When determining alternative pension benefits (such as joint and survivor annuities and early retirement benefits), a recent court decision held that underlying actuarial assumptions selected decades ago do not violate federal law simply because they are outdated and may result in a pension benefit that is less than using more current actuarial assumption.
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.
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.
Continue reading “$1.9 Trillion American Rescue Package Includes Major Relief for Single and Multiemployer Pension Plans”
On Friday January 8, the Pension Benefit Guaranty Corporation (PBGC) published a final rule that provides multiemployer pension plans with additional methods to help calculate employer withdrawal liability. The rule includes relatively simplified approaches to calculating withdrawal liability that multiemployer plans may choose to use. The rule comes into effect on Friday, January 7, 2022, 30 days after its publication in the Federal Register. The final rule reflects changes based on several comments made to the proposed rule that was published on February 6, 2019.
The Employee Retirement Income Security Act (ERISA) charges the PBGC with oversight of multiemployer pension plans, including employer withdrawal liability. Multiemployer plans and their actuaries do not have free reign to calculate withdrawal liability as they see fit. Rather, they must follow the provisions and approved methods set forth in ERISA and as published by the PBGC. The new rule stems from amendments to the ERISA funding rules implemented by Congress in 2006 under the Pension Protection Act (“PPA”) and in 2014 under the Multiemployer Pension Reform Act (“MPRA”). The funding rules permitted financially distressed multiemployer plans to reduce adjustable benefits, suspend a portion of nonforfeitable benefits, and impose contribution increases and surcharges for underfunded plans. These funding rules clarified whether plans could take these changes into account when determining withdrawal liability and instructed the PBGC to draft simplified methods to do so.
On December 22, 2020, the Internal Revenue Service (“IRS”) issued an advance version of Notice 2021-03 (the “Extension Notice”) to extend the temporary relief from the “physical presence” requirement for participant elections under retirement plans that was previously granted in Notice 2020-42 (the “Relief Notice”).
The Coronavirus Aid, Relief, and Economic Security (CARES) Act suspended 401(k) loan repayments for qualified individuals that are due between March 27, 2020, and December 31, 2020. Qualified individuals include plan participants (1) who have been diagnosed with COVID-19, (2) whose spouse or dependents have been diagnosed with COVID-19, or (3) who experiences adverse financial consequences as a result of COVID-19. The CARES Act allows the loan period to be extended to account for the suspension, and prior IRS guidance in Notice 2005-92 allows the loan to be reamortized.
There is another loan provision included in Notice 2020-23 that effectively delays repayment of all 401(k) loans. Notice 2020-23 Section III.A. defines affected taxpayers to include anyone performing a “time-sensitive action” listed in Revenue Procedure 2018-58, which applies to any taxpayer affected by a federally declared disaster and includes in the list of actions payment of 401(k) plan loans.
COVID-19 is a federally declared disaster in every state, so Notice 2020-23 delays any 401(k) plan loan payments that are due between April 1, 2020, and July 14, 2020. But unlike the CARES Act loan suspension, under Notice 2020-23 taxpayers only have a delay and potentially will have to pay all missed loan repayments as of July 15, 2020 (additional guidance from the IRS on this point would be very helpful). As of the date of publication of this alert, it does not appear that the term of the loan can be adjusted to include the Notice 2020-23 delay period (unlike the CARES Act loan suspensions). It is likely that the loan still will be subject to the original loan term.
If the Notice 2020-23 payment delay applies, then it will impact 401(k) plans because of the timing of when a loan default occurs. For example, generally if a participant stopped making loan repayments in May, the latest default period allowed under the Code would be the end of the third quarter (although a 401(k) plan may specify a shorter period). But if the loan repayment due date is delayed until July 15, 2020, then the loan will end up missing a repayment in Q3 and defaulting in Q4. Based on the July 15, 2020, delayed payment date, it is unlikely any loan recipients will have any tax issues that span into 2021 as a result of Notice 2020-23.
Note that 401(k) plan sponsors and their recordkeepers should be aware of this issue and properly administer plan loans in light of Notice 2020-23.
A new California law requires California employers to notify employees who participate in a flexible spending account (FSA) and work in California of any deadlines applicable to withdrawing funds from their FSA before the end of the year. This includes health care FSAs, dependent care FSAs and adoption assistance FSAs.
The American Arbitration Association (AAA) significantly altered its rules for multiemployer pension plan arbitrations to respond to Pension Benefit Guaranty Board (PBGC) concerns and public comments regarding recent fee increases and the selection of arbitrators. Today, the PBGC published a Notice of Approval of AAA’s application of its amended rules. Click here for our alert on the changes, which discusses the welcome relief these amended rules provide employers who wish to challenge withdrawal liability assessments and the impact on arbitrating assessments between multiemployer plans and employers.
In Pizzella v. Vinoskey, the U.S. District Court for the Western District of Virginia held that an independent fiduciary hired to represent the interests of participants in an employee stock ownership plan (the ESOP) engaged in a prohibited transaction and breached its fiduciary duties of prudence and loyalty in a $21 million transaction involving the ESOP’s purchase of stock from one of the company’s founders. The ESOP was awarded a $6.5 million judgment based on the amount that the Court determined the ESOP had overpaid for the stock. The Court held that the founder and independent fiduciary were jointly and severally liable for this judgment.
The withdrawal liability case of the year came to an anticlimactic end on Monday, September 16, 2019, as the Second Circuit docket sheet of New York Times Company v. Newspaper and Mail Deliverers’ Publishers’ Pension Fund pinged to life with a stipulation withdrawing the case with prejudice.
The most-watched issue in the case was a challenge to the Segal Blend discount rate assumption used by many multiemployer pension plans to calculate employer withdrawal liability. The discount rate assumption can have a massive effect on an employer’s withdrawal liability as even a small variation can dramatically increase a withdrawal calculation.