New COVID-19 Stimulus Bill Provides Relief for Multiemployer Pension PlansMarch 11, 2021 – Articles
Included within the legislation known as the American Rescue Plan Act of 2021 are several significant provisions designed to provide relief to multiemployer pension plans, contributing employers and plan participants.
For seriously underfunded plans, the Act provides for “special financial assistance” that is not subject to repayment. Eligible recipients include those funds that are certified to be in critical and declining status, have suspended benefits consistent with the Multiemployer Pension Reform Act of 2014 (MPRA), are in critical status with a certain funded percentage and ratio of inactive to active participants, or are insolvent and not terminated.
The Act also offers additional tools to plans and flexibility to plan sponsors in response to economic and financial disturbance brought about by the COVID-19 pandemic.
The MPRA Compromise
Plan sponsors of seriously underfunded plans have historically had few options to respond to funding challenges. The main tools for trustees are increasing contribution rates or adjusting benefits. While those tools may be helpful in averting future problems, they have limited impact on addressing underfunding attributable to past service.
Wrestling with this issue in 2014, Congress distilled the choices to two basic options: give plan sponsors legislative tools to reduce benefits for prior service or provide plans with financial support to allow them to meet their obligations. The latter option was derided as a bail-out for mismanaged plans. But critics of the former argued that cutting retirees’ benefits was too painful a step, and that if the U.S. government had bailed out private industry why couldn’t it do the same for retirees?
As reflected in MPRA, the compromise reached was to allow plans in critical and declining status to apply to the Department of Treasury for approval to suspend or reduce benefits to avoid insolvency.
The first plan to seek relief under MPRA was the Central States Teamsters Pension Fund. One of the largest severely underfunded multiemployer defined benefit pension funds. Central States is projected to become insolvent in 2025, and its insolvency alone could alone cause the Pension Benefit Guaranty Corporation (PBGC) to run out of money. Central States’ impending insolvency was a primary impetus for MPRA.
Treasury and the Department of Labor denied Central States application for several reasons, including that the proposed cuts were not significant enough to prevent the insolvency. While other applications were approved, the denial of Central States’ application, the looming failure of the PBGC and the outcry of affected retirees whose benefits had been cut brought Congress back to the drawing board to address the continuing and worsening multiemployer pension plan crisis.
Special Financial Assistance
In ARP, Congress is now pursuing the option it declined in 2014 by providing “special financial assistance” to certain plans.
Eligible to apply for the “special financial assistance” are plans that:
- are in critical and declining status
- have implemented benefit suspensions
- are in critical status with a funded percentage – using the current liability rates that are benchmarked to U.S. Treasury rates – of less than 40%, with a ratio of inactive to active participants of less than 2 to 3, and
- are currently insolvent, and became insolvent after December 16, 2014, and have not terminated.
The “special financial assistance” is a lump-sum and in an amount sufficient to guarantee benefits without suspensions or reductions through 2051. The “special financial assistance” must be invested in investment-grade bonds and it, and the earnings thereon, must be segregated from plan assets. Importantly the “special financial assistance” is not a loan and does not need to be repaid.
Plans that receive the “special financial assistance” must reinstate any suspended benefits and repay participants the amount of any previously reduced benefits. This does not include any adjustable benefits that were cut in connection with a rehabilitation plan.
In making these payments, the Act directs PBGC to prioritize plans that are (a) insolvent, (b) likely to become insolvent within five years, (c) have a present value of over $1 billion in unfunded vested benefits, or (d) have already implemented benefit suspensions. The Act instructs the PBGC to develop implementing regulations within 120 days of the Act’s passage.
The versions of the legislation passed by the Senate and House differed in a key respect as to the impact of this “special financial assistance” payment on an employer’s withdrawal liability. In the version initially passed by the House, an employer’s withdrawal liability to a plan that received “special financial assistance” would have been calculated without regard to the “special financial assistance” for 15 plan years following the payment to the plan. In the version passed by the Senate, this provision was removed to comport with the Senate’s procedural requirements for passing the legislation via the reconciliation process.
It is possible that the PBGC, consistent with its authority under the Act to develop implementing regulations, will incorporate the House’s requirement that an employer’s withdrawal liability will be calculated without regard to the payment for the 15 plan years following the payment.
In sum, by providing this “special financial assistance,” the Act reverts to the other option available to Congress when it passed MPRA, and unwinds benefit suspensions made pursuant to MPRA.
Extensions in Response to COVID-19
Like legislation passed following the 2008 financial crisis, the Act allows for the extension of certain periods in response to COVID-19 disruptions to contribution levels and investment returns. Depending on a plan’s Pension Protection Act funded percentage, and perhaps most importantly whether it is a calendar year plan, these provisions may or may not be beneficial to a plan.
In lieu of the 15-year amortization period, plans may elect to amortize losses incurred in either or both of the first two plan years ending after February 29, 2020, over a 30-year period. Plans may also revise their asset valuation method, which is ordinarily subject to a five-year limit, to smooth the losses over 10 years, and allow the smoothed actuarial value to exceed the market value by 30%, instead of the normal 20% corridor.
Plans in either endangered, critical or critical and declining status in the first plan year beginning during the period of March 1, 2020 through March 1, 2021, may elect to retain their same status for the following plan year, and if elected they are not required to update either their funding improvement or rehabilitation plan.
Plans in endangered or critical status may extend their funding improvement and rehabilitation period by five years.
Increase in PBGC Premiums
The PBGC acts as a back-stop for retirees’ benefits, and has been chronically under-funded. Despite that fact, premiums have avoided sharp increases. Most recently, MPRA increased the rate from $12 to $26 per participant per plan year. For plan years beginning in 2021, the rate is $31 per participant.
The Act increases the rate to $52 per participant, effective for plan years beginning after December 31, 2030. This premium rate is indexed for inflation thereafter.