ML BeneBits


As the effects of the coronavirus (COVID-19) pandemic hit the United States, downsizings and shutdowns are spreading indiscriminately throughout the economy. Employers who are complying with “shelter in place” regulations and attempting to mitigate these extraordinary economic challenges with layoffs should keep in mind that such unprecedented actions may still involve complying with routine regulatory obligations.

When downsizing or laying off employees who are participating in a company’s qualified retirement plan, employers need to be aware that they may be triggering a “partial termination” of the retirement plan, and/or liability under 4062(e) of ERISA due to a “substantial cessation of operations.” In a difficult economic environment, partial plan terminations and “substantial cessations of operations” can occur more frequently and without warning. Employers should closely monitor their employee turnover and take appropriate actions if either a partial plan termination or a “substantial cessation of operations” is triggered.


The significance of a partial termination is that once triggered, all participants covered under the portion of a defined benefit or defined contribution plan that is deemed terminated must be 100% vested in benefits accrued as of the partial termination date. This accelerated vesting must occur regardless of the vesting requirements otherwise applicable under the terms of the plan. Note that full and immediate vesting does not apply to any participants who are not affected by the partial termination event, i.e., participants who remain eligible for the plan as active employees of the company.

Determining when a partial termination occurs is a facts-and-circumstances test; however, the IRS has provided guidance to help identify when a partial termination is triggered. A partial termination is presumed to occur when more than 20% of plan participants are terminated in a particular year. The turnover rate is calculated by dividing employees terminated from employment (vested or unvested) by the number of all participating employees during the applicable period or as a result of related events spanning more than one year. The only severances from employment that are not factored in when determining the 20% are those that are voluntary or otherwise out of the employer’s control, such as death, disability, or retirement.

There are other circumstances in which a partial termination may be deemed to occur, but those circumstances are generally unrelated to downsizing and layoffs.


When an employer maintaining a single employer defined benefit pension plan closes a facility and as a result incurs a workforce reduction of 15% or more of its employees who are eligible to participate in a qualified retirement plan, including a 401(k) plan (“substantial cessation of operations”), the employer may be subject to more onerous withdrawal liability and notice rules that otherwise only apply to multiple employer plans under ERISA Sections 4063, 4064, and 4065.

A company that closes a facility and incurs a “substantial cessation of operations” must

  • notify the PBGC of the “withdrawal” within 60 days after its occurrence, and
  • request that the PBGC determine its liability with respect to the withdrawal.

As soon as possible after the PBGC request, the PBGC will determine if the company is liable for any amount relating to the withdrawal. If a company is subject to Section 4062(e) liability, there are several ways to satisfy the determined liability—some more expensive and burdensome than others.

Exemptions from Section 4062(e) Obligations

If a plan falls under one of the following exemptions, then no reporting is required:

  • Small Plan Exemption: Plans that have fewer than 100 participants with accrued benefits are exempt from Section 4062(e).
  • 90% Funded Exemption: Plans that were 90% or better funded in the plan year before the substantial cessation of operations occurred are also exempt. The funded level is measured by comparing the plan’s assets to the plan’s unfunded vested benefits.

Section 4062(e) Liability

Companies have several options for satisfying a 4062(e) liability. These options are divided into two categories: (1) “contribution” options, i.e., making additional plan contributions either through installments or by lump sum (pursuant to Section 4062(e)(4)), or (2) “non-contribution” options, i.e., putting cash in an escrow fund for five years; establishing a letter of credit for five years; or posting a surety bond in favor of PBGC for five years. Note that these options can also be combined.

If you have any questions on determining whether your company is subject to Section 4062(e) or identifying the most effective way to satisfy a liability imposed by Section 4062(e), please contact the authors or your Morgan Lewis contacts.