One of the primary objectives of the Pension Protection Act of 2006 (“PPA”)
is to shore up the funding of defined benefit pension plans, including
multiemployer plans. As most of the PPA provisions on multiemployer pension
plans take effect for plan years beginning this year (2008), it is worthwhile to
review some of these provisions and how they affect contributing employers.
Obligations of Critical or Endangered Pension Plans
The PPA imposes new funding and benefit-restriction rules for multiemployer
pension plans in critical or endangered status. In general:
- A plan is “critical” if its funded percentage is
less than 65% and the plan projects: (a) an inability to pay benefits within
seven years, or (b) a funding deficiency within five years.
A plan is “endangered” if it is not in critical
status but its funded percentage is less than 80% and it: (a) has an
accumulated funding deficiency for the plan year, or (b) is projected to
have an accumulated funding deficiency in any of the succeeding plan years.
Within 90 days of the start of each plan year, a plan’s actuary must certify
to the Treasury and the plan trustees whether the plan is in critical or
endangered status. Within 30 days after certification of critical or endangered
status, the plan’s trustees must provide notice of critical or endangered status
to: (a) participants and beneficiaries, (b) participating employers and their
unions, (c) the Pension Benefit Guaranty Corporation and (d) the U.S.
Department of Labor (“DOL”).
Within 240 days following the deadline for certifying plan status, critical
plans must adopt a rehabilitation plan, and endangered plans must adopt a
funding improvement plan. A rehabilitation plan or funding improvement plan
consists of the actions that the plan trustees propose to the employers and
union to meet the plan’s required funding benchmarks.
Within 30 days after the adoption of the rehabilitation plan or funding
improvement plan, the plan’s trustees must provide the union and employers with
at least two schedules. The schedules must show, among other things, the revised
benefit structures, revised contribution structures or both which, if adopted,
would be expected to meet the benchmarks of the rehabilitation plan or funding
One schedule (the “default schedule”) must
provide for reductions in the amount of future benefit accruals necessary to
achieve the benchmarks of the rehabilitation plan or funding improvement
plan, assuming no increase in contributions other than increases necessary
to achieve the benchmarks after amendments have reduced future benefit
accruals to the maximum extent permitted by law.
The other schedule must provide for increases in
contributions necessary to achieve the applicable benchmarks, assuming no
amendments reducing future benefit accruals.
Critical and endangered plans may face substantial excise taxes and civil
monetary penalties if they fail to adopt, or comply with the provisions of,
rehabilitation plans or funding improvement plans, respectively.
Obligations of Employers Contributing to Critical or Endangered Plans
Thirty days after first receiving notice that a plan is in critical status, a
contributing employer must pay a 5% surcharge on the contribution otherwise due
to the plan. The surcharge increases to 10% of contributions otherwise required
in succeeding plan years if the plan continues in critical status. Surcharges
are due and payable on the same schedule as the contributions on which the
surcharges are based. Unpaid surcharge contributions are treated as delinquent
contributions, meaning that the plan can bring suit under the Employee
Retirement Income Security Act of 1974, as amended (“ERISA”), to collect the
amount due. Surcharges are not required as to employees covered by a collective
bargaining agreement (“CBA”) that complies with a rehabilitation plan schedule.
If a participating employer’s CBA expires, and the employer has received
schedules under a rehabilitation plan or funding improvement plan, the employer
and union must agree to adopt appropriate changes to employer contribution and
benefits or the trustees must implement the default schedule. The plan trustees
must implement the default schedule on the earlier of: (a) the date on which the
DOL certifies that the parties are “at impasse” or (b) 180 days after the date
on which the CBA expires. If the schedule requires additional employer
contributions, an excise tax in the amount of the unpaid contribution is imposed
on an employer who fails to make timely contributions.
Reductions in Adjustable Benefits Under Critical Plans
Notwithstanding the anti-cutback provisions in ERISA, trustees of critical
plans may reduce “adjustable benefits,” such as early retirement subsidies. A
notice of any reduction of adjustable benefits must be provided at least 30 days
before the general effective date of the reduction for all participants and
beneficiaries. Such notice must be provided to plan participants, beneficiaries,
unions and contributing employers.
