Section 4204 states its own deal: a bona fide, arm's-length sale of assets to an unrelated purchaser is not a withdrawal — if three conditions travel with the transaction. Each is mechanical. Each is documentary. And each is unforgiving, because a safe harbor entered imperfectly is not entered at all. This page treats the election covenant by covenant, as fund counsel will read it.
Threshold: Bona Fide, Arm's-Length, Unrelated
Before the covenants, the statute's own gate: the transaction must be a bona fide, arm's-length sale of assets to an unrelated party. Sales between commonly controlled entities, restructurings dressed as sales, and transactions whose economics run to insiders do not qualify however carefully the covenants are drafted. The gate exists because § 4204 would otherwise be the universal solvent for withdrawal liability — every employer would "sell" to itself. Diligence on the relatedness question belongs at term-sheet stage, particularly where management rolls equity or the seller finances the purchase.
Covenant One: Contribution Continuation
The purchaser must assume an obligation to contribute to the plan with respect to the acquired operations for substantially the same number of contribution base units for which the seller was obligated. The CBU — hours worked, tons hauled, shifts run, whatever unit the collective bargaining agreement uses — is the statute's measure of continuity, and "substantially the same" is its deliberately unquantified cushion. Two practice consequences follow. First, the covenant must be real: a purchaser whose integration model contemplates shrinking the covered work below the substantial-similarity band has a covenant problem no drafting solves, and — as our underwriting guide explains — a bond problem as well, since the purchaser's operating intent for the union work is the core of the surety analysis. Second, the obligation runs through the collective bargaining relationship: the CBA assumption or successor agreement, and where applicable the union's consent, are the covenant's evidence, and they belong in the closing set alongside the purchase agreement.
Covenant Two: The Bond or Escrow
For the five plan years commencing with the first plan year beginning after the sale, the purchaser must provide the plan a bond issued by a corporate surety acceptable under ERISA § 412, or place the equivalent amount in escrow with a bank or similar institution satisfactory to the plan. The amount is the greater of the seller's last-plan-year contribution or its three-preceding-year average — treated with worked examples in the penal sum guide — and the instrument pays the plan if the purchaser withdraws during the period and fails to satisfy its withdrawal liability. The bond-versus-escrow election is a treasury decision with real spread, analyzed in the comparison guide; the § 412 surety qualification is the standard this firm has written against more than 25,440 times.
Covenant Three: The Seller's Secondary Liability
The sale contract must provide that if the purchaser withdraws within the five plan years and fails to pay, the seller is secondarily liable for the amount it would have owed the plan but for the election. The seller's exposure is thus deferred and conditioned, not extinguished — a distinction sellers' boards sometimes learn later than they should. The five-year tail, its interaction with the bond, and the sell-side protections worth negotiating are the subject of our seller's guide. Note also the statute's ancillary discipline: if the seller distributes substantially all its assets or liquidates during the period, it must provide its own bond or escrow — the statute anticipates the disappearing seller.
Where Elections Fail
The failure modes are documentary and recurring. Omitted covenants — agreements that recite § 4204 aspiration without the operative continuation, bond, and secondary-liability provisions. Mismatched parties — covenants running from the wrong entity in a multi-entity purchase structure, so the obligated purchaser is not the operating purchaser. Unpapered CBU continuity — a purchaser that assumed the covenants but not the collective bargaining relationship that generates the contribution base units. Silent multi-plan coverage — one set of covenants gesturing at several funds, where the statute runs plan by plan and each fund is entitled to its own bond at its own penal sum. And the missing notice where a variance is claimed: 29 CFR § 4204.11 conditions the self-executing variance on the parties informing the plan in writing of the § 4204 intention and demonstrating the applicable test — the demonstration is made to the plan, and a variance nobody communicated is a bond nobody posted.
The cure for every mode is the same: treat the § 4204 provisions as closing conditions with an owner, not boilerplate with a form number. This desk reviews the covenant package on every file as part of underwriting — not as legal advice, but because a surety should not issue against an election that fails on its face, and because the review catches at the quote stage what would otherwise surface in a fund audit years later.
The Fund's Perspective
It disciplines drafting to remember who reads it. The fund's counsel will verify the covenants, calculate its own penal sum from its own contribution records, take a position on the bond form — frequently prescribing one — and file the package against the day the purchaser stumbles. Funds are professional obligees with long memories and statutory presumptions behind them. The transaction that treats the fund as an adversary to be papered around fares worse, in our observed experience, than the one that treats it as a counterparty to be satisfied precisely. Precision is cheaper.
Authorities: ERISA § 4204, 29 U.S.C. § 1384; ERISA § 412, 29 U.S.C. § 1112; 29 CFR Part 4204. Practitioner commentary, not legal advice; the statutory text governs.