Pension Benefit Guaranty Corporation 92-4 June 18, 1992 RE FE RE NC E: [*1] § 4204 (a) § 4204(a)(1)(B ) § 4204(a)(1)(C) § 4204(c) 29 CFR § 2643.11 (a) 29 CFR § 2643 .11(d) OP INI ON : I write i n response to your request for t he opini on of the Pension Benefit Guaranty Corporation ("PBG C") as to the meaning and o pera ti on of sec ti on 4204 (a) (1) (B) a nd ( C) and 4204(c) of t he Employee Reti rement I ncome Securit y Act of 19 74 ( "E RIS A" ) and regula tions the reund er. Sec tion 42 04( a)(1 ) of E RIS A pr ovid es that: A com plete o r partia l withdra wal of a n emp loyer (. . . the " seller" ) und er this sect ion doe s not occur sol ely beca use, as a res ult of a bona fi de, arm' s-l ength s ale of asset s to an u nrelat ed party (. . . th e "purchaser "), t he sel ler cea ses cover ed ope rations or ce ases to have a n ob ligation to contrib ute for su ch op eratio ns, if -- (A) the purchaser has an obligat ion to contribute t o the plan wit h res pect to t he oper ati ons f or sub st ant ial ly th e sa me numb er of co ntributio n bas e units for which th e seller h ad an obliga tion to c ontrib ute to the plan; (B) the pu rchas er pro vides to the plan for a period of 5 plan years commencing with the f irst pl an year beginning aft er t he sa le of ass ets , a bon d . . . , or an a mount hel d in e scrow . . . , in [ a spec if ied a mount ]; a nd (C) the cont ract [ *2] f or sale provides t hat, if the purc has er withdra ws in a complete wi thdrawal , or a part ial with drawal with respect to operat ions, during such fir st 5 pl an years , th e sell er is secondari ly l iable f or any wi thdrawal liability it would have had t o the pla n wit h respect to th e operati ons (but for t his s ecti on) if the l iabil ity of th e purchaser wit h res pect to t he pl an i s not paid. n1 n1 In dep end ently of the pro visions o f section 420 4(a) (1)(C ), section 420 4(a) (2) p rovid es that -- [i]f the purchaser . . . withdraws bef ore the last day of the fi fth plan y ear beginning aft er the sale, and . . . fails to make any withd rawa l liability paym ent whe n due , then the se ller shall p ay to the plan a n amo unt eq ual to the payment that wo uld ha ve be en du e from the seller b ut for [se ction 4 204 ]. Under secti on 4204(c), t he PBGC "may by re gul ati on vary" the bo nd/es crow and c ontra ct-langu age re quire men ts of section 4204(a)(1)(B) and (C). n2 P ursuant to th at autho rity, the PB GC has issue d its regu lation o n Va riance s for Sa le of Ass ets (29 CFR Par t 264 3). Se ction 2 643 .11( a) of the regula tion pr ovid es that: A purch aser 's bond or es crow u nder s ecti on 4204(a) (1)( B) of [ ERISA] and t he sa le- contr act provi sion [*3] under sect ion 420 4(a) (1)(C ) are no t requir ed if the parties to the sale infor m the p lan in writing of their inte ntion tha t the sale be cove red b y section 420 4 of [ER ISA ] and dem onstra te to the sa tisfaction o f the plan that at least o ne of the criteria con tained in § 26 43.1 2, § 2 643 .13 o r § 26 43.1 4(a) is satisfied. Yo u first ask for -- an opinion o f the scope of the contract f or sale requirement of ERISA Section 4204 (a)(1)(C), incl uding a deter minat ion of whet her la nguage, such as the cont ract language contained in [a document submitted wit h the request], fulfills section 4 204 (a)(1 )(C) fo r the ap plicatio n of the sa le of asse ts exem ption . Secti on 4221 of ERISA provides tha t any dispute between a plan sponsor and an employer concerning a dete rmin ati on made under ERISA sections 4201 through 4219 -- whi ch woul d inc lude a det ermi nati on under sect ion 4204 ba sed on the int erpre tat ion of a contract provision - - be resolved through arbit ration, subject to review in t he cour ts. Acco rding ly,

