Multiemployer pension plans are collectively bargained defined-benefit employee benefit plans that are funded by several unrelated employers for the benefit of unionized employees. In recent years, the crisis of significantly underfunded multiemployer plans has continued to grow. In response, Congress enacted the American Rescue Plan Act of 2021 (ARPA), which was signed into law on March 11, 2021. ARPA amended ERISA to establish a new program within the Pension Benefit Guarantee Corporation (PBGC) to offer “special financial assistance” (SFA) to multiemployer plans in danger of becoming insolvent; in contrast to other assistance offered by the PBGC, plans are not required to repay the SFA.
ARPA directed the PBGC to issue regulations or other guidance to prescribe the application requirements for SFA payments and for how funds are to be invested and to impose conditions on plans that receive SFA payments. On July 9, 2021, the PBGC issued this guidance in the form of interim regulations.
Note that this blog post is a high-level summary of the general provisions of this regulation. For more specific guidance on the application of the interim regulations to your particular plan, potential withdrawal liability or situation, please contact your Faegre Drinker attorney.
Who is eligible to file for SFA?
Four types of multiemployer plans are eligible to apply for SFA:
- A plan in critical and declining status in any plan year beginning in 2020, 2021 or 2022.
- A plan with a suspension of benefits approved under Section 305(e)(9) of ERISA as of March 11, 2021.
- A plan certified to be in critical status that has a modified funded percentage of less than 40% and a ratio of active to inactive participants which is less than 2 to 3, in any plan year beginning in 2020, 2021 or 20221.
- A plan that became insolvent for purposes of section 418E of the Internal Revenue Code after December 16, 2014, that has remained insolvent and that has not terminated under Section 4041A of ERISA as of March 11, 2021.
What amount of SFA is available to eligible plans?
In the SFA application, plans are required to include a requested amount that is required for the plan to pay all benefits due during a period that begins with the date of payment of the first SFA payment and ending on the last day of the plan year that ends in 2051.
The regulations provide guidance on how plans are to calculate this amount. All of the plan’s resources, including future contributions and investment returns, reduced by anticipated plan expenses, must be considered in determining the amount of the SFA requested for the plan. These amounts are determined using a single set of actuarial assumptions. Instead of prescribing actuarial assumptions to be used when estimating this amount, the regulation requires the use of the plan assumptions previously selected by the plan actuary to certify the plan’s funding status before January 1, 2021, unless such assumptions are unreasonable. A plan may change any of the unreasonable actuarial assumptions except for the interest rate. A plan must use the interest rate that is the lesser of the rate used in the actuarial certification prior to January 1, 2021, and the rate specified in ERISA Section 303(h)(2)(C)(iii) plus 200 basis points.
Upon approval of an SFA application, payment will be made to the plan in a lump sum, generally within 60 days (but no later than 90 days) after the approval of the SFA application.
Information required to file for special financial assistance (SFA) from PBGC
The regulation describes the information plan sponsors must include in an application for SFA:
- Plan information
- Actuarial and financial information (including the amount of SFA requested)
- A completed checklist (available on the PBGC’s website)
- Signature of an authorized trustee who is a current member of the board of trustees
- A signed penalties of perjury statement
- A copy of the executed plan amendment providing that, beginning with the SFA measurement date, the plan must be administered in accordance with the restrictions and conditions described in the regulations
- A copy of the proposed plan amendment to reinstate benefits and pay make-up payments, if benefits had been suspended, and certification by the plan sponsor that the plan amendment will be adopted in a timely fashion
- Additional information as requested by PBGC to clarify or verify the information in a filed application
The regulation also provides guidance on information needed in applications from plans that have an approved application of partition from the PBGC.
Any initial application must be filed by December 31, 2025, and any revised application must be filed by December 31, 2026. PBGC is required to process an application within 120 days.
Which plans will be given priority to file applications before March 11, 2023?
In order for the PBGC to review each application thoroughly and within 120-days, the regulation permits the PBGC to manage the filing process by establishing “priority groups.” Initially, priority will be given to the applications of plans that are projected to become insolvent under Section 4245 of ERISA by March 11, 2022. Plans in the first priority group may file an application beginning July 9, 2021. The regulation prescribes a total of seven priority groups, along with the dates after which applications may be submitted (the preamble to the regulation contains a helpful chart outlining the priority groups and applicable timeline). As a new priority group opens, the PBGC will continue to accept applications of plans in earlier priority groups.
Does the regulation stipulate how SFA funds are to be invested?
The funds may only be invested in investment-grade bonds or other safe investment-grade vehicles that will ensure that short-term needs of benefit payments can be met, such as fixed income securities, commingled funds, mutual funds, pooled trusts, or other commingled securities.
Are there any restrictions or conditions for the SFA funds?
SFA funds, and any earnings thereon, must be segregated from other plan assets and can only be used to make benefit payments and pay plan expenses.
The following conditions are imposed by the regulations:
- If a plan previously suspended benefits, upon receipt of SFA funds, the plan must reinstate any benefits that were suspended and must provide payments to certain participants or beneficiaries to make up past amounts of benefits previously suspended.
- Plan contributions by participating employers must remain at the same levels as those required by the collective bargaining agreements or plan documents in effect on March 11, 2021 (unless the change lessens the risk of loss to plan participants and beneficiaries). A plan that proposes a change in plan contributions must seek PBGC approval if the change affects annual contributions over $10 million.
- The regulations also restrict new benefits and benefit increases under certain circumstances. A benefit or benefit increase may not be adopted during the SFA coverage period if it is attributable in whole or in part to service accrued or to other events occurring before the adoption date of the proposed amendment. Prospective benefits and benefit increases must not be adopted during the SFA coverage period unless there is an increase in employer contributions to account for such increases and these employer contributions were not included in the determination of the SFA amount.
- A plan must not engage in a transfer of assets or liabilities (such as a spinoff) or merger, except with PBGC approval.
How are contributing employers impacted?
The major impact is that plans receiving SFA should be able to avoid insolvency for at least the next thirty years. This should lower the chance that such plans incur a mass withdrawal because of the scramble of employers to avoid being the last one standing. The regulations also address benefit increases, contribution decreases and withdrawal liability. Specifically, plans receiving SFA:
- May not implement a retroactive benefit increase attributable to service or other events that occurred before the SFA coverage period.
- May offer a future benefit increase but only when there are employer contribution increases that the plan actuary certifies will be sufficient to pay for such benefit increases and if the increases were not contemplated as part of the SFA amount.
- May not allow for contribution decreases (including revising the contribution base unit) unless such a reduction reduces the risk of loss to the plan participants, for example, if a reduction would allow an employer to avoid bankruptcy.
- Must calculate withdrawal liability using the so-called PBGC interest rates (or mass withdrawal interest rates) published in Table I of appendix B to Section 4044 of ERISA for the later of either ten years or the last day of the plan year in which the plan no longer holds any SFA or earnings on SFA in the required segregated account.
- Must obtain PBGC approval for any settlement of withdrawal liability when the assessed liability is greater than $50 million. The $50 million threshold is the lesser of the lump sum or the present value of the installment payments.
PBGC includes a request for public comment on these interim regulations. Comments must be submitted by August 11, 2021.
[1] “modified funded percentage” is defined as the percentage equal to a fraction, the numerator of which is the current value of plan assets (as defined in Section 3(36) of ERISA) and the denominator of which is current liabilities (as defined in Section 431(c)(6)(D) of the Code).
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