Pension Benefit Guaranty Corporation 

78-13 

June 30, 1978 

REFERENCE: 

4004(f)(4) Temporary Authority. Waiver of Employer Liability 

OPINION: 

 We have reviewed your request of April 29, 1975, on behalf of * * *, that the Pension Benefit Guaranty Corporation

(the "PBGC") waive, pursuant to Section 4004(f)(4) of the Employee Retirement Income Security Act of 1974

("ERISA"), the employer liability imposed pursuant to Section 4062 of ERISA as a result of the termination of the * *

* Pension Plan. In the course of this review, we have considered the information submitted in connection with the

termination of the pension plan, additional written submissions from you, and information presented by you during

meetings with PBGC staff. The information submitted concerned the overall financial condition of * * * and the

partnership that owned * * * prior to and during the plan termination. 

Section 4004(f)(4) gives the PBGC authority to waive or reduce employer liability resulting from the termination

of a pension plan during the first 270 days after enactment of ERISA if the PBGC determines (1) that the employer was

unable as a practical matter to continue the plan and (2) that a waiver or reduction is necessary to avoid unreasonable

hardship. [*2] We have concluded in this case that the liability of the employer should be reduced, based on the factors

and considerations set forth below. 

* * * located at * * * * * * was an acute care hospital operated by a general partnership, the members of which are

* * * * * * and * * * maintained a pension plan for its employees, which was terminated on May 15, 1975. As of the date

of plan termination, the value of guaranteed benefits under the plan exceeded the value of plan assets allocable to such

benefits by $135,891. Consequently, pursuant to Section 4062 of ERISA, was liable to the PBGC in that amount.

Information submitted to PBGC shows that in 1973 the employer failed to make a contribution of $45,000 to the plan.

In 1974 it made a contribution of only $24,150, and for the four months of 1975 that the plan was in effect it made no

contribution. In light of the facts set forth below, the PBGC has determined that * * * was not able, as a practical matter,

to continue its pension plan. 

At the time of plan termination, * * * was in a declining financial condition with scant prospects for a financial

turnaround. 

Specifically, * * * was located in a rapidly declining inner-city [*3] neighborhood of * * *. The hospital has stated

that: "Because of the change in the background of the residents of the area surrounding the hospital there has been a sharp

decline in patient census." Added to the effect on patient census produced by demographic changes in the area was the

fact that there was a surplus of hospital beds in the * * * metropolitan area. This decline in patient census resulted in a

relative decline in cost reimbursements from Blue Cross, Medicaid and Medicare (the principal source of hospital

revenues), and as a consequence, * * * had experienced operating losses during three of the four years preceding plan

termination; also the hospital earned no return on assets during this period. 

Other factors, too, show a declining financial condition. In slightly more than three years preceding plan termination

(December 31, 1971 - March 31, 1975), * * * working capital declined from a deficit of $70,464 to a deficit of $138,012.

While the current ratio remained essentially the same during this period (approximately .81), the quick ratio declined

from .73 to .58. It further appears that at the time of plan termination, * * * could not obtain bank credit since [*4] it

was not profitable and had a negative cash flow. Finally, it is noted that the equity account of the partnership itself was

in a deficit position during the four-year period preceding termination. 

* * * prospects were made even more bleak by the fact that due to the age of the hospital, the facility was not in

compliance with applicable * * * Department of Health requirements. * * * has alleged that it would have been necessary

to construct a new facility in order to achieve compliance with the * * * standards. At the time of plan termination, *

* * was operating under a temporary waiver granted by the State Department of Health. 

 In light of the above, it is apparent that at the time of plan termination * * * financial condition was precarious, and
it appeared unlikely that the hospital would be able to restore profitability and a sound financial condition. This very

poor financial condition existed independently of the imposition of any employer liability under Section 4062 of ERISA.

It follows that the waiver or reduction of this liability would not appreciably improve this gloomy financial forecast. As

noted above, a prerequisite to granting relief under Section 4004(f)(4) [*5] of ERISA is a finding that a waiver or

reduction of liability is necessary to avoid unreasonable hardship. 

However, in determining what is an "unreasonable hardship," we are mindful of the fact that in the instant matter,

because we are dealing with a general partnership and not a corporation, any liability imposed by PBGC will ultimately

be borne by the partners directly; the liability does not rest solely with a business entity - a corporation. Because of the

personal liability of general partners for partnership debts, we believe that consideration must be given to the impact of

the imposition of employer liability on the partners themselves, and not just on the business entity operated by the

partnership. n1 In this connection, we note that the business operated by the partnership was losing money, and that the

two general partners were incurring further liabilities. As of the date of plan termination, the partnership deficit was

$125,000. Imposition by the PBGC of employer liability in the amount of $135,891 would obviously substantially

increase the partners' liabilities. 

n1 This conclusion is limited to the facts of this case. We need not and we do not decide at this time whether, in

the case of a limited partnership or a corporation owned by a few people, we would look beyond the business entity

involved to the individuals who control that entity in order to apply the "unreasonable hardship" test of Section

4004(f)(4). [*6] 

Turning to the financial condition of the partners, it appears that as of the date of plan termination, (who held 95

percent of the partnership) had a net worth of $ * * * net of partnership deficit. At that time, * * * was nearly * * * years

old and was employed as of the hospital. (* * * was not, however, a participant in the pension plan.) Because of * * *

age, it would be reasonable to assume that * * * future earning potential was rather limited, and that therefore she would

be forced to rely on * * * savings in order to support herself in the future. It also appears that * * * is a few years older

than * * *, and it is possible that * * *, too, will have to rely on * * * savings for * * * furture support. 

Finally, consideration should be given to the purpose of Section 4004(f)(4) in the context of the statutory scheme

created by Congress. Specifically, Congress recognized that the imposition of employer liability, even though limited

to thirty percent of an employer's net worth, could create hardship. In order to minimize this hardship, Congress, in

Section 4067, gave the PBGC authority to permit deferred payment of employer liability. Additionally, in providing in

Section [*7] 4004(f)(4) for the waiver or reduction of liability with respect to plan terminations occurring during the

first 270 days after enactment of ERISA, Congress obviously intended to provide even greater relief from the hardship

employers might have experienced during the early days of the new law. 

The PBGC has adopted a flexible approach in permitting deferred payment of employer liability pursuant to Section

4067, and we recognize that similar flexibility is appropriate in fashioning relief under Section 4004(f)(4). Under the

former provision, in the case of a corporate employer with capital value of some $550,000, the PBGC would typically

permit deferred repayment of a liability of $135,000. We would not require the liquidation of twenty-five percent of the

corporation's capital assets in order that it could pay its employer liability immediately; rather, an attempt would be made

to enable the employer to finance the payment of employer liability more from income. This is achieved by permitting

payments to be spread over a period of years, typically no more than ten. Similar equitable considerations should be

taken into account in determining the amount of a reduction in employer [*8] liability under Section 4004(f)(4). 

In view of the foregoing factors, the PBGC has determined that it should reduce the $135,891 liability of * * * * *

* Hospital by $50,000, in order to avoid unreasonable hardship. By waiving this amount, the remaining liability under

Section 4062 is $85,891. n2 

n2 We note that this liability is probably close to the amount of contributions that the employer failed to make to

the pension plan during the 1973-1975 period. 

 This constitutes the final action of the PBGC with respect to the request of * * * for a waiver, pursuant to Section

4004(f)(4) of ERISA, of its employer liability under Section 4062. 

Matthew M. Lind 

Executive Director