The ERISA 4204 section comes into play when an employer ceases covered operations under a multi-employer plan or ceases to have an obligation to contribute to such operation because of a bonafide, arms-length sale of assets to an unrelated purchaser who does not recur withdrawal liabilities when certain conditions are met.
Instead of going through the exact ins and outs of the conditions or the underwriting of the bond, I want to discuss this from a different point of view. You have an arms-length sales transaction, so there is a buyer and a seller of a company or their asset. The buyer and seller, in many situations, must each post their own bond. The bond guarantees that the buyer will continue to contribute and remain a participant in a multi-employer pension plan. A lot of times the seller must post the bond for the whole amount of the withdrawal liability that guarantees that the buyer will continue to contribute, will stay in business and will stay in the plan.
It is a bit of a quirky obligation when you have a seller who must put up a bond to guarantee what somebody else is going to do. And separately, a lot of times, the buyer also must post a bond for the average of the three-year contributions into the plan. The reason I want to discuss this is that you have a transaction that you want to close, and clients often approach me for this bond when they are scrambling to obtain it after the transaction has already closed. What I always suggest when I talk to these attorneys about the current bonding situation, is what is going to happen the next time they need a bond for this scenario? I always stress that they should be talking to me about this a couple of weeks to a couple of months before the transaction’s closing so that the bond is lined up ahead of time.
Given that there is an acquisition or a sale of assets, there are various negotiations that happen between the two parties. In many situations, either the buyer or the seller agrees to obtain the bond on behalf of the other party, which may or may not be a good idea. The bond itself is an extension of credit. The party indemnifying the surety for the bond will retain the risk through the indemnity agreement. If the seller is indemnifying the surety, they are guaranteeing that another party (the buyer) will stay in the plan and continue to fund the plan for the next five-plus years. It is difficult to guarantee anything for five years-let alone the actions of another party. Looking back at the last couple of years, few people predicted the COVID-19 outbreak, which had a material negative impact on many businesses.
If the client decides that they should agree to obtain the bond on behalf of the other party, they need to know what the terms for the 4204 surety bond will be before they agree to post it. The reason is that these are not common bonds. A surety may require collateral, additional indemnity from shareholders or investors, or increased annual bond premiums. Your client should apply for the bond ahead of time to be sure that they will have favorable terms for the bond and so that they can use this information in their negotiation for the transaction.
Give me a call or send me an email today to discuss the ERISA 4204 surety bond.
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