On December 16, 2014, President Obama signed the Multiemployer Pension Reform Act of 2014 into law. The Act was introduced by Representatives John Kline (R-MN) and George Miller (D-CA) on December 10 as part of the omnibus government funding bill, which Congress passed on December 13.
The following is a high-level summary of the key components of the Act.
This summary is intended for general informational use only. It does not represent legal, tax, or other professional advice. Please contact your Horizon Actuarial consultant for more information on how the Act may affect your multiemployer pension fund.
The following is a high-level summary of the key components of the Act.
This summary is intended for general informational use only. It does not represent legal, tax, or other professional advice. Please contact your Horizon Actuarial consultant for more information on how the Act may affect your multiemployer pension fund.
1. PPA modifications and repeal of sunset.
The Act makes permanent the funding rules affecting multiemployer pension plans under the Pension Protection Act of 2006 (“PPA”). Certain provisions of the PPA had been scheduled to sunset on December 31, 2014.
The Act also modifies certain provisions of the PPA, effective beginning in 2015. For example, a plan approaching critical status may elect to enter critical status early, thus bypassing endangered status. The ambiguity regarding emergence from critical status when Internal Revenue Code section 431(d) amortization extensions apply (the so-called “revolving door”) is eliminated. A plan will remain in the “green zone” if it would have otherwise entered endangered status, but requires no corrective action under a funding improvement plan. The Act includes other technical corrections and modifications, as well, including the elimination of the reorganization rules.
Additionally, the Act extends guarantees by the Pension Benefit Guaranty Corporation (“PBGC”) to pre-retirement survivor annuities. It also expands required disclosures for multiemployer pension plans under section 101(k) of ERISA.
2. Mergers and partitions.
The Act gives the PBGC new authority to facilitate plan mergers and grant partitions, to the extent that doing so would strengthen the position of the PBGC’s multiemployer program. The new rules apply only to situations involving plans that are in critical status and approaching insolvency.
3. PBGC premiums.
The Act increases PBGC flat rate premiums for multiemployer pension plans to $26 per covered participant and beneficiary, effective in 2015. The flat rate premium for future years will be automatically increased with inflation. For reference, the flat rate premium was $12 per covered participant and beneficiary in 2014, and it was scheduled to increase to $13 in 2015.
4. Benefit suspensions for deeply troubled plans.
The Act gives trustees of a multiemployer pension plan that is in critical status and approaching insolvency (in “critical and declining status”) the authority to suspend benefits that were previously protected under law, if doing so would enable the plan to avoid insolvency. The Act defines the suspension of benefits as the temporary or permanent reduction of any current or future payment owed by the plan to any participant or beneficiary. The trustees must determine annually that the benefit suspensions remain necessary to avoid insolvency, after all other reasonable measures to avoid insolvency have been taken.
There are several limitations on the benefit suspensions. For example, suspensions cannot reduce benefits below 110% of the levels guaranteed by the PBGC (a monthly benefit of up to $35.75 per year of service). Retirees who are age 80 or older at the time the suspensions go into effect are protected, as are disabled retirees. (Retirees age 75 to 79 are partially protected.) The suspensions must not materially exceed the level needed to avoid insolvency, and they must be spread equitably across the participant population. Trustees of large plans (with at least 10,000 participants) must also designate a retired plan participant to advocate for the interests of retired and deferred vested participants through the suspension process.
The suspensions are subject to approval by the Secretary of Treasury and ratification by a vote of plan participants and beneficiaries. If the suspensions are rejected by the participant vote, and the plan represents more than $1 billion in potential financial assistance payments from the PBGC (a “systemically important” plan), the Secretary of Treasury has the authority to override the vote and implement the suspensions. The Secretary of Treasury will act in consultation with the PBGC and Secretary of Labor, and it will issue regulations within 180 days of the enactment of the Act.
There are certain disclosure requirements that must precede any benefit suspensions. For example, before the plan can submit its application for approval to the Secretary of Treasury, it must send a detailed notice to interested parties, including an “individualized estimate” of the effect of the proposed suspensions on each participant or beneficiary. In addition, the plan’s application to the Secretary of Treasury will be posted online for public inspection and comment.
5. Changes to withdrawal liability rules.
The Act also changes certain rules for determining employer withdrawal liability. For example, certain contribution increases required under a funding improvement plan or rehabilitation plan (for plans in endangered status or critical status, respectively) are disregarded for purposes of allocating unfunded vested benefits to participating employers and when calculating an employer’s statutory payment schedule. Employer surcharges (for plans in critical status only) are also disregarded.
