On December 16, 2014, President Barack Obama signed into law the Consolidated and Further Continuing Appropriations Act of 2014, the so- called CRomnibus bill. Included within this bill is the Multiemployer Pension Reform Act of 2014 (MEPRA), a bipartisan bill introduced by Rep. George Miller (D-California) and Rep. John Kline (R-Minnesota). MEPRA includes many provisions regarding multiemployer pension plans – it permanently removes the sunset date that would have otherwise applied to the provisions pertaining to the funding “zone status” of plans and the automatic five-year extension of amortization period enacted in the Pension Protection Act of 2006 (PPA) – but the provision allowing trustees of seriously financially troubled multiemployer plans to reduce accrued benefits to enable such plans to avoid insolvency is the most noteworthy. Below are some of the more significant changes to multiemployer plans as a result of MEPRA.
Remediation for Plans in Critical and Declining Status
MEPRA allows troubled multiemployer plans satisfying certain conditions to apply for permission to suspend participant benefits in order to avoid insolvency. Specifically, to be eligible for this remediation, a multiemployer plan must be in “critical and declining status” – a new “zone” status established for deeply troubled multiemployer plans. Benefits may be suspended only if the trustees determine that all reasonable measures to avoid plan insolvency have and will be taken but the plan will continue to be projected to be insolvent absent the proposed benefit suspensions. A multiemployer plan will be in “critical and declining status” if it is in “critical status” (determined in accordance with PPA) and is projected to become insolvent:
- during the current plan year or any one of the next 14 years or
- during the current plan year or any of the next 19 years and either the plan’s inactive to active participant ratio is more than 2 to 1 or the plan’s funded percentage is less than 80 percent.
Subject to certain conditions, the plan sponsor of a plan in critical and declining status may, by an amendment to the plan, temporarily or permanently reduce the plan’s payment obligations to plan participants and beneficiaries in and out of pay status and incur no liability for this suspension of benefits.
The conditions that allow a sponsor to suspend benefits for a critical and declining plan are:
- Insolvency Determination – The plan trustees determine, in writing, that the plan is projected to become insolvent unless benefits are suspended and despite the taking of all reasonable efforts to avoid insolvency.
- Actuarial Certification – The plan actuary certifies that the plan is projected to avoid insolvency indefinitely if the suspension of benefits occurs.
- Limitation on Suspension of Benefits – The suspension of benefits is also subject to a number of limitations. Benefits in the aggregate may not be reduced below the level necessary to avoid insolvency, no participant’s benefits may be reduced below 110 percent of the benefit guaranteed by the Pension Benefit Guaranty Corporation (PBGC), no disability-based benefits or benefits for participants over age 80 may be suspended, and benefits for participants between ages 75 and 80 are limited.
- Retiree Representative – If the multiemployer plan has 10,000 or more participants, the plan’s board of trustees must select a participant in pay status as a “retiree representative” to advocate for the retired and deferred vested participants throughout the suspension process (whose reasonable expenses are paid for by the plan).
- Notice Requirements – The plan trustees must apply to the Department of Treasury (Treasury) for approval. If Treasury fails to notify the plan sponsor within 225 days that the application does not fulfill the necessary requirements, the application is considered approved.
- Approval and Ratification – Plan sponsors must also provide notice of the proposed suspension to plan participants and beneficiaries, contributing employers plan, and employee representatives. Within 30 days of Treasury’s approval of the suspension, Treasury will put the suspension of benefits to a ratification vote. If a majority of participants and beneficiaries reject the suspension, it generally cannot go into effect. However, the plan sponsor may subsequently submit a new application for suspension of benefits. Moreover, Treasury may permit the suspension notwithstanding a majority vote against suspension if it deems the plan “systematically important.” Treasury will deem a plan systematically important if the (PBGC) projects the value of projected financial assistance payments to exceed $1 billion.
The suspension of benefits will remain in effect until it expires based on its own terms or the plan sponsor provides certain benefit improvements, i.e., resumption of suspended benefits, an increase in benefits, an increase in the rate at which benefits accrue, or an increase in the rate at which benefits become non-forfeitable under the plan. With some limitations, a plan sponsor may choose to provide benefit improvements during a suspension of benefits. Limitations include the requirement that, with exceptions, the benefit improvement may not increase plan liabilities for participants and beneficiaries who are not in pay status at the beginning on the plan year that the benefit improvement takes effect.
Repeal of PPA Sunset Provisions
The PPA provided that funding rules applicable to multiemployer plans considered in endangered or critical status would sunset at the end of 2014. MEPRA repeals this provision and consequently the PPA funding rules due to sunset remain in place indefinitely.
