The Consolidated and Further Continuing Appropriations Act, 2015 (the so-called “Cromnibus Act”), enacted into law last week, is not just a $1.1 trillion
spending bill that keeps most of the federal government open through September 2015. The Cromnibus Act also addresses several critical issues impacting
multiemployer and single-employer pension plans and the Pension Benefit Guaranty Corporation (PBGC) and makes other changes affecting defined benefit
Changes for multiemployer pension plans are most sweeping, including:
- Authorization to suspend benefits for active and retired participants where multiemployer plans in “critical and declining status” meet detailed
- Doubling of PBGC premiums for multiemployer plans.
- Repeal of the “sunset” provisions of the Pension Protection Act (PPA) multiemployer funding rules.
- Disregard of PPA surcharges and certain other contributions when calculating withdrawal liability.
- Expansion of PBGC authority to approve plan partitions and facilitate plan mergers.
- Clarification of PPA and Internal Revenue Code (Code) rules impacting multiemployer plans.
Additionally, the Cromnibus Act:
- Amends ERISA Sec. 4062(e) to limit the circumstances in which the PBGC can seek “downsizing liability” from single-employer pension plan sponsors.
- Permits a new definition of “normal retirement age” for pension plans.
Details of these amendments are discussed below.
Suspension of Benefits in Multiemployer Plans in Critical and Declining Status
The Cromnibus Act seeks to ameliorate the funding issues faced by many multiemployer pension plans as well as the looming insolvency of the PBGC
The PPA required greater contributions to underfunded multiemployer plans, with surcharges on contributing employers and reductions of benefits. Despite
these reforms, one out of 10 multiemployer plans faces insolvency. Moreover, as indicated in our earlier WorkCite article, the PBGC’s 2014 Annual
Report revealed a fivefold increase in its multiemployer program deficit.
The Cromnibus Act permits multiemployer plan trustees to suspend pension benefits if the plan is in “critical and declining status” under specific criteria
and procedures, notwithstanding ERISA Sec. 204(g) and Code Sec. 411(d)(6), which generally prohibit plan amendments that cut back accrued benefits.
A plan is in “critical and declining status” if:
- It meets the PPA criteria for “critical status” (which includes having a funded percentage less than 65 percent); and
- It is projected to become insolvent within 15 plan years (20 plan years if the plan’s ratio of inactive to active participants exceeds two to one or if
the funded percentage of the plan is less than 80 percent).
To suspend benefits, a multiemployer plan in critical and declining status must comply with the following:
- Retiree Representative
: Plans with 10,000 or more participants must select a participant in pay status as a “retiree representative” to advocate for retired and deferred
vested participants, with reasonable expenses paid by the plan.
- Actuarial Certification: The plan actuary must certify that the plan is projected to avoid insolvency until the suspension of benefits expires.
- Insolvency Determination:
The plan trustees must determine that the plan is projected to become insolvent unless benefits are suspended.
- Limits on Suspension
- The monthly benefit of any participant cannot be reduced below 110 percent of the monthly benefit guaranteed by the PBGC on the date of suspension.
- Suspensions are limited for participants who have attained age 75 or older but not age 80 on the effective date of the suspension and are prohibited for
participants age 80 and older on that date.
- No suspensions of disability benefits are permitted.
- Suspensions must be equitably distributed based on: (i) life expectancy; (ii) time in pay status; (iii) amount and type of benefit; (iv) extent of
subsidized benefit; (v) extent of post-retirement benefit increase; (vi) history of benefit increases; (vii) years to retirement for active employees;
(viii) whether active participants will withdraw support for the plan, accelerating employer withdrawals; and (ix) the extent to which benefits are
attributed to service with an employer that failed to pay withdrawal liability.
- Notice Requirements
: Trustees must give detailed notice of a proposed suspension to the Treasury Department, participants, employers and unions.
- Approval by Treasury
: The Secretary of the Treasury (Secretary) must find that the suspension satisfies all requirements.
- Ratification by Participants
: The proposed suspension must be submitted to a vote of participants. Except for “systemically-important plans” (those for which the PBGC financial
assistance would exceed $1 billion), the suspension would go into effect unless a majority of all participants voted to reject it. However, for
systemically-important plans, not later than the end of the 90-day period beginning on the date the results of an adverse vote were certified, the
Secretary would either have to permit the implementation of the suspension as proposed by the plan sponsor or permit the implementation of a
modification by the Secretary of such suspension (so long as the plan is projected to avoid insolvency under that modification).
- Judicial Review:
Available for denial or approval of benefit suspensions.
Other Changes to ERISA and the Code Impacting Multiemployer Plans
The Cromnibus Act makes the following technical changes to ERISA and the Code:
Repeal of Sunset of PPA Funding Rules:
These funding rules, including requiring rehabilitation plans for plans in critical status and funding improvement plans for plans in endangered
status, had been scheduled to expire for plan years beginning on or after Jan. 1, 2015.
Election to Be in Critical Status
: A multiemployer plan may elect to be in critical status effective for the current plan year if the plan was projected to be in critical status
in any of the succeeding five plan years. If elected, the election year would be treated as the plan’s first year of being in critical status,
regardless of the date the plan first satisfied the critical-status requirements of ERISA and the Code.
Clarification of Rule for Emergence From Critical Status
: A plan will emerge from critical status when the plan actuary certifies that (i) the plan did not qualify as a plan in critical status as of the
beginning of the plan year; (ii) the plan is not projected to have an accumulated funding deficiency for the plan year or any of the nine succeeding
plan years, without regard to the use of the shortfall method but taking into account any extension of certain amortization periods; and (iii) the plan
is not projected to become insolvent within any of the next 30 plan years.
