| 97-1 |
| May 5, 1997 |
| REFERENCE: |
| >4001(b)(1)> |
| >4201(a)> |
| >29 CFR 4001.3> |
| OPINION: |
| This responds to your request for the opinion of the Pension Benefit Guaranty Corporation ("PBGC") concerning the |
| application of the employer liability provisions of the Employee Retirement Income Security Act of 1974 ("ERISA") to |
| members of controlled groups located outside the United States. |
| Your request makes the following representations of fact. Company A is a privately-owned domestic holding corporation |
| whose assets are its equity interests in several operating subsidiaries located throughout the world, including Company B, |
| a domestic corporation. In September 1993, Company A and Company B (collectively, the "Debtors") petitioned for |
| reorganization under Chapter 11 of the Bankruptcy Code. |
| Company B was obligated to contribute to the Plan, a "multiemployer plan" within the meaning of section 4001(a)(3) of |
| ERISA. On January 1, 1994, Company B permanently ceased all covered operations or to have an obligation to contribute |
| under the Plan within the meaning of ERISA § 4203(a). Subsequently, the Plan underwent a "mass withdrawal" within the |
| meaning of 29 C.F.R. § 4001.2. The Plan filed bankruptcy claims against the Debtors for withdrawal liability, including |
| liability allocable as a result of the mass withdrawal. The Debtors and the Plan entered into a settlement agreement that |
| provided that the Plan would have an allowed general unsecured claim against Company B. The settlement agreement |
| released certain entities that are under "common control" with Company B within the meaning of ERISA § 4001(b)(1). The |
| settlement agreement expressly provided, however, that the release does not apply to eight wholly-owned subsidiaries of |
| Company A that are incorporated and operate in the United Kingdom (collectively, the "UK Entities"). We assume that the |
| settlement agreement was duly approved by the bankruptcy court. |
| You ask (i) whether the UK Entities constitute a "single employer" with the Debtors within the meaning of ERISA § |
| 4001(b)(1), and if so (ii) whether the UK Entities' location outside the United States affects the principle that all controlled |
| group members are jointly and severally liable for withdrawal liability. |
| As you know, section 4221 of ERISA provides that disputes between a plan sponsor and an employer on issues |
| concerning withdrawal and withdrawal liability are to be resolved through arbitration. PBGC does not involve itself in such |
| proceedings. However, PBGC will continue its practice of answering general questions of interpretation under Title IV of |
| Section 4201(a) of ERISA provides that "[i]f an employer withdraws from a multiemployer plan[,] . . . then the employer is |
| liable to the plan in the amount determined under [part 1 of subtitle E of Title IV of ERISA] to be its withdrawal liability." |
| Section 4001(b)(1) provides that for purposes of Title IV, |
| under regulations prescribed by [PBGC], all employees of trades or businesses (whether or not incorporated) which are |
| under common control shall be treated as employed by a single employer and all such trades or businesses as a single |
| employer. The regulations prescribed under the preceding sentence shall be consistent and coextensive with regulations |
| prescribed for similar purposes by the Secretary of the Treasury under section 414(c) of the Internal Revenue Code of |
| This principle of treating commonly controlled businesses as a single employer was subsequently reaffirmed during |
| debates on the Multiemployer Pension Plan Amendments Act of 1980 ("MPPAA"). As the Senate floor sponsor stated: |
| Under current law, a group of trades or businesses under common control, whether or not incorporated, is treated as a |
| single employer for purposes of employer liability under Title IV. Thus, if a terminating single employer plan is maintained |
| by one or more members of a controlled group, the entire group is the "employer" and is responsible for any employer |
| liability. The leading case in this area is Pension Benefit Guaranty Corporation v. Ouimet Corp., 470 F. Supp. 945 (D. |
| Mass. 1979), [aff'd, 630 F.2d 4 (1st Cir. 1980), cert. denied, 450 U.S. 914 (1981),] in which the court held that all members |
| of a controlled group are jointly and severally liable for employer liability imposed under section 4062 of ERISA. The bill |
| does not modify the definition of "employer" in any way, and the Ouimet decision remains good law. |
| 126 Cong. Rec. 23,287 (1980) (statement of Sen. Williams). In the years since MPPAA was enacted, the principle that |
| withdrawal liability is a joint and several obligation of all controlled group members has become well settled. Your question |
| concerns the application of this principle to foreign controlled group members. |
| Because it appears from your inquiry that Company A has a "controlling interest" in the UK Entities within the meaning of |
| the section 414(c) regulations, the UK Entities would be under "common control" with the Debtors within the meaning of |
| section 4001(b)(1) of ERISA and therefore treated with the Debtors as a single employer for purposes of section 4201(a). |
| See 26 C.F.R. § 1.414(c)-2(a), (b)(1), (2)(A). It is our opinion that, as such, they would be jointly and severally liable for |
| withdrawal liability. |
| In our view, your inquiry does not implicate extraterritorial application of ERISA. The Plan and its related trust are |
| established and administered in the United States (see ERISA § 4021(a); IRC § 401(a)). The events that triggered |
| liability under ERISA took place in the United States and involved the cessation of the contribution obligation or covered |
| operations, under the Plan, of one or more United States entities. Thus, the liability in question represents the domestic |
