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PBGC 4062 e comment letter

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April 25, 2005 Filed Electronically Legislative and Regulatory Department Pension Benefit Guaranty Corporation 1200 K Street, NW Washington, DC 20005-4026 Re: Proposed rule concerning liability pursuant to ERISA Section 4062(e) Dear Sir or Madam, The American Benefits Council (Council) appreciates the opportunity to comment on the proposed regulations issued on February 25, 2005, relating to computing liability under Section 4063(b) of the Employee Retirement Income Security Act of 1974 (ERISA) when there is a substantial cessation of operations by an employer as described by ERISA Section 4062(e). The Council is a public policy organization representing principally Fortune 500 companies and other organizations that assist employers of all sizes in providing benefits to employees. Collectively, the Council's members either sponsor directly or provide services to retirement and health plans that cover more than 100 million Americans. We would like to start by applauding the Pension Benefit Guaranty Corporation (PBGC) for proposing rules intended to provide more certainty in an area traditionally handled on a case-by-case basis. However, the Council recommends that the PBGC address several areas that we believe need further clarification under the proposed regulation. The Council suggests that additional guidance would be helpful in the following areas discussed in more detail below: (1) cessation of operations, (2) formula ...
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April 25, 2005 Filed Electronically Legislative and Regulatory Department Pension Benefit Guaranty Corporation 1200 K Street, NW Washington, DC 200054026 Re: Proposedrule concerning liability pursuant to ERISA Section 4062(e) Dear Sir or Madam, The American Benefits Council (Council) appreciates the opportunity to comment on the proposed regulations issued on February 25, 2005, relating to computing liability under Section 4063(b) of the Employee Retirement Income Security Act of 1974 (ERISA) when there is a substantial cessation of operations by an employer as described by ERISA Section 4062(e).The Council is a public policy organization representing principally Fortune 500 companies and other organizations that assist employers of all sizes in providing benefits to employees. Collectively,the Council's members either sponsor directly or provide services to retirement and health plans that cover more than 100 million Americans. We would like to start by applauding the Pension Benefit Guaranty Corporation (PBGC) for proposing rules intended to provide more certainty in an area traditionally handled on a casebycase basis.However, the Council recommends that the PBGC address several areas that we believe need further clarification under the proposed regulation.The Council suggests that additional guidance would be helpful in the following areas discussed in more detail below:(1) cessation of operations, (2) formula modification and examples, (3) mergers and acquisitions, and (4) effective date. Cessation of Operations The proposed regulations require an employer that has a 20 percent or more reduction in a plan’s active participants in connection with a cessation of operations at one or more facilities to make a liability payment that would be
kept in escrow by the PBGC for five years and returned if the plan does not terminate. Thepayment would be equal to the termination liability (as if the plan terminated on the date of the cessation of operations) multiplied by a fraction of the number of participants separated from service over the total number of participants.In lieu of the escrow payments, employers could post bond in an amount not exceeding 150 percent of this calculation. If security is to be required on a consistent basis, it is important to employers for the PBGC to provide guidance on what constitutes the cessation of operations of a facility and what employees are considered separated as a result of the “cessation”. Forexample, if a cessation occurs over an extended period of time, employers need certainty in determining the time frame for measuring the decline in active participants.If more than one process is conducted on the same property, perhaps in multiple buildings, shutdown of one portion of the activities should not trigger the security requirement.However, the employer may have multiple locations within the same city or multiple facilities involved in producing a single product but different parts of a manufacturing process. Operations may be reduced because the employer will no longer take on new manufacturing but remain open for a period of time to complete preexisting work. Employeesmay leave on their own when they anticipate a future cessation of operations.A fire or other disaster may destroy a facility.In many of these situations, it is not clear whether a “cessation” of operations has occurred and when it occurs. It would also be helpful to clarify what constitutes active plan participation in the context of a cessation of operations.For example, a company that freezes its plan to further participation might also be moving business activities and affected employees from one facility to another.Some employees invited to make the transfer may decide not to move to the new location which could be in the same city or county.If the company has a strike at a location and plan participation stops for the strikers (or the employer locks out the workers during a labor dispute), it is not clear whether a bond would be necessary. Formula Modification and Examples The proposed rule would compute the required security payment by multiplying the total liability that would be imposed if the plan had terminated on the “date” of the “cessation” of operations at a “facility” by a fraction of the number of employees who are participants under the plan and are separated from employment because of the shutdown over the total number of employees who were participants in the plan prior to the cessation of operations.The Council recommends that the liability calculation use the lesser of this headcount calculation or the actual ERISA Section 4044 calculated liability for the affected participants.
Using the headcount calculation alone would provide some unreasonable results. Forexample, a large company might open or acquire a new facility with a substantial number of new employees but decide to close or sell that facility one or two years later for a bona fide business reason.The employer in this situation will likely be faced with liability far in excess of the potential liability for pension payments to the affected participants.This potential excessive liability could result in companies opening less new facilities when they weigh the risk. In addition, the seeming straightforward head count formula could be subject to interpretation that could result in widely varying calculations and specific examples would help to clarify these issues. For example, assume a company sponsors a pension plan with 100,000 participants of which 80,000 are active employees (the remainder are retirees or deferred vested participants) and the plan is underfunded on a PBGC termination basis by $100 million.Assume further that the $100 million underfunding is attributable to the participant categories as follows:$20 million for retiree and deferred vested participants, and $80 million for active plan participants. Thecompany shuts down a plant which results in the termination of 20,000 participants in the plan.A security payment would be required under ERISA Section 4062(e) because 20 percent of the total participants in the plan have been terminated (and 25 percent of active participants).The issue is whether to use the total number of participants or only the number of active participants in the formula. Total number of participants (active and inactive) example: x 20,000$100 million underfundingterminated plan participants  100,000total participants before cessation = liabilityof $20 million or surety bond of $30 million Total of active participants example: terminated plan participantsx 20,000$80 million underfunding 80,000 active participants before cessation = liabilityof $20 million or surety bond of $30 million The second example appears to be the better approach because it reflects the amount of underfunding (at least on a per capita basis, see discussion above) represented by the active participants who will no longer be active.It does not seem appropriate to include the liabilities associated with the deferred vested
and retiree participants in the calculation as they may have not been associated with the particular facility in question.In any event, an example or two would help clarify application of the formula. Mergers and Acquisitions The proposed rule does not clearly indicate whether the security payment is expected to apply to a sale of assets that includes a facility that the selling employer would cease to operate.The PBGC has long taken the position that mergers and acquisitions do not trigger a “cessation” and withdrawal where posting a bond would be necessary.The Council recommends that the PBGC clarify that the proposed rule is not a change in the PBGC’s longstanding policy of not imposing the security requirements of ERISA Section 4062(e) for mergers and acquisitions. Effective Date The proposed rule does not include a proposed effective date.The Council recommends that the final rule clarify that it will not be applied retroactively.If an employer ceased operations at one or more facilities prior to the publication of the final rule, the rule would not apply. While the Council appreciates the PBGC’s efforts to provide uniform rules in this area, the Council strongly encourages the PBGC to carefully consider potential impacts of the proposed rule.The Council recommends that the PBGC move very slowly in this area to avoid any unanticipated consequences that might discourage healthy employers from maintaining defined benefit plans.Again, we appreciate the opportunity to comment on these proposed regulations.If additional information from us would be helpful, please do not hesitate to contact me.  Sincerely,
 JanM. Jacobson  Director,Retirement Policy  AmericanBenefits Council