PBGC Issues First Appeals Decision on Downsizing Liability

August 30, 2011—CLIENT ALERT:

In recent years, many employers who have downsized or sold businesses have faced a PBGC demand for liability under ERISA Section 4062(e).  The demand is typically for a portion—or in some cases all—of the full liability that would be incurred if the employer’s pension plan terminated, even though the plan remains ongoing with no intention to terminate it.  Because that number is determined using PBGC’s conservative actuarial assumptions, it can be a shock—particularly when the downsizing event has had an immaterial or even positive impact on the financial strength of the employer and the plan.

On August 8, 2011, the PBGC Appeals Board issued its first determination regarding Section
4062(e) downsizing liability.  The Board’s 30-page determination sets forth the agency’s views regarding several significant statutory and regulatory interpretative issues, and PBGC may rely on it in an effort to support its negotiating positions.

PBGC’s most recent semiannual regulatory agenda targets November 2011 for publication of a final, comprehensive downsizing rule. Whether PBGC’s final rule will continue to take the aggressive positions reflected in both its negotiating positions and in the proposed rule it published in August 2010 is unclear.  The Appeals Board’s decision provides some clues.


On the books since 1974, Section 4062(e) empowers PBGC to demand that an employer provide an escrow payment or post a bond in the case of certain cessations of operations that result in the separation from employment of more than 20 percent of its employees who are participants in a PBGC-covered pension plan established and maintained by the employer.  Section 4062(e) provides that the liability may be satisfied by payment of 100 percent of the liability to PBGC, with PBGC holding the funds in escrow until five years after the event.  PBGC returns the funds to the employer without interest after the expiration of the five-year period (unless the plan is terminated during the five-year period).  An alternative method for satisfying the liability is the employer’s furnishing of a bond in the amount of 150 percent of the liability.

Since PBGC’s 2006 issuance of a final rule providing a Section 4062(e) liability formula, the provision has become a centerpiece of PBGC’s enforcement efforts.  Typically PBGC seeks a negotiated resolution of the liability rather than the provision of an escrow or the posting of a bond.  A typical settlement provides for additional contributions to the plan over a period of several years, coupled with an agreement not to create or increase the plan’s prefunding balance as a result of the additional contributions.  Settlements may instead or also include a letter of credit, a grant of security (not necessarily a first position), or a guarantee by a foreign member of the sponsor’s controlled group or by a non-controlled group member. 

Last year, PBGC published a comprehensive proposed rule regarding Section 4062(e) liability.  The proposed rule took an expansive position on the circumstances in which downsizing liability is triggered.  For example, liability under the proposed regulation could be triggered by routine business transactions, such as selling an ongoing business unit to a new owner, even when operations and employment seamlessly continue under the new owner.  There were many public comments urging PBGC to reconsider various positions it had advanced in the proposed rule.

In response to the President’s January 2011 Executive Order 13563 on “Improving Regulation and Regulatory Review” (essentially, the Administration’s “business-friendly” regulatory initiative), PBGC announced on April 1, 2011, that it was undertaking a review of its regulations “to make PBGC’s regulatory program both more effective and less burdensome,” and solicited public comments.  In May 2011, after considering the public comments submitted, PBGC issued its “Preliminary Plan for Regulatory Review.”  In that document, after noting that PBGC was planning to re-propose its November 2009 proposed rule on reportable events “with an emphasis toward reducing the unnecessary burdens on employers and plans,” PBGC stated that, “[i]n light of industry comments, PBGC will also reconsider its 2010 proposed rule that would provide guidance on the applicability and enforcement of ERISA section 4062(e).”  PBGC’s final regulatory plan, issued August 23, 2011, reiterates PBGC’s intention to reconsider its 4062(e) proposal.

The Appeals Board Decision

The Appeals Board was considering an appeal from an initial PBGC determination that the employer had incurred liability under Section 4062(e).  In its August 8, 2011, final determination:

  • The Appeals Board rejected the argument that the employer was not liable under Section 4062(e) because it did not both “establish and maintain” the plan, as required by the statutory language. The Board stated that, even if, as alleged, the Plan was a successor plan to a plan established by another employer, ERISA Section 4021(a), which provides that a successor plan is considered to be a continuation of a predecessor plan for all Title IV purposes and which has been interpreted by PBGC as treating the successor plan as having the history of the predecessor plan in other Title IV contexts, is inapplicable in a 4062(e) context.

  • The Board concluded that PBGC’s 4062(e) regulation required that the valuation date for purposes of calculating the amount of the Plan’s unfunded benefit liabilities (“UBL”) be “the date immediately after” the date of the 4062(e) event, rather than (as assumed in the initial determination) the date of the event.

  • The Board concluded that PBGC was not required to determine the amount of the employer’s liability in accordance with its established procedures governing plan terminations, and could assess 4062(e) liability based on estimates.

  • While asserting that it was not required to do so, the Board revised the estimated UBL calculations, which had been based on outdated source documents, using the most recent Actuarial Valuation Report and Schedule SB, which resulted in a reduction in the UBL.

  • The Appeals Board concluded that the plan’s UBL should not be reduced by the value of the claim on behalf of the plan under ERISA Section 4062(c).

