With respect to multiemployer plans, the new law eases statutory funding requirements by allowing plans to recognize investment losses incurred during 2008 and 2009 over longer periods of time. This delayed recognition will allow plan sponsors to develop less arduous funding benchmarks for plans in critical or endangered status. Additionally, many plans will see an improvement in the current or future PPA status. For example, the provisions will make it easier for some plans to remain in the “green zone.”
There are technical issues with the newly-passed law, some of which may be addressed by future regulations issued by the Secretary of the Treasury.
SUMMARY OF MULTIEMPLOYER PROVISIONS
The following is a summary of the key provisions affecting multiemployer plans.
(A) LONGER AMORTIZATION PERIODS: Normally, experience gains and losses are amortized over a period of 15 years in the funding standard account. The funding relief allows the plan sponsor to elect to amortize investment losses from 2008 and 2009 over a period of (almost) 30 years. The extended period(s) cannot be combined with amortization extensions to result in a total amortization period that is longer than 30 years. A key item that will depend on regulatory guidance will be the manner in which the investment losses are measured and recognized in current and future plan years.
(B) EXPANDED ASSET SMOOTHING: Normally, gains and losses on the market value of assets are smoothed into the actuarial value of assets over a period of up to five years. However, the actuarial value of assets cannot be less than 80% or more than 120% of the market value of assets. The funding relief allows the plan sponsor to elect to smooth 2008 and 2009 asset losses over a period of 10 years instead of 5 and to allow the actuarial value of assets to be up to 130% of the market value of assets for the first two plan years following the year in which the investment losses were incurred. Any change in the actuarial value of assets resulting from this relief must be amortized over a period of 30 years in the funding standard account.
(C) SOLVENCY TEST: A plan sponsor can elect to utilize funding relief only if the plan actuary certifies that the plan is projected to have sufficient assets to pay benefits and expenses over the extended amortization period.
(D) RESTRICTION ON BENEFIT INCREASES: If a plan sponsor elects to utilize funding relief, then there can be no amendments to improve benefits during the current plan year or next two plan years, unless the plan actuary certifies that the benefit improvements are funded by additional contributions and the plan’s funded percentage and funding standard account credit balance are not projected to decrease as a result of the change. There is debate over which plan years this restriction will apply, and how benefit improvements adopted during 2008 and 2009 impact access to the relief.
(E) REPORTING: If a plan sponsor elects to utilize this relief, the plan must send notices indicating this to plan participants and beneficiaries, as well as the Pension Benefit Guaranty Corporation (PBGC).
DIFFERENCES FROM PRIOR VERSION OF FUNDING RELIEF
There have been multiple versions of funding relief legislation included in various bills over the past several months. Prior to the passage of the new law, the latest version of funding relief legislation was included in the American Jobs and Closing Tax Loopholes Act of 2010 (H.R. 4213), which passed the House on May 28, 2010 before stalling in the Senate. The funding relief language that was added to the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (H.R.3962), however, was from a previous bill that had been passed by the Senate in March.
The following are some provisions that had been included in H.R. 4213 but were not included in the H.R. 3962, which is now law. It is possible that technical corrections to the funding relief legislation will be passed, perhaps putting (back) into place some of the provisions described below. Alternatively, regulatory guidance may address some of these issues.
* A provision to recognize 2008 and 2009 investment losses in the funding standard account according to a specific schedule – 1/2 in the first year, none in second year, and 1/6 in each of the third, fourth and fifth years, assuming 5-year asset smoothing.
* A correction to the language that defines the amortization periods in the funding standard account for 2008 and 2009 net investment losses. Specifically, the portion of the net investment loss recognized in the first year would be amortized over 30 years, the portion recognized in the second year over 29 years, and so on. The language in the newly-passed law appears to set the first amortization period at 29 years, the second at 28 years, and so on.
* The actuarial value of assets would still have been limited to 120% of the market value of assets. In other words, there was no provisions included in a prior version of the bill to extend the corridor on the actuarial value of assets up to 130% of the market value of assets.
* Clarification in the language regarding restrictions on benefit improvements for plans electing to utilize funding relief. For example, restrictions would apply only to amendments adopted on or after March 10, 2010.
* Clarification regarding possible revisions of prior actuarial certifications to reflect funding relief. For example, the plan sponsor could direct the plan actuary to revise the certification for plan years beginning on or after October 1, 2009 to reflect funding relief. Also, a plan that is no longer in critical status as a result of the revised certification would have to cease employer surcharges and benefit restrictions required under critical status within 30 days of the revision.
* Stricter requirements under the “solvency test.” A plan would qualify for funding relief only if its actuary certified that the plan’s funded percentage, based on the market value of assets, was not projected to worsen over time. The newly-passed law requires only that the plan remain solvent over the extended amortization period.
* Funding improvement periods (for plans in endangered status) and rehabilitation periods (for plans in critical status) could be extended by up to 5 years, upon election.
* Plans in endangered status or critical status could elect to designate an alternative schedule as the “default schedule” under the funding improvement plan or rehabilitation plan, respectively, provided that contracts covering 75 percent of active participants had already been adopted to accept that alternative schedule.
POSSIBLE ADDITIONAL RELIEF
Additional pension relief for multiemployer plans is still under consideration. The key provisions of this relief are related to enabling mergers and alliances between multiemployer plans and the expansion of the PBGC partitioning rules. The partitioning provisions would address the funding of so-called “orphan” participants in multiemployer plans. These provisions are contained in a bill proposed by Senator Bob Casey (D-PA).
The summary and commentary provided above are intended for general informational use only. They do not represent legal, tax, or other professional advice.
* * * UPDATE * * *
On November 26, 2010, the IRS released guidance on the Pension Relief Act of 2010 in the form of Notice 2010-83. Now available for download is a HORIZON BULLETIN summarizing the provisions of the Pension Relief Act of 2010 affecting multiemployer plans, reflecting the guidance provided by Notice 2010-83.