An underfunded pension plan may be manageable while a company is healthy. When the business is already under financial strain, however, the plan can threaten the company’s survival. Termination may be the only workable course, even though it creates substantial liabilities to the Pension Benefit Guaranty Corporation. In an article recently published in the Journal of Pension Planning & Compliance, Wagner Law Group Partner Harold J. Ashner discusses that problem and the practical choices that often determine whether a non-bankruptcy business-continuation case succeeds.
Ashner served as Assistant General Counsel for Legislation and Regulations at PBGC, where he drafted or supervised virtually all regulations and policies issued by PBGC from 1988 until he left the agency in 2005. That work covered the full single-employer program, including premiums, reportable events, annual employer reporting, penalties, plan terminations, benefit valuation, and benefit payments.
“Harold brings a rare combination of institutional knowledge and current case experience to these matters,” said Marcia Wagner, Founder and Managing Partner of The Wagner Law Group. “He understands not only how PBGC’s rules were developed, but how the agency’s legal, actuarial, and financial teams apply them when a company’s survival may be at stake.”
The full article, PBGC Distress and Involuntary Terminations: A Brief Overview and Some Observations, has now been published and is available by clicking here. Readers should consult it for the complete discussion. The points below are among Harold’s practical observations for a company that is no longer treating termination as a remote possibility.
- Start with the question everyone asks: why pursue Distress Test 3 outside bankruptcy? If a company can’t afford its pension plan, terminating outside bankruptcy seems, at first, to compound the problem: the termination adds PBGC liabilities, but there is no bankruptcy process for resolving them. The answer is that Distress Test 3 is intended to let the employer stay in business. PBGC understands that the test would serve no purpose if the eventual settlement were one the company couldn’t afford.
- Distress alone doesn’t make the case. The employer has to establish both sides of the proposition: it can’t continue with the plan, but it can continue after termination on realistic settlement terms. PBGC may ask why it should take a loss when major creditors haven’t made concessions. The company should therefore be prepared to explain why bankruptcy makes little sense and what, if anything, other creditors have done to share the pain. The forecasts matter. PBGC may test contribution assumptions, question operating projections, or retain an industry consultant who sees the company’s prospects differently. And if the projections assume a PBGC settlement, PBGC may treat that number as the opening offer. Ashner’s advice is to make it reasonable without being overly generous. It is, after all, just the first offer.
- A conversation with PBGC before filing may save time later. When circumstances permit, Ashner strongly recommends a pre-filing consultation. A high-level presentation lets the company hear PBGC’s questions while there’s still time to improve the submission; in some cases, the agency may also simplify or expedite part of the process. Once the proposed termination date has passed, Ashner generally recommends filing Form 601 promptly. The 120-day period is a deadline, not a target.
- Don’t lose sight of the ongoing plan. The Notice of Intent to Terminate bars participant loans, most lump sums, purchases of irrevocable commitments, and payment of PBGC premiums from plan assets. It doesn’t put ordinary plan administration on hold. Benefit payments continue, and interim reductions generally bring benefits down to estimated guaranteed or estimated asset-backed levels. If the regulatory reductions are too severe in a particular case, PBGC’s regulations permit the agency to modify them. Missed funding obligations can also continue to trigger excise-tax and lien issues.
- One signature can change the negotiating position. After PBGC approves the application and accepts the proposed termination date, it may send an agreement that terminates the plan and appoints PBGC as statutory trustee. Ashner’s advice at that point is blunt: “Don’t sign that agreement until you have a settlement in place with PBGC.” The signature creates the very liabilities still under negotiation. The settlement documents must also address PBGC in two distinct capacities. As guarantor, PBGC may assert claims for unfunded benefit liabilities, unpaid premiums, and termination premiums; as trustee, it may claim due and unpaid employer contributions. A general release may not cover both. IRS, rather than PBGC, administers minimum-funding excise taxes, and PBGC ordinarily will not immediately release potential fiduciary-breach claims. On that last point, Ashner’s advice is even shorter: don’t commit fiduciary breaches.
- Settlement discussions can begin before the distress case is formally approved. That can be important because anything more complicated than a single payment may take time to negotiate and document. Installments, collateral, future-profit payments, and other contingencies all add work. Whatever the structure, the company must be able to honor the deal and remain in business. Ashner therefore begins with affordability, not a recovery percentage: “If all you can afford to pay is $100,000,” he writes, “it doesn’t matter whether the PBGC liability is $200,000 or $200,000,000.” If the amount of the claim matters, the employer can request PBGC’s Pension Information Profile and the underlying spreadsheet, review the assumptions with the plan actuary, and prepare either an estimate or a full valuation.
- Sometimes there is a shorter route. A distress termination is initiated by the plan administrator; an involuntary termination is initiated by PBGC. But “involuntary” does not always mean contested. PBGC often completes an involuntary termination by agreement – what Ashner calls, oxymoronically, a “consensual involuntary termination.” For the right plan, that route may avoid the full distress-termination process.
No one chooses this route when a fully funded standard termination is available. When it is not, early advice can matter, especially before the company takes a step that cannot easily be undone.
Harold Ashner is not the only former senior PBGC official in The Wagner Law Group’s Washington, DC office. The team also includes professionals whose agency experience covers legal policy, litigation, participant benefits, actuarial and financial analysis, ombuds functions, and plan-termination administration:
- Israel Goldowitz, former PBGC Chief Counsel and former PBGC Deputy General Counsel for Program Law and Policy;
- Linda Rosenzweig, former Executive Assistant to the General Counsel;
- Camille Castro, former Senior Associate Participant and Plan Sponsor Advocate;
- John Langhans, former Deputy Manager of PBGC’s Actuarial Services Division;
- John Henkel, former Supervisory Auditor for PBGC’s Plan Termination Insurance Program; and
- Ellan Spring, formerly PBGC’s primary program official on benefit policy.
Taken together, those backgrounds let the firm’s PBGC team look at the same termination from several angles: the legal case for the filing, the projections PBGC is likely to test, the treatment of participant benefits, and the settlement the employer can actually perform.
Employers, plan administrators, restructuring professionals, lenders, actuaries, and other advisers dealing with an underfunded pension plan may contact Harold Ashner at [email protected] or (202) 969-2800 to discuss the available options.