  • The Board stated that it lacks the authority to grant any relief with respect to arguments regarding the validity and reasonableness of PBGC’s Section 4062(e) regulation, and that it also could not review the validity or reasonableness of the regulation as it is applied to a particular employer.


The decision, in a number of respects, reaches conclusions that depart from the literal language of the statute and PBGC regulations:

  • The Appeals Board’s conclusion that Title IV’s successor plan provision is inapplicable in a Section 4062(e) context departs from the statutory language specifying that the successor plan definition is applicable “for purposes of Title IV of ERISA,” which would include ERISA Section 4062(e).
  • The Board’s conclusion that PBGC is not required to determine the amount of Section
    4062(e) liability in accordance with the procedures it follows with respect to terminated plans departs from the literal language of PBGC’s 4062(e) regulation, which defines the liability amount as “the amount [of the plan’s UBL], as if the plan had been terminated by the PBGC . . . . ” (emphasis added).
  • Similarly, the Board’s conclusion that PBGC is not required to reduce the amount of a plan’s UBL by the value of the shortfall amortization charges claim under Section 4062(c) of ERISA departs from the same literal language of PBGC’s 4062(e) regulation, which requires the UBL amount to be the same as it would be if the plan had terminated.  The decision concedes that, in a terminated plan context, the value of a 4062(c) claim (which is asserted on behalf of the plan by the plan’s statutory trustee) must be treated as a plan asset that reduces the amount of the plan’s UBL, but disregards the value of that claim because the plan had not actually terminated.

Moreover, some of the rationales given by the Board for its conclusions raise significant questions.  For example, in concluding that PBGC could simply estimate (and not determine) the liability amount, the Board said that, “unlike section 4062(b) liability, the amounts paid by the employer for section 4062(e) liability are refunded or may (in effect) be corrected at a later date, i.e., at the expiration of the five-year-period or upon a final accounting at plan termination.  Accordingly, the need for precision is not as great for calculating section 4062(e) liability as it is for calculating section 4062(b) liability.” 

In addition to departing from the literal language of PBGC’s 4062(e) regulation, this analysis does not make clear whether or how PBGC took into account that: (1) if the plan terminates within the five-year period, the employer may never recover an overpayment; (2) the rights of other creditors may be adversely affected by the employer’s overpayment to PBGC; and (3) if the plan does not terminate within the five-year period, because the statute does not provide for interest on the escrow, the employer will have lost the use of the escrowed funds for a significant period.

What the Appeals Board Did Not Decide

The issues that the Board did not decide are as important as the ones that it did decide.  Among the former:  

  • Is the PBGC’s 4062(e) regulation consistent with the statutory requirement that the downsizing employer must be treated “as if” it were a substantial employer withdrawing from a plan and incurring liability under ERISA Section 4063, or does it conflate the statutory criteria for determining whether liability has been triggered with the statutory criteria for determining the amount of that liability? 
  • Is the regulation consistent with the statutory requirement that any liability formula prescribed by regulation must be “equitable,” or does its liability formula improperly stack the deck to maximize liability to PBGC?
  • Is it arbitrary and capricious for PBGC to attempt to impose liability for 100 percent of the liability that would be incurred upon plan termination after a downsizing event that strengthens the financial condition of an already healthy employer?


Thirty-seven years after the enactment of Section 4062(e), there are still no definitive answers to many interpretative issues raised by the statute’s opaque language.  The Appeals Board’s decision clearly is not the final word with respect to Section 4062(e) issues, but it does provide insight into the agency’s thinking on a number of issues the agency had not previously addressed.  Moreover, the decision provides some indication that the agency will continue to conclude that downsizing liability has been incurred in a particular case despite statutory provisions that suggest otherwise, and will continue to take positions that maximize the amount of the purported downsizing liability.  The unsettled nature of the statutory and regulatory landscape makes it particularly important for an employer faced with downsizing issues to carefully analyze the 4062(e) issues and develop an effective strategy for addressing them. 

Keightley & Ashner LLP represents the employer in this matter.  Employers or their professional advisors who would like to discuss issues relating to downsizing liability under ERISA  Section 4062(e) may contact any of our professionals at 202-558-5150. 

For further information, see Stealth Liability Lurks for Employers with Ongoing Pension Plans Who Downsize or Sell Businesses by Harold J. Ashner (Pension & Benefits Reporter, BNA, September 10, 2010); Downsizing Employers with Ongoing Pension Plans May Face an Immediate and Significant PBGC Liability (Keightley & Ashner LLP Client Alert, February 18, 2009); Beware of PBGC Downsizing Liability! by Harold J. Ashner (Journal of Pension Benefits, Aspen Publishers, Inc., Spring 2008); and PBGC’s Final Rule on Liability for Facility Shutdowns Affects Downsizing Employers by Harold J. Ashner (Pension & Benefits Reporter, BNA, June 23, 2006).

© 2011 Keightley & Ashner LLP. All Rights Reserved. This article is provided as a service for the firm’s clients and friends. It is designed solely for informational purposes, is not intended to constitute legal advice, and should not be acted upon with respect to any specific matter without professional counsel.