Senate Passes Bill to Clarify Definition of ‘Substantial Cessation of Operations’
The Senate on Sept. 16 passed a bill that, if enacted, would amend ERISA to clarify definitions concerning what constitutes a shutdown event. The measure is not law yet, but the legislation is worth watching since it would affect administration of defined benefit plans. Sen. Tom Harkin (D-Iowa) introduced the bill on June 19.
The way the term substantial cessation of operations is defined is important since it is relevant to compliance with Section 4062(e) of ERISA, which requires sponsors of single-employer DB plans to make financial assurances — such as providing a letter of credit, a lien on land, or additional contributions to the plan — when they have a substantial cessation of operations. Current law defines that term as the end of operations at a facility that results in a 20% reduction in the number of plan participants.S. 2511
would change that definition to a permanent cessation of operations that results in a reduction in the number of eligible employees at that facility that is equivalent to more than 15% of the number of all the employer’s eligible employees. It also would establish a new alternative way employers could use to satisfy the requirements of ERISA Section 4062(e).
The bill would make other changes to ERISA Section 4062(e): it would exempt well-funded plans and provide plan sponsors a seven-year payment option for satisfying liabilities.
The Congressional Budget Office (CBO) estimates that if the bill becomes law, plan sponsors will be able to make smaller contributions to their plans if they terminate operations. It further says that this would result in higher revenues, and the CBO and the Joint Committee on Taxation estimate that the measure would cut deficits by $29 million between 2015 and 2024.
The measure was sent to the House of Representatives on Sept. 17.