attrition event. An attrition event occurs if the sum of the number of active participants covered by the plan at the end of such plan year plus the number of individuals who ceased to be active participants during the same plan year (e.g., by reason of quit, retirement, death, etc.) that are reported to PBGC in a single-cause event report in that plan year, is less than 80% of the number of active participants at the beginning of such plan year. Unlike testing for the presence of a single-cause event, testing for the presence of an attrition event takes place only at the end of the plan year. Also, while this is called an attrition event, this event can result from the combination of general attrition and one or more single-cause events that did not independently meet the threshold for reporting previously (i.e., resulted in a reduction in active participants below 20%). For employers that may be laying off their employees by location or in response to a series of discrete events, such as the loss of specific contracts, projects or accounts, where each layoff likely constitutes its own potential single-cause event but fails to meet the 20% threshold on its own, those smaller events can result in an attrition event occurring at year-end.

A participant essentially is any person who is owed a benefit under a pension plan. An active participant is a participant who (1) is receiving compensation from any member of the plan’s controlled group for work performed for any member of the plan’s controlled group; (2) is on paid or unpaid leave that has been granted for a reason other than a layoff; (3) is laid off from work for a period of time that has lasted less than 30 days (i.e., this can include employees on furlough); or (4) is absent from work due to a recurring reduction in employment that occurs at least annually. A participant does not cease to be an “active participant” if the participant leaves employment with one member of the plan’s controlled group and subsequently commences employment with another member of the same controlled group.

The obligation to provide notice of an Active Participant Reduction Event is waived, however, for:

  1. Small plans (100 or fewer participants for which only a flat-rate premium had to be paid to the PBGC for the prior plan year);
  2. Low-default-risk plan sponsors (those that meet a long list of financial criteria published by the PBGC);
  3. Well-funded plans (no variable rate premium was due for the prior plan year);
  4. Public company plan sponsors BUT ONLY IF they timely file an SEC Form 8-K, disclosing the relevant event (other than in sections of the 8-K relating to Results of Operations or Financial Statements); and
  5. A plan sponsor required to report to PBGC under ERISA Section 4062(e) with respect to the same plan (discussed below).

The takeaway here is that if an employer sponsors a pension plan (whether active, frozen or partially frozen) and engages in one or more workforce reduction or right-sizing transactions, care must be taken to analyze whether such transactions (taken alone or with attrition) cause or result in a 20% active participant reduction in a single plan year.

NOTE: On April 10, 2020, the PBGC announced extended deadlines for upcoming premium payments and other filings, including the Reportable Event Filing for Active Participant Reductions. Due dates for such filings that otherwise would have been due on or after April 1, 2020, and July 15, 2020, have been extended to July 15, 2020.

B. Restructurings, Cessation of Operations, and Facility Sales or Shutdowns.

In the event that a defined benefit pension plan sponsor significantly restructures its operations and, as a result, permanently ceases operations at a facility (or sells a facility where plan-covered employees work), this action is an event potentially covered by ERISA Section 4062(e).

A 4062(e) event occurs whenever:

  • There is a permanent cessation of operations at a facility (including by reason of an asset sale or other transfer of operations to a new employer); and
  • That cessation results in a workforce reduction of more than 15% in the total number of eligible employees; where,
  • Eligible employees are those employees who are eligible to participate in any employee pension plan (i.e., any defined benefit plan or defined contribution plan – including a 401(k) plan) then being maintained by members of the controlled group.

So, the numerator in this analysis is the number of employees who lose their jobs as the result of the transaction at the involved facility or facilities, and the denominator is the number of employees, controlled groupwide, who are eligible to participate in one or more company-sponsored retirement plans.

Certain plans are exempt from ERISA Section 4062(e):

  1. Small plans (plans with fewer than 100 participants); and
  2. Plans that were 90% or more funded in the year before the cessation, as determined for purposes of calculating and paying PBGC premiums.

Consequences of a 4062(e) Event:

In the event an employer discovers that it has incurred a Section 4062(e) event, it will need to take the following actions:

  1. Report the event to the PBGC within 60 days after the event as occurred (i.e., the date that the 15% threshold has been reached or exceeded); and
  2. Accelerate its funding of its defined benefit pension plans, over the ensuing seven-year period, to fully fund that portion of the pension plan’s (or plans’) liability which corresponds to the percentage reduction that it has experienced in the number of active participants that it previously had employed (subject to certain limitations).

Depending on the circumstances, the PBGC and a plan sponsor may agree on other ways to satisfy the extra funding liability, including:

  • Putting cash in an escrow fund for five years.
  • Establishing and maintaining a letter of credit for five years.
  • Purchasing and providing a surety bond in favor of the PBGC for five years.

The takeaway here is that when an employer engages in a workforce reduction that involves the cessation of operations, the closure of one or more facilities, and the termination of employment of a significant segment of its workforce (even if some or all of the workforce gets hired by the buyer in a corporate asset sale transaction), the employer needs to quickly determine whether that action will require it to notify the PBGC of the event and recognize that significant additional pension funding obligations could be forced upon it. It also should be noted that the PBGC has an office which monitors business news and wire reports and is very proactive in contacting employers with pension plans when it sees these types of transactions or situations.

Authorship Credit: Raymond M. Malone

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