New Rules on Partition of Multiemployer Plans
MEPRA substantially revises the existing rules on the partition of multiemployer plans. Under Section 4233 of the Employee Retirement Income Security Act of 1974 (ERISA), the PBGC may sever the portion of a multiemployer plan benefit liability that is “directly attributable” to service with certain bankrupt employers if it determines that, among other things, doing so would significantly reduce the risk that the plan will become insolvent. These “partitioned” benefit obligations are combined in a new plan and the original multiemployer plan is no longer responsible for them. Prior to MEPRA, partition was only available to vested benefits attributable to a bankrupt employer. Under MEPRA, a multiemployer plan may seek PBGC approval for partition if it is in “critical and declining status” (as described above) and the plan sponsor has taken all reasonable measures to avoid insolvency, including suspending benefits to the maximum extent permissible, such that benefit suspension will allow the remaining portion of the original plan to remain solvent. The PBGC must certify to Congress that its ability to meet existing financial assistance obligations to other plans will not be impaired by such partition and that the cost arising from such partition is paid exclusively from the PBGC’s fund for basic benefits guaranteed for multiemployer plans.
Once a multiemployer plan sponsor notifies the PBGC of its requests for a partition, the plan sponsor must notify the plan’s participants and beneficiaries within 30 days of submitting the application. The PBGC must make a determination regarding the plan’s application within 270 days of the application’s submission and, within 14 days after the PBGC’s partition order, the PBGC must provide notice to Congress.
If the PBGC approves the plan sponsor’s partition request, the order must provide that the “old” partitioned plan transfer just enough of its liabilities to the “new” successor plan created by the partition to keep the “old” partitioned plan solvent. The plan sponsor will continue in effect for both the “old” partitioned and “new” successor plans. The “new” successor plan is responsible for paying only the level of PBGC-guaranteed benefits, but the “old” partitioned plan must pay a monthly benefit to its participants and beneficiaries for each month that the benefit is in pay status in the amount by which the benefit that would be paid under the plan terms exceeds the PBGC’s guaranteed benefit amount for that person.
If an employer withdraws from the “old” partitioned plan within 10 years of the partition, withdrawal liability will be assessed with respect to both the “old” partitioned plan and the “new” successor plan. However, if a withdrawal takes place after the passage of 10 years, withdrawal liability is only assessed with respect to the “old” partitioned plan.
In addition, the “old” partitioned plan must pay PBGC premiums with respect to the participants whose benefits were transferred to the “new” successor plan for a period of 10 years after the partition.
Rules to Facilitate Multiemployer Plan Mergers
MEPRA has given the PBGC the authority to promote and facilitate the merger of multiemployer plans in the event that the plan sponsors request this assistance and the PBGC determines the merger is in the interest of the participants and beneficiaries of at least one of the affected plans and is not adverse to the overall interests of the participants and beneficiaries of the other plan. PBGC assistance may take the form of training, technical guidance, mediation, communication with stakeholders, and support with requests made to other government agencies. Assistance may also be financial if 1) it is necessary to allow at least one of the plans to forestall or avoid insolvency, 2) at least one of the plans is in “critical or declining status” as previously described, 3) the PBGC reasonably expects this action will reduce its long-term loss with respect to the plans and assistance is necessary for the merged plan to be solvent, 4) the PBGC certifies the assistance will not impair financial obligations to other plans, and 5) the assistance is paid exclusively from the PBGC’s multiemployer benefit fund.
Early Election to Enter Critical Status
Under the PPA, an actuary must now certify to Treasury and the multiemployer plan sponsor whether or not the plan will be in “endangered status” for the plan year or “critical status” for that year and the succeeding five years. Under MEPRA, the plan sponsor of a multiemployer plan that is not presently in “critical status”, but is projected to be in “critical status” during any one of the next five years, may elect for the plan to be considered in “critical status” for the current year (thus bypassing “endangered status” and allowing the plan sponsor to more quickly develop a rehabilitation plan).
Stricter Rules on Emergence from Critical Status
MEPRA revises the rules for determining whether a multiemployer plan can emerge from “critical status”, making it more difficult for a plan to emerge from “critical status” (including a plan that elects to be in “critical status” as described above) so that such plan is not continually going in and out of “critical status” on a yearly basis. Prior to MEPRA, the actuary need only certify that the multiemployer plan was not projected to have an accumulated funding deficiency for the current plan year and the subsequent nine plan years. Now, the actuary must also certify that the multiemployer plan is not projected to become insolvent for any of the next 30 years and such plan is not in “critical status” as of the beginning of the plan year. Certification that the multiemployer plan is not in “critical status” at the beginning of the plan year is subject to an exception for some plans that have an automatic extension of amortization period. However, MEPRA also protects multiemployer plans that emerge from “critical status” from overly easy reentry into critical status. These plans now only reenter critical status if the plan is projected to have an accumulated funding deficiency for the plan year or any one of the succeeding nine plan years or the plan is projected to become insolvent for any of the subsequent 30 years.
Specifying Applicable Contribution Schedule When Collective Bargaining Agreement Expires
Upon the expiration of a collective bargaining agreement (CBA), which had been agreed to under a funding improvement or rehabilitation plan, if the parties to the expired CBA cannot agree on a new remedial contribution schedule, the contribution schedule under the previously expired CBA will be automatically implemented after 180 days from that CBA’s expiration date.