When a company is sold and the former entity ceases to exist, the buyer and/or the seller can obtain a bond to cover the unfunded pension liabilities. This is required under the Employee Retirement Income Security Act (ERISA), section 4204 and is commonly referred to as a 4204 surety bond.
Determining the amount of the surety bond under ERISA Section 4204
The purchaser must post a 4204 surety bond or similar security for a five-year period. The amount of the bond is the greater of:
- the seller’s average annual contribution for the three plan years preceding the year of sale or
- the seller’s contribution in the plan year preceding the sale. Twice the amount is required if the plan is in “reorganization.” If the purchaser withdraws or fails to make timely contributions during the five-year period, the amount of the bond is paid to the plan.
The bond continues for approximately five years. We have seen scenarios where the union required the bond to be extended for a certain period of time. In the past, we have seen a mixture of both the seller and the buyer stepping in to indemnify the surety for the bond, or just one party.
Please see ERISA bond, section 4204A1B, text below via FederalRegister.gov:
Section 4204 of the Employee Retirement Income Security Act of 1974, as amended by the Multiemployer Pension Plan Amendments Act of 1980 (“ERISA” or “the Act”), provides that a bona fide arm’s-length sale of assets of a contributing employer to an unrelated party will not be considered a withdrawal if three conditions are met. These conditions, enumerated in section 4204(a)(1)(A)-(C), are that—
(A) The purchaser has an obligation to contribute to the plan with respect to the operations for substantially the same number of contributions base units for which the seller was obligated to contribute;
(B) The purchaser obtains a bond or places an amount in escrow, for a period of five plan years after the sale, equal to the greater of the seller’s average required annual contribution to the plan for the three plan years preceding the year in which the sale occurred or the seller’s required annual contribution for the plan year preceding the year in which the sale occurred; and
(C) The contract of sale provides that if the purchaser withdraws from the plan within the first five plan years beginning after the sale and fails to pay any of its liability to the plan, the seller shall be secondarily liable for the liability it (the seller) would have had but for section 4204.
The bond or escrow described above would be paid to the plan if the purchaser withdraws from the plan or fails to make any required contributions to the plan within the first five plan years beginning after the sale.
Additionally, section 4204(b)(1) provides that if a sale of assets is covered by section 4204, the purchaser assumes by operation of law the contribution record of the seller for the plan year in which the sale occurred and the preceding four plan years.
If you need assistance or have questions, contact us today at 212-227-7277.
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