Both houses of Congress recently passed and President Obama recently signed comprehensive spending legislation that includes an amendment with the provisions of the Multiemployer Pension Reform Act of 2014 (MPRA) along with a number of other pension related provisions. Much attention has been given to a controversial provision in the MPRA that allows multiemployer pension fund trustees to reduce vested benefits for active workers as well as benefits being paid to current retirees. But the broader spending bill also includes a number of other important changes that will impact both multiemployer and single employer pension plans. Some of the changes that that Congress included in the legislation are detailed below.

Technical and Other Changes Applicable To Multiemployer Plans:

  • extends indefinitely the extension of amortization periods for multiemployer plans that could not otherwise satisfy the Pension Protection Act’s (or “PPA”) funding obligations;
  • allows plans that are projected to enter critical status at a future date to elect to be in critical status for the current plan year;
  • allows plans to take any extension of amortization periods into account in determining whether the plan may emerge from critical status;
  • clarifies that plans that have previously entered into and emerged from critical status can reenter critical status for any subsequent plan year;
  • provides that endangered status is not applicable if the plan is projected not to be in critical or endangered status after ten years without additional contributions or other changes;
  • corrects the method of determining the targeted funded percentage for plans in endangered status;
  • confirmed the endangered status and critical status rules of operation related to contribution reductions, exclusion of employees and benefit improvements;
  • clarifies that subsequent contribution schedules for endangered plans and/or rehabilitation plan schedules for critical status plans are to be imposed if not adopted in subsequent collective bargaining agreements;
  • provides that contributions required by funding improvement or rehabilitation plans shall be disregarded in determining the allocation of unfunded vested benefits for withdrawal liability purposes and in determining a withdrawn employer’s payment schedule;
  • provides that benefit reductions, contribution surcharges, and contribution increases required by funding improvement or rehabilitation plans are disregarded in determining a plan’s unfunded vested benefits in determining withdrawal liability;
  • strengthens required disclosure of multiemployer plan information for employers and others;
  • provides for assistance, including financial assistance, to facilitate the merger of plans to avoid or postpone insolvency;
  • establishes a formal process for partition of eligible multiemployer plans; and
  • increases PBGC premiums for multiemployer plans from $13 to $26 per participant.

Multiemployer Pension Reform Act (MPRA) Remedial Provisions

As mentioned at the outset, the amendment to the spending bill to include the MPRA has received significant attention because it allows trustees to cut participant benefits for a few deeply troubled multiemployer plans that cannot avoid insolvency. The cut-back provision remains controversial because it reverses in the multiemployer plan context a bedrock principle under ERISA that pension benefits, once vested, cannot be reduced or eliminated.

For these plans, the MPRA allows trustees to suspend benefits that participants and retirees have already accrued when the plan is at risk of being unable to pay 100% of vested benefits in the next 10 to 20 years. To suspend benefits, trustees must establish that insolvency is inevitable and that plan trustees have exhausted all other reasonable measures to avoid insolvency.

The MPRA limits trustees’ ability to suspend benefits. Specifically, a plan may not reduce participant benefits to less than 110% of the amount of the PBGC guaranteed monthly benefit. There are further limitations on benefit suspensions for participants over age 75 and those receiving disability benefits. At the same time, plan trustees have some discretion under the MPRA to decide how to structure benefit cuts. For example, the MPRA allows trustees to favor active workers over retirees in deciding which group receives greater benefit reductions. Once benefits are suspended, the MPRA contains no requirement that plan sponsors raise benefits to previous levels if the plan returns to financial health.

Once trustees approve the suspensions, the remedial measures are subject to approval by the Department of Treasury. If Treasury, in consultation with the Department of Labor and the PBGC, approves the benefit reductions, the MPRA gives affected participants and beneficiaries the opportunity to vote on the benefit reductions. Treasury may override this vote if it determines that the plan is “systemically important”, which is defined under the MPRA as any plan that would require projected PBGC financial support in excess of $1 billion. If the plan is determined to be systemically important, Treasury can opt to implement the trustees’ original plan, or, in consultation with PBGC and the Department of Labor, issue a modified plan for benefit reductions.

Spending Measure Also Addresses Single-Employer Plan Sponsor Concerns Over PBGC Shutdown Liability Payments

The spending measure also updates ERISA section 4062(e), a provision which requires single employer plan sponsors to provide financial security to protect their defined benefit plans when the employer ceases operations at a facility and employees are laid off. Section 4062(e) liability arises when more than 20 percent of plan participants lose their jobs as a result of the shutdown. PBGC has stepped up enforcement of section 4062(e) in recent years and plan sponsors have often found that routine business decisions such as the temporary shutdown of a facility for repairs or the sale of a business unit have triggered a section 4062(e) event. 

In response to these employer concerns, the PBGC halted its 4062(e) enforcement program in July 2014. Further, in the recent spending bill, Congress adopted changes to section 4062(e) that now require, among other things, that the shutdown (1) be permanent, and (2) that 15 percent of all of the plan sponsor’s employees (not just those in the plan) lose their jobs in order to trigger a section 4062(e) event.

Grandfather of Certain Definitions of Normal Retirement Age For All Defined Benefit Plans

The law clarifies that a defined benefit plan that on or before December 8, 2014, provided for a normal retirement age which is the earlier of an age permitted by current law or the age at which a participant completes a number of years (not less than 30 years) of service shall not fail to comply solely because this rule applied to certain participants or only to employees of certain employers.