Multiemployer Pension Plans Get IRS Guidance on Suspension of Benefits
By Mark Johnson, Ph.D., J.D.
The Internal Revenue Service (IRS) issued a proposed ruling titled, “Additional Limitation on Suspension of Benefits Applicable to Certain Pension Plans under the Multiemployer Pension Reform Act of 2014,” on February 11, 2016. The MPRA relates to multiemployer defined benefit pension plans.
The proposed rule requires that a plan sponsor must file an application with the Secretary of the Treasury when requesting approval for a suspension of benefits. The Treasury will then consult with the Pension Benefit Guaranty Corporation (PBGC) and the Secretary of Labor before ruling on the application. The Treasury Secretary is required by statute to approve the application once it has been determined that certain conditions are met.
The conditions that must be met before a plan sponsor can move forward with a suspension of benefits program are identified in the proposed rules andsummarized below.
1. The plan must be in “critical and declining status.” This is defined as meaning that the plan has insufficient funds within a certain time period to provide the full benefits that would normally accrue to plan participants.
2. Multiemployer plans offered by employers that arranged a “complete withdrawal” under ERISA, paid the full employer’s liability, and assumed the responsibility under a collective bargaining agreement (CBA) to provide benefits to participants under a separate single-employer plan are subject to a limitation on how benefits must be applied. An employer in this situation is referred to as a ‘‘subclause III employer,’’ and the agreement for payment of benefits is referred to as a ‘‘make-whole agreement.’’
3. Depending on certain circumstances, the suspension of benefits should first be applied to benefits from an employer that withdrew from the multiemployer and either failed to pay or is delinquent in paying its withdrawal liability in full.
The proposed IRS regulations affect a wide range of interested parties within the pension industry, including “active, retired, and deferred vested participants and beneficiaries under any such multiemployer plan in critical and declining status as well as employers contributing to, and sponsors and administrators of, those plans.”
As we noted in an earlier article, the Central States, Southeast and Southwest Areas Pension Fund—known as Central States Pension Fund (“CSPF”)—submitted a proposed ‘rescue plan’ to the Treasury Department on September 25, 2015. The plan includes the proposed reduction of benefits for Central States plan participants. It was the first multiemployer pension plan to file an application under the MPRA.
United Parcel Service of America, Inc. (“UPS”) withdrew from the CSPF for a $6.1 billion lump sum payment under a 2007 agreement between UPS and the Teamsters. UPS then established a single-employer pension plan for its employees who were previously included in the CSPF. At the time UPS agreed to a “make-whole agreement,” which stipulated that the delivery company would compensate participants for any future benefit reductions due to CSPF financial difficulties.
The new IRS guidance, once finalized, would reinforce the need for UPS to “make whole” any UPS participants in the CSPF pension plan who are subject to budget cuts.
Background on Multiemployer Pension Plans
According to the PBGC, there are approximately 1,400 active multiemployer benefit pension plans in the country. Collectively bargained and maintained by more than one employer in a related industry and a labor union, these multiemployer plans cover about 10 million participants. Employees in these plans traditionally work in industries such as building and construction; film, television and theater; retail food; garment manufacturing; mining; trucking; and maritime.
Most multiemployer pension plans are governed by a board of trustees, with equal representation by labor and management.
The vesting, accrual and participation rules are similar between multiemployer plans and single-employer plans. Differences include the ability for multiemployer plan members to retain benefits while changing employment among the multiple employers in the plan, and the use of “unit benefit” plans in the multiemployer environment that specifies a monthly dollar amount benefit adjusted by years of service.
The IRS is accepting public comments on the proposed guidance until March 15. A special public hearing on the topic is scheduled to be held in Washington, D.C. on March 22.
ABOUT THE AUTHOR: Mark Johnson, J.D., Ph.D. Mark Johnson, Ph.D., J.D., is a highly experienced ERISA expert. As a former ERISA Plan Managing Director and plan fiduciary for a Fortune 500 company, Dr. Johnson has practical knowledge of plan documents as well as an in-depth understanding of ERISA obligations. He works as an expert consultant and witness on 401(k), ESOP and pension fiduciary liability; retiree medical benefit coverage; third party administrator disputes; individual benefit claims; pension benefits in bankruptcy; long term disability benefits; and cash conversion balances.
ERISA Benefits Consulting, Inc. by Mark Johnson provides benefit consulting and advisory services and does not engage in the practice of law.
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