PBGC Proposes Merger Rule for Multiemployer Pension Plans
By Mark Johnson, Ph.D., J.D.
The Multiemployer Pension Reform Act of 2014 (MPRA) may be changed under a proposal by the Pension Benefit Guaranty Corporation (PBGC) to allow for plan mergers and transfers between multiemployer plans. The proposed changes fall under title IV of the Employee Retirement Income Security Act of 1974 (ERISA).
The MPRA was initially passed by Congress to strengthen the financial outlook for multiemployer defined benefit pension plans, in part by allowing the PBGC to increase participant premiums and expand the agency’s support program. The MPRA also established a “critical and declining” funding status designation for plans that are expected to exhaust their ability to pay benefits within 20 years.
The PBGC reported a deficit of $42.4 billion in its multiemployer plan program as of September 2015, which is expected to decrease to $28 billion by FY 2024 as a result of the premium increase.
About 10 million U.S. workers and their families rely on pension benefits provided by multiemployer plans. While the majority of multiemployer plans are sufficiently funded, the PBGC reports that approximately 10% of all participants in multiemployer plans, or about one million participants, are covered by underfunded multiemployer plans that are projected to run out of money.
In a related matter, 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 IRS 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 Teamsters Central States Pension Fund, which represents 400,000 workers at 1,500 companies, is one multiemployer plan grappling with a significant funding shortfall. The fund has $16.8 billion in assets but $35 billion in liabilities, according to Wall Street Journal reports, and is expected to deplete its assets by 2025. A recent effort by the Teamsters to overhaul the fund, in part by cutting plan participant benefits, was rejected by the Treasury Department in May of 2016.
The Employee Benefits Security Administration within the Department of Labor lists 33 multiemployer funds as being in “Critical and Declining Status” in 2016, followed by 73 in “Critical Status” and 42 in “Endangered Status.”
When a multiemployer pension plan is designated in one of these three troubled categories, the plan sponsor is required by federal law to notify all plan participants, beneficiaries, bargaining parties, the Pension Benefit Guaranty Corporation, and the Department of Labor. Depending on a plan’s particular designation, the plan sponsor is also expected to take specified corrective actions.
The Federal Register notice regarding the PBGC proposal identifies four requirements for a merger of two or more multiemployer plans and transfers of assets and liabilities between multiemployer plans under section 4231(b) of ERISA:
(1) The plan sponsor must notify PBGC at least 120 days before the effective date of the merger or transfer;
(2) No participant's or beneficiary's accrued benefit may be lower immediately after the effective date of the merger or transfer than the benefit immediately before that date;
(3) The benefits of participants and beneficiaries must not be reasonably expected to be subject to suspension as a result of plan insolvency under section 4245 of ERISA;
(4) An actuarial valuation of the assets and liabilities of each of the affected plans must have been performed during the plan year preceding the effective date of the merger or transfer.
Interested parties are invited to submit comments on the PBGC proposal, with all comments due by the first Friday in August.
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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