it would be in appropriat e for the PBGC to expres s an opi nion as t o the adequac y of speci fi c la nguag e under sect ion 420 4(a) (1)(C ). n2 No variance is provided for, however, with respect to t he se condary li abil it y re quir ement of s ecti on 4204(a) (2) that complements the contract -language requirement. [*4] Yo u also a sk that the PB GC confirm that -- once the Seller and Buyer demonstrate to t he Plan that the t ra nsactio n [meets one of the cri teria ref erred to in § 2643.11(a) for vari ance of the bond/e scrow and cont ract -l angua ge re quir ement s], the Plan c annot ins ist tha t a bon d be posted or t hat the contr act for sale . . . agreement be renegotiated between the parties t o set forth y et another agreement regar ding the Seller's sec ond ary liability. In respo nse to th is requ est, we b egin b y noting th at satisfactio n of on e of the th ree va riance criteria referre d to in § 264 3.11 (a) is no t alone sufficient to entitl e a seller and buyer t o a variance; they must also give t he plan wri tten notic e of their i ntent that the sale b e cov ered by sec tion 42 04. A plan m ay there fore a gree th at one of the thre e varia nce c riteria is met an d yet p rop erly refuse to gran t a varian ce be cause an ap pro priate joint no tice of inte nt has no t been given. One purpose of th e joint notice r equirement under § 2643 .11(a) is to subst itute f or the contract- language requirement of s ecti on 42 04 (a)( 1)(C) by conf irmi ng t he se ll er' s acc eptan ce of it s se condary li abil it y un der s ecti on 4204(a)(2). As explai ned in t he preamble [ *5] t o the proposed amendment add ing Subpart B (§ § 2643.10-2643.15) to the re gulation : [T]he parties to a sale must inform the plan i n writi ng of t hei r i nt ent ion to b e cov ere d by s ect ion 4204 of ERISA. In this way , both the sel ler and purchaser expressly consent to the vari ous res pons ibi li ti es t hey ass ume by oper ati on of law. For e xam ple, if section 4204 applies, the seller as sumes a secondary liabil ity under sect ion 4204(a)(2) . . . . One purpo se of the sal e-contract requir ement is to requi re an aff irma ti ve act ion by the part ies in or der t o tri gger sect ion 4204. Th erefo re, the re quire men t of a jo int notice of intentio n minim izes the n eed for the sa le-con tract pr ovisio n. 48 FR 6556 (February 14, 1983). It does not follow that a pro vision like that required b y section 420 4(a)(1)(C ) must nece ssarily

be in the joint notice, much less in the sal e contract it self. It would be ill ogical to make fulf illment of the contract-l anguage requ ireme nt a pre requ isite to waiver of the sam e req uirem ent. On the othe r hand, i f th e joint notic e or the sal e cont ract can be i nter pret ed as r eject ing the secon dary li abil it y ru le of sect ion 4204(a)(2), it may be necessary t o clarify the se ller's accep tance [*6] o f that seco nda ry liability in ord er to m eet the jo int notice requ ir eme nt of § 264 3.11 (a). The bond/escrow r equirement present s dif ferent iss ues. W hil e a contr act- languag e waiver is aimed at retro actively curing an omission, a bond/ escr ow wai ver pr ovides only prospe cti ve re li ef f rom th e sec ti on 4204(a)(1)(B ) requirement that the bond or es crow be mai ntai ned f or th e spec if ied f ive- plan- year peri od. However, as t he PBGC stat ed in Opini on Letter 8 5-31 (De cem ber 3 0, 19 85) , -- [s] ecti on 4204 of ERISA cont emplat es i n gene ral tha t a bon d or escrow wi ll be f urnis hed at t he beginn ing of the f ive- year p eriod desc ribed in sectio n 42 04( a)(1 )(B ), and mainta ined th roug hout tha t perio d, unle ss and until it is waived . (Em pha sis supplied.) Section 2643.11(d) provides a limited exemption from the bond/escrow requirement for the peri od befor e a pl an act s on a vari ance r eques t i f t he re quest is subm itted be fore th e beginni ng of t he fi rst plan ye ar following the sal e. n 3 Other wis e, a plan is just if ied i n in sis ti ng t hat the requ ire ment be met un til it is waived, a nd in treating the sale as fa ili ng to come wi thi n the pur view of section 4204 if the bond or escrow is not f urnished at [* 7] the beg inning o f the five-pla n-year p eriod and m aintaine d until the plan a cts on th e varia nce re que st. n3 PBG C Opinion Lett er 86-6 (M arch 11 , 1986 ) also discus ses a l imit ed exemption a pplicabl e to pre- 1981 sales unde r § 26 43.1 2. Finally, we no te again (as we d id ab ove in con nectio n with your cont ract i nterpre tati on questi on) that a disput e over a plan 's dete rmin ati on not to gr ant a var ianc e under sect ion 4204 a nd th e PBGC's r egul ati on on Vari ances for Sale of Asse ts is subje ct to the d ispute re solutio n pro ced ures o f section 422 1. If you ha ve any fu rther q uestion s regar ding this matter, yo u may c all De bor ah C . M urph y of this off ice at 202- 778- 885 0.

Carol Connor Flowe Ge neral C ouns el