PBGC to Administer $94 Billion in Financial Assistance to Multiemployer Pension Plans
Multiemployer pension plans are back in the news following enactment of The American Rescue Plan (ARP) Act of 2021 on March 11, 2021. The Rescue Plan creates approximately $94 billion in funding for more than 200 eligible multiemployer pension plans that are severely underfunded. The Pension Benefit Guaranty Corporation (PBGC) announced a new Special Financial Assistance (SFA) Program under ARP in an interim final rule released on July 9, 2021. This article addresses key features of the PBGC program.
The 2021 Rescue Plan follows years of legislative effort to support multiemployer plans known to be in financial distress. The Multiemployer Pension Reform Act of 2014 (MPRA), for example, allowed plans in "critical and declining" status to apply to the Department of Treasury for a suspension of benefits.
How a Multiemployer Plan Qualifies for Special Financial Assistance
A multiemployer plan must meet one of the following criteria to qualify for financial assistance under the American Rescue Plan.
1. Plans that are in "critical and declining" status in any plan year beginning in 2020 through 2022. Under the Multiemployer Pension Reform Act (MPRA), the term critical and declining status means that the plan is projected to have insufficient fund assets to pay full benefits within the next 20 years.
2. A suspension of benefits has been approved for the plan under the MPRA as of March 11, 2021.
3. In a plan year beginning in 2020 through 2022, the plan is in critical status, has a "modified funding percentage" (as defined by the law) of less than 40 percent, and has a ratio of active to inactive participants of less than two to three (the requirements do not have to be met for the same plan year).
4. Insolvent plans that achieved that status after December 16, 2014, and which had not been terminated as of March 11, 2021.
How the PBGC Will Process and Prioritize Requests for Financial Assistance
The PBGC will accept applications for financial assistance in prioritized groups based on its estimated ability to handle the requests within a 120-day time period. There are six priority groups, as outlined below with the plan descriptions. The target date that plans may apply for assistance is indicated in parentheses.
1. Already insolvent or projected to become insolvent before 3/11/2022 (target application date of 7/9/2021).
2. Implemented MPRA benefit suspensions before 3/11/2021 or expected to be insolvent within one year of the date application was filed (1/1/2022).
3. Greater than 350,000 participants (4/1/2022).
4. Projected to become insolvent before 3/11/2023 (7/1/2022).
5. Projected to become insolvent before 3/11/2026 (2/11/2023).
6. Present value of financial assistance in excess of $1 billion (2/11/2023).
As noted above, the PBGC is only accepting Priority 1 submissions at this time. The PBGC expects that once an application is approved, SFA payments will be made within 60 to 90 days and in any event not later than September 30, 2030.
How Much Special Financial Assistance the PBGC Will Pay to Qualifying Plans
The PBGC will pay qualifying multiemployer plans the amount required to fund all benefits due beginning on the date of the SFA payment and ending on the last day of the plan year 2051. The PBGC will take all plan assets, income, and obligations into account when calculating the payment.
Participant and beneficiary accrued benefits will be considered as of March 11, 2021. If a plan previously suspended or reduced benefits, the plan may receive SFA to reinstate suspended benefits or provide certain make-up payments.
SFA funds and associated earnings must be segregated from other plan assets. Additionally, SFA funds must be invested in investment grade bonds or other permissible investments as authorized by the PBGC.
According to the Federal Register notice, "Unlike the financial assistance provided under section 4261 of ERISA, which is in the form of a loan and provided in periodic payments, a plan receiving SFA under section 4262 has no obligation to repay SFA, and PBGC must pay SFA in the form of a single, lump sum payment."
Background on Multiemployer Pension Plans
The "multiemployer" plan is not to be confused with the "multiple employer pension plan" (MEPP). "Multiple employer plans" are 401(k) plans, so there is no PBGC role or potential PBGC liability.
A multiemployer pension plan is established through a collective bargaining agreement between two or more employers and a labor union. These plans are also known as Taft-Hartley plans. Each plan is managed by a board of trustees, which contains an equal number of employer and union trustees.
The transportation, construction, retail, manufacturing, hospitality, and entertainment industries—which rely on a large base of employees who tend to move from one employer to another within the industry—represent the largest number of multiemployer plans.
In 2021 alone, the Employee Benefits Security Administration of the Department of Labor reports receipt of 28 new "critical and declining status" notices, 40 "critical status" notices, and 19 "endangered status" notices received as of July for multiemployer plans in financial distress.
Prior to enactment of the American Rescue Plan, the PBGC's 2020 Annual Report stated that its Multiemployer Insurance Program was severely underfunded with a negative net position of $63.7 billion and likely to become insolvent in 2026.
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Mark Johnson, Ph.D., J.D., is an experienced pension and 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. He can be reached at 817-909-0778. 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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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.