Yesterday the Internal Revenue Service (IRS) and Pension Benefit Guaranty Corporation (PBGC) issued temporary, proposed and interim final regulations and a revenue procedure (collectively, the Guidance) under the Multiemployer Pension Reform Act of 2014 (MPRA). The Guidance offers a first look at how the IRS and the PBGC intend to process requests for multiemployer plan benefit suspensions and plan partitions under MPRA.
As discussed in our earlier WorkCite article, MPRA seeks to improve the funding problems facing many multiemployer pension plans, as well as the looming insolvency of the PBGC multiemployer plan program, by permitting the trustees of such a plan to suspend pension benefits if the plan is in “critical and declining status” under specific criteria and procedures. Additionally, MPRA amends certain ERISA and Internal Revenue Code provisions to facilitate partitions of eligible multiemployer plans. Partitioning is a process by which the PBGC can remove and assume a segment of the plan’s overall benefits obligations relating only to bankrupt participating employers, thereby providing the plan with an enhanced opportunity to remain solvent.
Applications for Benefit Suspensions
The Guidance prescribes the process for approval of suspension applications and provides a model notice that plan sponsors may use to satisfy certain content and readability requirements. Applications must include (i) certain information demonstrating the plan’s eligibility for suspension; (ii) certain information demonstrating that the plan’s proposed suspension satisfies the statutory requirements for a suspension; (iii) a plan sponsor determination relating to reasonable measures taken to avoid insolvency; and (iv) certain other information. Once submitted, applications will become available for public viewing at www.treasury.gov/services/Pages/Plan-Applications.aspx.
Multiemployer Plan Partitions
Before MPRA, PBGC could partition a multiemployer plan at risk of insolvency only in limited situations involving employer bankruptcies. Under a partition order, the plan’s liabilities directly attributable to service with bankrupt employers, and an equitable share of assets, were transferred to a new plan created by the partition (which was both a terminated plan and a successor plan under Title IV of ERISA), at which point the original plan was no longer responsible for the transferred liabilities.
To increase PBGC’s ability to use partitions to strengthen plan underfunding, MPRA replaced the old requirements with a new framework of rules that would allow PBGC to approve partitions without requiring an employer bankruptcy. The Guidance adds a new part to PBGC regulations prescribing the application process to ensure timely processing of partition applications and related notice requirements. It also contains two model notices – one for coordinated applications with the IRS for benefit suspensions and one for only a partition.
For a multiemployer plan to be in critical and declining status in order to apply for a benefit suspension, the plan must satisfy the criteria for “critical” status and also be projected to become insolvent during the current plan year or in coming years. Because a critical-status plan presumably will have adopted a rehabilitation plan requiring additional employer contributions, the filing of an application for a benefit suspension should not come as a complete surprise to the plan’s participants or contributing employers. If a benefit suspension application has been approved and implemented, retirees certainly will be upset. Time will tell how the collective-bargaining process will be affected by a benefit suspension.
The Guidance provides that benefit suspension applications can be submitted beginning June 19, 2015, but also indicates that any submitted applications likely will not be approved prior to consideration of public comments on the proposed regulations and the subsequent issuance of final regulations. Moreover, applications submitted before the issuance of final regulations may need to be revised (including potential revisions to participant notices) or supplemented to take into account any differences that might be included in the final regulations. For these reasons, some struggling multiemployer plans may choose not to submit applications for benefit suspensions until final regulations are issued. Nonetheless, employers who participate in such plans will want to keep close watch over the further development of the Guidance. Employers also may want to make inquiries to the trustees of the plans in which they participate to determine what actions, if any, those plans may be considering taking in response to the Guidance.
Before MPRA, PBGC had exercised its authority to partition a multiemployer plan only three times. More partitions can be expected now that PBGC can partition a plan without the need for a contributing employer to be in bankruptcy.
Steps that a plan takes to avoid insolvency, by requesting a benefit suspension and possibly also a partition, should be viewed by its contributing employers as making the best of a difficult situation and increasing the likelihood that at least some pension benefits might be available for junior employees for whom current contributions are being made