Dispute Resolution and Enforcement Mechanisms
If within 60 days of the due date for the adoption of a rehabilitation plan
or funding improvement plan, the pension plan trustees have not agreed to such
plan, any member of the board of trustees may require the trustees to enter into
an expedited dispute resolution procedure for the development and adoption of
such rehabilitation plan or funding improvement plan.
If a rehabilitation plan or funding improvement plan is not adopted by the
240-day deadline for the adoption of such rehabilitation plan or funding
improvement plan, or if the trustees fail to update or comply with the terms of
a rehabilitation plan or funding improvement plan, any contributing employer can
bring suit (as can unions representing active participants in the pension plan).
Such actions seek to compel the trustees to adopt a rehabilitation plan or
funding improvement plan or to comply with the terms of a rehabilitation plan or
funding improvement plan, as the case may be.
ERISA currently requires plan sponsors of defined contribution and defined
pension plans to provide participants and beneficiaries with a summary annual
report (“SAR”) with certain information contained in the Form 5500. The PPA
excludes defined benefit plans from the SAR requirement. In place of the SAR for
multiemployer plans, the PPA adds a new requirement for multiemployer plans to
provide contributing employers and employee representatives with a report within
30 days of filing a Form 5500 with more information than the current SAR.
Additionally, the PPA requires the administrator of a multiemployer plan,
upon written request, to furnish copies of certain documents. Under proposed DOL
regulations implementing this requirement, the following documents must be made
Any periodic actuarial report received by the
plan for any plan year that has been in the plan’s possession for at least
30 days prior to the date of such request;
Any quarterly, semi-annual, or annual financial
reports prepared for the plan by any plan investment manager or advisor
(without regard to whether such advisor is a fiduciary under ERISA) or other
fiduciary that has been in the plan’s possession for at least 30 days prior
to the date of the written request; and
Any applications filed with the Secretary of the
Treasury requesting an extension of the period of years required to amortize
any unfunded liability and the determination of the Secretary pursuant to
The proposed regulations further indicate that the following persons may
request such documents: any plan participant; any beneficiary receiving benefits
under the plan; any labor organization representing participants under the plan;
and any employer that is a party to the CBA(s) pursuant to which the plan is
maintained or who otherwise may be subject to withdrawal liability under ERISA.
Excluded from the disclosure requirement under the proposed regulations are:
(a) any information or data that served as the basis for any such report or
application described above (although nothing in the proposed regulations limits
any other right that a person may have to review or obtain such information
under ERISA); and (b) any information the administrator reasonably determines to
be either: (i) individually identifiable information regarding any plan
participant, beneficiary, employee, fiduciary or contributing employer, or (ii)
proprietary information regarding the plan, any contributing employer or any
entity providing services to the plan.
Employer Action Steps
As noted above, employers contributing to multiemployer plans face potential
exposure under the PPA for surcharges on required contributions, as well as the
possibility that a future rehabilitation plan or funding improvement plan will
impose contribution increases and benefit cuts. This should be both a major
concern and a call to action for employers. Thus, employers contributing to such
Determine whether the multiemployer plans to
which they contribute are critical or endangered and what legal and
financial exposure they may have as a result. For this purpose, employers
should obtain current copies of pertinent multiemployer plan documents,
including trust agreements, bylaws and participation agreements and should
request an updated estimate of their withdrawal liability under all
multiemployer plans to which they contribute.
Ascertain how the new PPA provisions interact
with the expiration dates of their CBAs.
Analyze the cost of continued multiemployer plan
participation, keeping in mind: (a) the expense of withdrawal liability that
may result if contributions to a plan are partially or completely stopped,
and (b) the risk that new PPA requirements may impose contribution
obligations greater than those that employers negotiate with their
Develop a collective bargaining strategy for
dealing with risks and liabilities imposed by the PPA.
Be proactive in communications with unions and
employees if potential plan concerns are identified.
With the advent of the PPA, employers contributing to critical and endangered
plans will likely face tough negotiations with their unions, as well as National
Labor Relations Board and court challenges over bargaining duties. Employers
should also be even more cautious about entering into new relationships (whether
through acquisitions or collective bargaining) that would result in new
contribution obligations under multiemployer plans.
For further information as to the impact of the PPA on multiemployer pension
plans or assistance in analyzing your organization’s obligations and exposure
under the PPA, please contact any member of the McGuireWoods