The $1.9 trillion COVID stimulus package recently signed into law by President Biden includes significant assistance for pension plans. The financial assistance provisions will have a large bearing on shoring up the ongoing multiemployer pension crisis. The pension assistance has not received as much press as have other provisions of the American Rescue Plan Act of 2021 (ARPA) but it is no less impactful. The stimulus package provides direct financial support for certain underfunded multiemployer pension plans and relief from several minimum funding rules for both multiemployer and single-employer plans.
The pension provisions of ARPA are a modified version of the Butch Lewis Act, a pension rescue bill that has passed in the House but never in the Senate in years past. ARPA should allow over 100 severely underfunded multiemployer pension plans to return to relative financial health; however, ARPA does not provide for any long-term funding reform that would prevent another pension crisis. It also will have little or no effect for contributing employers.
ARPA provisions that relate to single-employer plans provide only relief from minimum funding regulations related to amortization and funding-stabilization segment rates.
First, ARPA expands the amortization period of funding shortfalls arising under the minimum funding requirements of both the federal tax code and the Employee Retirement Income Security Act (ERISA). Under ARPA, the shortfall amortization base for plan years before the first plan year after December 31, 2021, is reduced to zero. Plan sponsors may elect for this to apply retroactively for plan years beginning after December 31, 2018, 2019 or 2020. Additionally, the seven-year amortization period for all plan years beginning on and after December 31, 2018, is now fifteen years. As a result of these changes, plan sponsors will have a “fresh start” when determining a plan’s funding shortfall and associated minimum required contributions, which will allow plan sponsors to smooth out funding obligations over a longer period of time.
ARPA also modifies the segment rates used in actuarial assumptions for single-employer plans to allow for continued smoothing of interest rates. ARPA adds a minimum interest rate of 5% to apply to funding calculations rather than the 25-year average if it falls below 5%.
For certain multiemployer pension plans, ARPA provides both relief from minimum funding regulations and significant financial assistance.
The relief from funding regulations falls into three categories:
- Funding Status Delay. Plans may elect to remain in the same status zone as the previous year for the plan year beginning between March 1, 2020, and February 28, 2021, or for the subsequent plan year. If elected, the delay will remain in effect for one plan year from the election. Plans that are already in critical or endangered status zones that elect to remain in the same status zone will not have to update their funding improvement or rehabilitation plans until the first plan year following the delay.
- Extension of Funding Target Period. Multiemployer plans will be able to elect to extend the period they must meet funding targets by five years for plan years beginning after December 31, 2019. In most cases, the time period will go from 10 to 15 years; however, that may depend on exceptions or extensions provided for in other legislation.
- Spread of Losses. ARPA allows multiemployer plans to segregate some losses that they have experienced in one or both of the plan years after February 29, 2020. Plans can amortize those losses over 30 years, extended from the normal amortization period of 15 years.
The most-discussed pension provision in ARPA is the significant financial assistance for underfunded pension plans. ARPA does not appropriate a specific amount, but projections estimate that this provision will provide around $86 billion in assistance to qualified plans. A plan will qualify for assistance if it:
- is insolvent;
- is in “critical and declining” status in plan years 2020, 2021, or 2022;
- has been approved to suspend benefits; or
- has a modified funded percentage less than 40% and a ratio of active to inactive participants that is less than 2 to 3.
ARPA creates a new fund through which the Pension Benefit Guaranty Corporation (PBGC) will be able to provide the funds. ARPA charges the PBGC with the administration of the assistance program. ARPA also left it to the PBGC to issue regulations or guidance that limits a plan’s ability to file for assistance for two years after the effective date of ARPA unless it meets additional criteria. The PBGC will accept applications for assistance through December 31, 2025. The assistance will be paid in lump sums to plans for the amounts needed to cover benefits through plan years ending in 2051. Plans that receive assistance must reinstate benefit suspensions, and the assistance must be kept segregated from other plan assets.
Effects for Multiemployer Pension Plan Contributors
The pension provisions in ARPA itself will have minimal, if any, impact for employers who contribute to multiemployer plans, as there is nothing that directly addresses contributions, withdrawal liability or other issues. Indirectly, the financial assistance provided to severely underfunded plans may be a double-edged sword for employers. On the positive side, employers will have peace of mind that they will not be caught up in a mass withdrawal due to the insolvency of a plan; however, on the negative side, unions may be less willing to allow employers to cease pension contributions through bargaining since the previously underfunded plans will now have sufficient funds to provide benefits through 2051.
More significantly, ARPA does not address how financial assistance provided to plans will affect withdrawal liability. An earlier version of ARPA expressly stated that withdrawal liability must be calculated without regard to any assistance provided for 15 years from the receipt of such financial assistance. That provision was taken out to allow Congress to pass ARPA through the budget reconciliation process. However, ARPA directs the PBGC to issue regulations or guidance with respect to withdrawal liability. As such, it is possible, if not likely, that the PBGC will limit the effect that financial assistance has on withdrawal liability. This would be a significant blow to participating employers as they would owe withdrawal liability calculated based on the severely underfunded status of their plans, even though the plans are no longer underfunded.