Pension Benefit Guaranty Corporation 

78-3 

March 27, 1978 

REFERENCE: 

4063 Liability of Substantial Employer for Withdrawal

4063(b) Liability of Substantial Employer for Withdrawal. Amount of Employer Liability

4063(c) Liability of Substantial Employer for Withdrawal. Satisfaction of Liability Through Posting of Bond

4063(d) Liability of Substantial Employer for Withdrawal. Partitioning of Plan

4063(e) Liability of Substantial Employer for Withdrawal. Waivers

4064 Liability of Employers in Multiple Employer & Multiemployer Plans 

OPINION: 

 This is in response to your request for a ruling on the application of § 4063 of the Employee Retirement Income

Security Act of 1974 ("ERISA") to the anticipated withdrawal of * * * from the * * * Pension Plan (the "Plan"). The

withdrawal will be a consequence of the proposed transfer of * * * service and facilities to * * * whose personnel

participate in different pension plans. For the reasons given below, based on our correspondence and discussions with

you and other * * * representatives, with Plan representatives and with representatives of the Maritime Administration,

pursuant to § 4063(e) of ERISA the Pension Benefit Guaranty Corporation ("PBGC" ) has [*2] determined to waive

the application of § 4063(b), (c) and (d) with respect to this withdrawal. 

On the facts and circumstances of this case, we find that the Plan's funding arrangements constitute an indemnity

agreement adequate to justify waiving the withdrawal Liability that might otherwise have been imposed under ERISA

§ 4063. 

I. The Facts 

* * *, which is a substantial employer (as defined in ERISA § 4001(a)(2)) with respect to the Plan, joined the Plan

in 1971. * * *, which was acquired by * * * in December, 1969, had been a long-term but minor contributor to the Plan,

and its last contributions were made in 1970. You have informed us that * * * operations, which necessitated * * *

participation in the Plan, represent new service rather than a continuation of the former * * * operations. * * * Plan

contributions increased from approximately $1 million in 1971 to approximately $2.1 million in 1977, and its share of

total annual contributions rose from 5.7% to 13.8%. During that time, according to the actuarial reports you have

furnished us, the Plan's total estimated unfunded liabilities declined from more than $224 million to almost $142 million.

The Plan's actuaries [*3] have estimated that, if the Plan had terminated August 1, 1977, the total value of unfunded

benefits guaranteeable under Title IV of ERISA would have been about $80.4 million. As * * * average annual share

of contributions over the preceding five years was 10.5%, under § 4064 of ERISA its pro rata share of that hypothetical

insufficiency would have been about $8.46 million. * * * liability to PBGC would, however, have been limited to 30%

of its net worth, as determined by PBGC. 

Since 1965, the Plan has been funded on an actuarial basis, rather than at a fixed contribution rate. Section 30 of

the current collective bargaining agreement, for example, requires full funding of past service liabilities over a 27-year

period beginning June 16, 1975, and calls for quarterly reviews to assure that currently payable contributions are

adequate to satisfy the employers' mutual obligation to amortize past service and fund current service liabilities. In

addition, § 34(3) of the collective agreement requires a lump-sum payment representing estimated future contributions

when the covered employment base is reduced as the result of the sale of ships. 

Like * * * a number of contributing employers [*4] have Operating Differential Subsidy Agreements, pursuant to

which the Maritime Administration underwrites the bulk of their Plan contributions. In the Plan year ending July, 1977,

subsidized operators, including * * *, made 78.5% of all contributions. The major non-subsidized contributing employer

was responsible for 14% of the contributions received last year. 

While the Plan's financial status has improved in recent years, its contribution base has been shrinking. For example,
last year an employer that had been responsible for slightly more than 8% of the contributions withdrew from the Plan;

* * *, is now planning to withdraw and there is some doubt as to the continued participation of another subsidized carrier,

which made more than 23% of the contributions in the 1977 Plan year. 

 II. Analysis 

Under § 4063 of ERISA, a substantial employer that withdraws from a multiemployer plan must post security for

satisfaction of its contingent liability to PBGC under § 4064 of ERISA. The amount of the security, which may be in

the form of an escrow deposit or a bond, is measured by the amount for which the withdrawing employer would be liable

if the plan terminated on the date [*5] of the withdrawal. The PBGC may realize on the security only if the plan

terminates within five years after the withdrawal. The PBGC may waive the § 4063 security requirement, pursuant to

§ 4063(e), "whenever it determines that there is an indemnity agreement in effect among all other employers under the

plan which is adequate to satisfy the purposes of [§ 4063] and of § 4064." 

The basic purpose of termination liability, under § 4064 as under § 4062 of ERISA, is to protect PBGC's premium

funds by requiring employers to reimburse the Corporation, to the extent of their capacity as indicated by their statutory

net worth, if the termination of their pension plan gives rise to claims against the Title IV insurance system. Termination

liability prevents employers that can continue funding a plan as required by ERISA from shifting their pension

obligations to the PBGC's premium-payers. 

The purpose of the § 4063 security requirement of ERISA is evident: it assures collectibility of a withdrawn

employer's contingent debt to PBGC. Because § 4063 security payments cannot be used to pay pensions unless the plan

terminates, the plan itself does not benefit from the bond/escrow requirements. [*6] Under appropriate circumstances,

§ 4063(d) gives PBGC discretion to assume certain Plan liabilities in order to strengthen the continuing plan. This

partition option is only available upon a showing by the plan administrator that the decline in employer participation "has

resulted, or will result, in a significant reduction in the amount of aggregate contributions to or under the plan by

employers . . ." Plan partition has not been requested here and the facts before us do not indicate that it would be

appropriate at this point. 

