Presenting a live 90-minute webinar with interactive Q&A Underfunded Pension Plans: ERISA Liability Risks Increasing Mitigating Controlled Group, Affiliate and Successor Liability for Affiliated Companies, M&As and Corporate Reorganizations TUES DAY, OCTOBER 22, 2013 1pm East ern | 12pm Cent ral | 11am Mount ain | 10am Pacific Today’s faculty features: Jeffrey R. Capwell, Part ner, McGuireWoods , Charlot t e, N.C. James L. Eggeman, Assist ant Chief Counsel, Pension Benefit Guaranty , Washingt on, D.C. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Underfunded Pension Plans: ERISA Liability Risks Increasing fined Benefit Pension Plans Jeffrey R. Capwell McGuireWoods LLP jcapwell@mcguirewoods.com 704-353-6256
Overview • Controlled Group Liability – Identifying Group Members – Analyzing Potential Liability of Controlled Group – Controlled Group Liability in the Context of Private Equity Funds • Successor Liability – Stock Sales and Reorganizations – Asset Sales – “Evade and Avoid” Transactions – Alter Ego Theories • Multiemployer Plan Withdrawal Liability 6
The Controlled Group Concept • Under ERISA, certain employee benefit liabilities are a joint and several obligation of the plan sponsor or contributing employer and of each member of its “controlled group” – Minimum funding, termination liabilities, multiemployer plan withdrawal liability and PBGC premiums – The entire amount of the liability may be asserted against each member of the controlled group, but only one satisfaction permitted – Change in the controlled group may trigger reporting obligation to the PBGC under ERISA’s reportable event rules – Controlled group changes may trigger PBGC-initiated plan terminations under the agency's Early Warning Program. 7
Why Worry About Controlled Group Liability? • PBGC’s single-employer program protects nearly 33 million workers and retirees in about 24,000 pension plans. • PBGC’s multiemployer program protects about 10 million workers and retirees in about 1,500 multiemployer pension plans (aka Taft-Hartley plans) – Vast majority are not fully funded for withdrawal liability purposes; Many are facing insolvency and mass withdrawals. • During FY 2012, PBGC reached settlements with 27 companies for $471 million under ERISA 4062(e) – “downsizing liability.” • FY 2012 Annual Report: PBGC deficit increased to a record $34 billion. • Both PBGC and multiemployer plans look to controlled group members to satisfy unfunded pension liabilities. 8
Controlled Group Liability Applicable in the context of single-employer and multiemployer plans Liability arises without regard to controlled group member’s knowledge or intent Notice to signatory employer of withdrawal liability constitutes notice to all controlled group members and triggers the time period for raising defenses of all controlled group members. Employers who fail to timely initiate arbitration waive their right to challenge determination and are immediately liable for amount of withdrawal liability demanded 9
What is a Controlled Group? • ERISA § 4001(b)(1): "Under regulations prescribed by [PBGC], all employees of trades or business (whether or not incorporated) which are under common control shall be treated as employed by a single employer and all such trades and businesses as a single employer.” • ERISA Section 4001(a)(14) requires the PBGC to adopt regulations “consistent and coextensive” with IRS regulations defining common control in Code Section 414(b) and (c). • Applicable PBGC regulations generally incorporate IRS/Treasury regulations under Code Section 414 “[f]or purposes of title IV of ERISA.” – See 29 CFR § 4001.3. 10
IRS/Treasury Standards for Controlled Group Status • Code Sections 414(b) and 414(c) provide standards for determining when a group of organizations are treated as a single employer – Corporations, partnerships, proprietorships, trusts or estates can all be controlled group members – The Code standards allow limited liability companies (LLCs) to elect to be treated as partnerships or as corporations • Two general sets of standards – Controlled group consisting of corporations – Controlled group consisting of trades or businesses, whether or not incorporated 11
Identifying Corporations in a Controlled Group • Method #1 - Parent-subsidiary group – One or more chains of corporations connected through at least 80% stock ownership, by vote or value, with a common parent corporation – Example – P Corp is the sole owner of all outstanding stock of S1 Corp and S2 Corp; P, S1 and S2 are all members of a controlled group • Method #2 - Brother-sister group – Five or fewer persons who are individuals, estates or trusts – Together they own at least 80% of the total vote or value of stock of each of multiple corporations – And the sum of their overlapping stock ownership is at least 50% • Method #3 - Combined group 12
Identifying Organizations that are a Controlled Group • Method #1 - Parent-subsidiary group – One or more chains of organizations conducting trades or businesses connected through a “controlling interest” – For a trust, 80% actuarial interest (assumes maximum exercise of discretion in favor of beneficiary) – For a partnership, 80% capital or profits interest – For a sole proprietorship, ownership – For a corporation, 80% of total vote or value of all classes • Method #2 – Brother-sister group – Same standards as for corporations, using the controlling interest definition above • Method #3 - Combined group 13
The Trade or Business Condition • “Trade or business” is not defined by ERISA or regulations – Term often used but not defined in the Code • Supreme Court’s test ( Commissioner of Internal Revenue v. Groetzinger, 480 U.S. 23 (1987)): – Must be engaged in an activity for the primary purpose of income or profit, and – The activity must be conducted with continuity and regularity • Passive holding of investments not a trade or business – Individuals engaged in passive investment were found not to be conducting a trade or business. Higgins v. Comm'r , 312 U.S. 212 (1941); Whipple v. Comm'r, 373 U.S. 193 (1963) – Mere ownership of land is not a trade or business. Textile Workers Pension Fund v. Oltremare, 764 F. Supp. 287 (S.D.N.Y. 1989). 14
Supreme Court and Trade or Business • Individual with extensive investments, who devoted a considerable portion of his time to managing them, hired others to assist him in managing them, and rented offices for those helping him, was not engaged in a “business” as a matter of law, “[n]o matter how large the estate or how continuous or extended the work required may be.” Higgins v. Comm’r , 312 U.S. 212, 218 (1941). • Whipple v. Comm’r , 373 U.S. 193, 202 (1963): “When the only return is that of an investor, the taxpayer has not satisfied his burden of demonstrating that he is engaged in a trade or business since investing is not a trade or business and the return to the taxpayer, though substantially the product of his services, legally arises not from his own trade or business but from that of the corporation.” 15
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