Additionally, the effect of any benefit suspensions (as described above) are disregarded for purposes of determining withdrawal liability, for a period of ten years following the effective date of the suspensions.
Lastly, for plans that engage in a partition (as described above), for the first ten years following the partition, withdrawal liability will be determined with respect to both the original plan that was partitioned as well as the new plan that was created by the partition. After ten years, withdrawal liability will be determined with respect to the original plan only.
The Act makes permanent the funding rules affecting multiemployer pension plans under the Pension Protection Act of 2006 (“PPA”). Certain provisions of the PPA had been scheduled to sunset on December 31, 2014.
The Act also modifies certain provisions of the PPA, effective beginning in 2015. For example, a plan approaching critical status may elect to enter critical status early, thus bypassing endangered status. The ambiguity regarding emergence from critical status when Internal Revenue Code section 431(d) amortization extensions apply (the so-called “revolving door”) is eliminated. A plan will remain in the “green zone” if it would have otherwise entered endangered status, but requires no corrective action under a funding improvement plan. The Act includes other technical corrections and modifications, as well, including the elimination of the reorganization rules.
Additionally, the Act extends guarantees by the Pension Benefit Guaranty Corporation (“PBGC”) to pre-retirement survivor annuities. It also expands required disclosures for multiemployer pension plans under section 101(k) of ERISA.
2. Mergers and partitions.
The Act gives the PBGC new authority to facilitate plan mergers and grant partitions, to the extent that doing so would strengthen the position of the PBGC’s multiemployer program. The new rules apply only to situations involving plans that are in critical status and approaching insolvency.
3. PBGC premiums.
The Act increases PBGC flat rate premiums for multiemployer pension plans to $26 per covered participant and beneficiary, effective in 2015. The flat rate premium for future years will be automatically increased with inflation. For reference, the flat rate premium was $12 per covered participant and beneficiary in 2014, and it was scheduled to increase to $13 in 2015.
4. Benefit suspensions for deeply troubled plans.
The Act gives trustees of a multiemployer pension plan that is in critical status and approaching insolvency (in “critical and declining status”) the authority to suspend benefits that were previously protected under law, if doing so would enable the plan to avoid insolvency. The Act defines the suspension of benefits as the temporary or permanent reduction of any current or future payment owed by the plan to any participant or beneficiary. The trustees must determine annually that the benefit suspensions remain necessary to avoid insolvency, after all other reasonable measures to avoid insolvency have been taken.
There are several limitations on the benefit suspensions. For example, suspensions cannot reduce benefits below 110% of the levels guaranteed by the PBGC (a monthly benefit of up to $35.75 per year of service). Retirees who are age 80 or older at the time the suspensions go into effect are protected, as are disabled retirees. (Retirees age 75 to 79 are partially protected.) The suspensions must not materially exceed the level needed to avoid insolvency, and they must be spread equitably across the participant population. Trustees of large plans (with at least 10,000 participants) must also designate a retired plan participant to advocate for the interests of retired and deferred vested participants through the suspension process.
The suspensions are subject to approval by the Secretary of Treasury and ratification by a vote of plan participants and beneficiaries. If the suspensions are rejected by the participant vote, and the plan represents more than $1 billion in potential financial assistance payments from the PBGC (a “systemically important” plan), the Secretary of Treasury has the authority to override the vote and implement the suspensions. The Secretary of Treasury will act in consultation with the PBGC and Secretary of Labor, and it will issue regulations within 180 days of the enactment of the Act.
There are certain disclosure requirements that must precede any benefit suspensions. For example, before the plan can submit its application for approval to the Secretary of Treasury, it must send a detailed notice to interested parties, including an “individualized estimate” of the effect of the proposed suspensions on each participant or beneficiary. In addition, the plan’s application to the Secretary of Treasury will be posted online for public inspection and comment.
5. Changes to withdrawal liability rules.
The Act also changes certain rules for determining employer withdrawal liability. For example, certain contribution increases required under a funding improvement plan or rehabilitation plan (for plans in endangered status or critical status, respectively) are disregarded for purposes of allocating unfunded vested benefits to participating employers and when calculating an employer’s statutory payment schedule. Employer surcharges (for plans in critical status only) are also disregarded.
Additionally, the effect of any benefit suspensions (as described above) are disregarded for purposes of determining withdrawal liability, for a period of ten years following the effective date of the suspensions.
Lastly, for plans that engage in a partition (as described above), for the first ten years following the partition, withdrawal liability will be determined with respect to both the original plan that was partitioned as well as the new plan that was created by the partition. After ten years, withdrawal liability will be determined with respect to the original plan only.
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