To justify a waiver of the § 4063 security requirement, an indemnity arrangement need not expressly address the

employers' responsibility for satisfying the withdrawn employer's contingent liability under § 4064 of ERISA. The

remaining employers' commitment to fund all of the plan's liabilities in a responsible manner can satisfy the purposes

of § § 4063 and 4064 by enhancing the prospects for plan continuation and reducing the PBGC's potential exposure if

the plan later terminates. Indeed, the legislative history of § 4063(e) of ERISA indicates that Congress envisioned this

type of indemnity agreement. In explaining the withdrawal liability provisions, [*7] the Conference Report on ERISA

states: 

The corporation is entitled to waive the use of either of these procedures if there is an indemnity agreement between

all the other employers in the plan sufficient to satisfy all plan liabilities. 

H. Rep. No. 93-1280, 93d Cong., 2d Sess. 379 (1974). 

The Parties sponsoring the * * * Plan have departed from the typical multiemployer-plan pattern and agreed to full

actuarial funding of the Plan's defined benefits, rather than negotiating a contribution rate that can only be changed

through collective bargaining. Although Titles I and II of ERISA would have allowed 40 years to amortize the Plan's

unfunded past service, the Union and the employers adopted a 27-year amortization schedule, and the collective

agreement provides for timely adjustments to the employers' current payments to assure that the agreed-upon funding

commitment is met. Moreover, § 34(3) of the collective agreement expresses the employers' commitment to protect the

Plan directly from the potential adverse impact of certain actions that might reduce the Plan contribution base. n1 In our

judgment these arrangements constitute an indemnity agreement within the contemplation [*8] of § 4063(e) of ERISA.

n1 We are aware that the enforceability of § 34(3) with respect * * * proposed transfer of services to * * * has been

questioned. The availability of this collectively-bargained with drawal liability, which could strengthen the Plan directly

and to provide pension protection that is superior to the security requirements of § 4063, is relevant but not essential

to the PBGC's determination in this case. 

Whether a commitment among employers to continue funding an ongoing plan provides protection for the

termination insurance system that is adequate to satisfy the purposes of § § 4063 and 4064 of ERISA depends, of course,

on the likelihood that the continuing employers will honor that commitment. The actuarial reports you have submitted,
and a series of employer-withdrawal notices that the Plan has filed, demonstrate that the * * * Plan's contribution base

has been shrinking in recent years and that the decline could accelerate. As a result, per-day contributions have

increased, and may increase further, to the extent future funding costs are not offset by payments under § 34(3) of the

labor contract. Nevertheless the evidence is that the employers rema ining [*9] in the Plan will be able to pay the

increased contributions, either because the expense will largely be subsidized by the Maritime Administration or because

of the companies' market strength. Thus, the potential increase in contributions is unlikely to precipitate full Plan

termination in the near future. 

Subsection 4063(e) gives PBGC discretion to waive withdrawal liability when it determines that there is a

satisfactory indemnity agreement. In exercising that discretion, we evaluate the specific circumstances of a case in light

of the purposes of Title IV of ERISA. In our judgment, the circumstances of the present case indicate that waiver is

equitable and appropriate. This judgment is based on two major conclusions: first, that * * * withdrawal is a necessary

consequence of a good-faith business arrangement, motivated in no way by the intent or desire to avoid pension

obligations and second, that it is unlikely that the imposition of withdrawal liability here would be of sufficient benefit

to either PBGC or the Plan to justify the unreasonable hardship it might pose for * * * 

In connection with those conclusions, we note the following: 

1. The transfer of * * * services [*10] to * * * must be approved in all respects by the Maritime Administration.

If that agency approves, its determination will reflect an expert judgment that the transaction is bona-fide and will

promote the policies of the Merchant Marine Act of 1936, 46 U.S.C. § § 1101 et seq., by strengthening U.S.-flag

shipping. 

2. * * * will continue defined-benefit pension coverage for the crews of the transferred vessels. That coverage will

involve different multiemployer plans because of * * * collective bargaining obligations. 

3. * * * would have no real financial incentive to withdraw from the Plan in order to avoid paying for its employees'

benefits under the Plan, as * * * pension contributions are subsidized by * * * and would continue to be subsidized if *

* * continued to employ Plan participants. 

4. Given the improvement in the Plan's funding status during the years of * * * participation, it is possible that the

Plan has profited from * * * short-term involvement. In effect, * * * has paid for the benefits that participants earned

under the Plan as a result of their employment with * * * 

5. In light of the substantial costs that PBGC would incur to determine and collect [*11] withdrawal liability from

* * * and the impact of the net worth limitation on that liability, the net amount available as security for PBGC is not

likely to be significant. On the other hand, the expense and regulatory complexities that * * * would face could endanger

the transaction. 

Please note that this letter-ruling relates solely to the application of § 4063 of ERISA. * * * will be liable to PBGC

in accordance with § 4064 of ERISA if the Plan terminates within five years from the date of * * * withdrawal. 

Matthew M. Lind 

Executive Director