| application of United States law. The fact that this liability may ultimately include within its scope certain foreign affiliates |
| does not compel a different conclusion, as by statute such affiliates are part of a "single employer." As the courts have |
| correctly noted, Title IV's controlled group principle is intended to prevent business owners from avoiding liability by |
| fractionalizing their business operations, and from juggling their activities to eviscerate the liability provisions of ERISA. |
| These purposes would be ill-served by a controlled group principle that did not apply to all entities under common control. |
| Even if the question involved extraterritorial application of ERISA, we would reach the same conclusion. It is well settled |
| that Congress has the power to enact laws that have extraterritorial application, but is presumed not to have exercised that |
| power unless its intent to do so is clear from the statute. We think controlled group liability under ERISA was intended to |
| have extraterritorial application, and that this is clear from the relevant statutes. |
| In original section 4001(b) of ERISA (now section 4001(b)(1)), Congress authorized PBGC to promulgate regulations |
| governing the treatment of entities under common control. Those regulations are to be "consistent and coextensive" with |
| certain Treasury regulations. Accordingly, when PBGC adopted regulations in 1976 to implement section 4001(b), it |
| incorporated those Treasury regulations by reference. A few years later, in enacting MPPAA, Congress carried forward the |
| controlled group principle for purposes of the new withdrawal liability rules. It did so again in 1986 when it enacted section |
| 4001(a)(14) and amended section 4062(a) to codify the principle of controlled group liability in the context of termination of |
| a single-employer plan, using slightly different terminology to describe the "employer." None of these legislative actions |
| indicated any Congressional intent that controlled group liability be limited to domestic entities. |
| The PBGC regulations provide that two or more trades or businesses will be considered under common control (and hence a |
| single employer) for purposes of Title IV of ERISA if they are "'under common control,' as defined in regulations |
| prescribed under section 414(c) of the [IRC]." 29 C.F.R. § 4001.3(a)(1), (2). Section 414(c) of the IRC authorizes the |
| Secretary of the Treasury to prescribe regulations based on "principles similar to the principles which apply in the case of |
| subsection (b) [of section 414]." |
| Under section 414(b) of the IRC, employees of corporations that are "members of a controlled group of corporations |
| (within the meaning of section 1563(a), determined without regard to section 1563(a)(4) and (e)(3)(C)) shall be treated as |
| employed by a single employer." The Treasury Regulations under section 414(b) provide, in pertinent part, that |
| the term "members of a controlled group" means two or more corporations connected through stock ownership described in |
| section 1563(a)(1), (2), or (3), whether or not such corporations are "component members of a controlled group" within the |
| meaning of section 1563(b). |
| 26 C.F.R. § 1.414(b)-1(a). Thus, the governing Treasury regulation under section 414(b) does not incorporate the "foreign |
| corporation" exclusion of section 1563(b)(2)(C). (That subsection excludes certain foreign entities from controlled group |
| membership for purposes of filing consolidated tax returns.) |
| It follows that one of the "principles which apply in the case of subsection (b) [of section 414]" is that corporations |
| connected through stock ownership under section 1563(a) shall be treated as a single employer, even if they might |
| otherwise be excluded from the group under section 1563(b). And, true to Congress's mandate that the regulations under |
| IRC § 414(c) be based on principles similar to those that apply under IRC § 414(b), the stock ownership tests set forth |
| at 26 C.F.R. § 1.414(c)-1 et seq. substantially reflect the stock ownership tests of IRC § 1563(a), with no express |
| Other sections of the IRC amply demonstrate that Congress knew how to specify a subgroup of corporations, such as |
| "foreign corporations" or "domestic corporations," when that was its intent. See, for example, section 861(a)(1) (referring to |
| "domestic corporations"); sections 881-84 (dealing with taxation of "foreign corporations"); and section 864(b) (providing |
| rules for whether a "foreign corporation" is engaged in trade or business within the United States). Clearly, if Congress had |
| intended to except foreign entities from the ambit of relevant controlled group provisions such as sections 414 and 1563(a) |
| of the IRC or section 4001(b) of ERISA, it would have done so expressly. Instead, as noted above, the exclusion of |
| foreign entities in section 1563(b) is to be disregarded when determining the membership of a "controlled group of |
| corporations" under IRC § 414(b). This principle of expansive controlled group membership, which serves to effectuate |
| the prophylactic purposes of controlled group liability, is embodied in the section 414(c) regulations as well. In sum, we |
| think that section 4001(b)(1) of ERISA ultimately incorporates IRC provisions that generally apply to all corporations under |
| common control, including foreign corporations. Accordingly, it would be our opinion that Congress intended for the |
| controlled group principle under Title IV of ERISA to have extraterritorial application on the facts you have given. |
| The opinions stated herein are limited to Title IV of ERISA, and we express no view regarding jurisdictional issues relating to |
| suits against foreign situs entities. |
| We hope the foregoing response is helpful. If you have any questions, please feel free to call Nathaniel Rayle of this |
| Office at 202.326.4020, ext. 3886. |
| James J. Keightley |
| General Counsel |