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The Status of Single Employer Pension Plans in 2021

Expert Witness: ERISA Benefits Consulting, Inc.
The American Rescue Plan Act of 2021 ("ARPA"), signed into law on March 11, 2021, provides two significant funding relief measures for defined benefit single employer pension plans, as outlined below.

ARPA Extended Amortization

Sec. 9705 of ARPA is titled "Extended Amortization for Single Employer Plans." This provision makes significant changes relating to a fund's minimum required contribution as determined by the "shortfall amortization bases" and "shortfall amortization installments." ARPA allows for the amortization bases and amortization installments to be reduced to zero, often referred to as a "fresh start." Further, the amortization period is lengthened from a 7-year plan period to a 15-year plan period.

Section 9705 applies to single-employer plan years beginning after December 31, 2021 or, at the discretion of the plan sponsor, plan years ending on December 31 of 2018, 2019 or 2020.

The intention of this section is to relieve financial stress on single-employer pension plans that may be struggling with large unfunded liabilities.

Interest Rate Stabilization

When interest rates decline, as they have in recent years, the amount of money that a plan sponsor needs to contribute to an underfunded plan increases.

Sec. 9706 of ARPA is titled, "Extension of Pension Funding Stabilization Percentages for Single Employer Plans." While this provision is technical, it basically provides for adjustments to a "corridor" relating to the 25-year averages of certain corporate bond yields. Several interest rate adjustments are made in this section of ARPA to establish a minimum 5% on 25-year average rates, allow a five-year deferral in an interest calculation that would have been unfavorable without the ARPA adjustment, and an initial narrowing of the interest corridor.

By way of background, this "smoothing" of interest rates used by private sector single-employer plan sponsors under the Employee Retirement Income Security Act of 1974 (ERISA) was initially based on a 2-year period. It was lengthened to a 25-year historical average by the Moving Ahead for Progress in the 21st Century Act (MAP-21) of 2012. In today's current environment of low interest rates, however, a 25-year average rate may be unfavorable when calculating funding obligations.

The PBGC Annual Report on Single Employer Plans

In a separate but related topic, the Pension Benefit Guaranty Corporation ("PBGC") released its FY 2020 Annual Report in late December 2020. The Single-Employer Insurance Program maintained by the PBGC continued to improve during the 2020 time period, with a 10.5 percent return on investments and a positive net position of $15.5 billion. Nevertheless, the Single Employer Program has a $176 billion exposure posed by weak corporate plan sponsors that may require future PBGC assistance.

According to the PBGC, the Single-Employer Program protects more than 23 million workers and retirees in about 23,200 pension plans.

Despite the overall favorable position of the Single Employer Insurance Program, the PBGC took action in 2020 to protect thousands of plan participants who were exposed to bankruptcy proceedings filed by the plan sponsors listed below.

• PG&E is the California utility company that filed for bankruptcy to protect itself from claims relating to widespread wildfires. The PG&E pension plan had more than 53,150 plan participants.

• FirstEnergy Solutions Corp. is an Akron-based coal and nuclear power generating company with more than 41,600 pension plan participants.

• Neiman Marcus (more than 10,600 participants).

• Windstream Holdings, an Arkansas telecommunications and software company with more than 8,800 participants.

• McDermott International, Inc. (more than 4,850 participants).

• American Commercial Lines (more than 4,050 participants).

Many of the companies listed above were subsequently able to exit from bankruptcy after reorganizing their pensions and other debt obligations.

Overall, the PBGC assumed financial responsibility for 69 additional single-employer plans in FY 2020. These plans collectively cover almost 57,000 current and future retirees.

ABOUT THE AUTHOR: Mark Johnson, Ph.D., J.D.
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.

Copyright ERISA Benefits Consulting, Inc.

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.

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