Furloughs, Workforce Reductions, and Facility Closures Due to Coronavirus: Important Defined Benefit Plan Reporting Obligations

15 April 2020 Coronavirus Resource Center:Back to Business Blog
Author(s): Gregg H. Dooge Arthur T. Phillips

Employers face unique legal and financial challenges in connection with the COVID-19 pandemic. One such challenge includes the impact of a potential furlough, workforce reduction, or facility closures on benefit plan administration and compliance. We discussed a number of these issues in our recent newsletter, Understanding the Impact of and Guidance to Navigating Employer Furloughs Due to the Coronavirus.

In this article, we focus attention on employers that sponsor defined benefit pension plans. Employers should be aware of Pension Benefit Guaranty Corporation (PBGC) reporting obligations that may arise when implementing COVID-19 related furloughs, workforce reductions, and facility closures.  

This article highlights reporting obligations that may arise as employers make decisions in the current economic environment. In particular, this article highlights the following PBGC reporting obligations: 

  • Reportable Events 
  • Facility Closures

Reportable Events

ERISA requires that the administrator or the contributing sponsor of a defined benefit pension plan notify the PBGC of the occurrence of certain events (called reportable events). In general, notice must be provided within 30 days following the occurrence of the event, although in certain cases where the employer’s defined benefit pension plans have aggregate unfunded vested benefit obligations in excess of $50 million, notice must be provided at least 30 days prior to the effective date of the event. 

Timely filing of the reportable event notice operates as an informational filing to the PBGC. The filing does not begin the process of terminating the plan or require accelerated pension plan funding. However, failure to file (or late filing of) the required notice might result in substantial penalties assessed for each day that notice was required but not provided. PBGC Form 10 is used to provide notice.

Reporting is required with respect to various corporate events. The most likely reportable event in the current environment involves an “active participant reduction.” An “active participant reduction” reportable event generally occurs when the number of active participants in a defined benefit plan falls below 80% of the number of active participants at the beginning of the plan year.

The PBGC defines “active participant” to include (1) participants receiving compensation for work performed, (2) participants on paid or unpaid leave of absence for reasons other than layoff, (3) participants who are laid-off from work for less than 30 days, and (4) participants who are absent from work due to a recurring reduction that occurs at least annually (e.g., seasonal reductions).

Importantly, under the PBGC rules, a participant who is laid-off for more than 30 days ceases to be an “active participant,” potentially triggering the reportable event notice requirement.

Reporting may also be required with respect to other events, including:

  • When an employer (or member of the employer’s controlled group) commences, or has commenced against it, an insolvency proceeding or a proceeding to affect a composition, extension, or settlement with creditors, executes a general assignment for the benefit of creditors, or undertakes to affect any other non-judicial composition, extension, or settlement with substantially all its creditors.
  • When an employer (or member of the employer’s controlled group) has a loan balance of $10 million or more and
    • There is an acceleration of payment or a default under the loan agreement or 
    • The lender waives or agrees to an amendment of any covenant in the loan agreement; the effect of which is to cure or avoid a breach that would trigger a default.  

Facility Closures

Section 4062(e) of ERISA also requires reporting (and perhaps additional plan contributions or payments to the PBGC) when a “substantial cessation of operations” at a facility occurs. This generally occurs when a permanent cessation of operations at a facility causes a workforce reduction at the facility (separation from employment) of more than 15% of the employer’s total number of “eligible employees.”   

For this purpose, an “eligible employee” generally means an employee at any of the employer’s facilities who is eligible to participate in either a defined benefit or a defined contribution plan maintained by the employer. As a result, as applied to an employer with multiple facilities, Section 4062(e) looks not at whether there is a greater than 15% reduction in the employees employed at a particular facility or within the participants who are eligible under a particular plan. Rather, the test looks at whether the cessation of operations at a facility produces a greater than 15% reduction in the employer’s total number of employees who are eligible for a defined benefit or defined contribution plan.

A Section 4062(e) facility closing notice likely will be required less frequently than the Reportable Event notices discussed above. However, where required, the consequences are more significant. In contrast to a Reportable Event notice that is informational but does not trigger other employer obligations, a facility closure for which reporting is required under Section 4062(e) produces an employer financial obligation beyond the reporting requirement. The additional financial obligation involves either the payment of liability directly to the PBGC or an employer commitment to make additional contributions to the pension plan. 

When 4062(e) reporting event has occurred, the employer must submit to the PBGC Form 4062(e)-01 within 60 days after the event.

Additional Guidance

Employers should be aware of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) which includes several provisions affecting defined benefit plans, including limited relief relating to minimum required contributions due during 2020 and adjusted funding target percentage (“AFTAP”) calculations. For more information, click here. For more other information on the impact of the coronavirus pandemic on employee benefits and executive compensation, click here. To receive this content directly in your inbox, click here and submit the form. 


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