Endangered Status Not Applicable if No Additional Action Were Required
: A plan will not be in endangered status if its funded status is projected to improve on its own. If a plan would be in endangered status but for this
provision, the PBGC notification requirements would apply.
Endangered Status Funding Improvement Plan Target Funded Percentage
: The Cromnibus Act clarifies that (i) a plan’s funded percentage as of the close of the funding improvement period should equal or exceed the
percentage of the plan’s funded percentage as of the first plan year for which the plan is certified as being in endangered status (instead of “the
beginning of such period”); and (ii) no accumulated funding deficiency will occur during the last year of the funding improvement period (instead of
“any plan year” during the funding improvement period).
Corrective Plan Schedules When Parties Fail to Adopt Contribution Schedule
: Where parties fail to adopt, through bargaining, a contribution schedule consistent with a multiemployer plan’s funding improvement plan (for a plan
in endangered status) or a plan’s rehabilitation plan (for a plan in critical status), upon the expiration of a collective bargaining agreement (CBA):
- If a CBA in effect when the plan entered endangered (or critical) status expired and the
bargaining parties failed to adopt a contribution schedule consistent with the funding improvement plan or rehabilitation plan, then the plan sponsor would
have to implement a schedule under ERISA Sec. 305(c)(1)(B)(i)(I) or 305(e)(3)(1)(B)(i).
- If a CBA in accordance with a funding improvement plan (or rehabilitation plan) expired while the plan was still in endangered (or in critical) status,
and the bargaining parties failed to adopt a contribution schedule consistent with the updated funding improvement plan (or rehabilitation plan), then the
contribution schedule applicable under the expired CBA would have to be implemented by the plan sponsor on the date that is 180 days after the date on
which the CBA expired.
- Withdrawal Liability:
PPA surcharges and contribution increases (except for increases due to increased work levels, employment or periods for which compensation is provided)
pursuant to funding improvement plans or rehabilitation plans are generally disregarded when calculating withdrawal liability.
- Guarantee of Pre-retirement Survivor Annuities Under Multiemployer Pension Plans
: PBGC will guarantee preretirement survivor annuities retroactively as to benefits payable on or after Jan. 1, 1985 (except where the surviving spouse
died before Cromnibus Act’s enactment).
- Required Disclosure of Multiemployer Plan Information
: The ERISA provision requiring the disclosure of information to participants, employee representatives and contributing employers has been expanded to
require the disclosure of the following additional information:
- The plan document.
- The latest summary plan description.
- The trust agreement.
- If requested by a contributing employer, any employer participation agreement relating to the employer’s participation during the current or any of the
five immediately preceding plan years.
- The plan’s annual report (Form 5500).
- The plan’s annual funding notice.
- Audited financial statements.
- For a plan in critical or endangered status, the rehabilitation plan or latest funding improvement plan, as applicable, and the related contribution
- PBGC Merger Facilitation
: PBGC gains authority to facilitate plan mergers, including training, technical assistance, mediation, communication with stakeholders, support with
related requests to other governmental agencies, and financial assistance.
- Partitions of Eligible Multiemployer Plans
: ERISA and the Code provisions are amended to facilitate partitions of eligible multiemployer plans.
- PBGC Insurance Premium Increases for Multiemployer Plans
: The PBGC insurance premium for multiemployer plans is doubled, from $13 to $26 per participant, beginning in 2015, with increases in later years
based on the changes in the Social Security national average wage index.
The Cromnibus Act also makes the following changes affecting defined benefit plans:
- Revision of ERISA Sec. 4062(e)
- ERISA Sec. 4062(e) applies where an employer ceases operations at a facility and more than 20 percent of active plan participants are separated from
employment. Under PBGC’s former interpretation of Section 4062(e), employers could face substantial “downsizing liability” requiring significant additional
funding to the pension plan, even where the plan was otherwise properly funded under ERISA and IRS rules.
- Aggressive PBGC enforcement of Sec. 4062(e) has given rise to significant compliance challenges and large unexpected liabilities for many companies that
engage in normal business transactions. In July of this year, the PBGC announced a moratorium, until the end of 2014, on the enforcement of Sec. 4062(e)
- Under amendments to Sec. 4062(e) made by the Cromnibus Act:
- There is no Sec. 4062(e) event unless there is a substantial shutdown of operations at a facility relative to the size of the entire employer.
- Subject to certain exceptions, there is no Sec. 4062(e) event unless employees actually lose their jobs, as opposed to going to work for another
- The employer’s liability, if a Sec. 4062(e) event occurs, is substantially reduced.
Revision of Definition of “Normal Retirement Age”
- ERISA and the Code had defined “normal retirement age” (NRA) as the earlier of (i) the time a plan participant attains normal retirement age under the
plan; or (ii) the later of (a) the time a plan participant attains age 65, or (b) the fifth anniversary of the time a plan participant commenced
participation in the plan.
- The Cromnibus Act amends ERISA and the Code to permit a definition of NRA in a defined benefit plan on Dec. 8, 2014, as the earlier of (i) an age otherwise
permitted under the current definition of NRA in ERISA and the Code or (ii) the age at which a participant completes the number of years (not less than 30
years) of benefit accrual service specified by the plan. A plan that did not have such a definition of NRA on that date can be amended to add such a
definition, but only as to persons who (i) were participants in the plan on or before Jan. 1, 2017; or (ii)
were employed by a sponsor of the plan on or before
Jan. 1, 2017 and who became participants thereafter.
For further information, please contact any of the authors, James P. McElligott Jr., Robert B. Wynne and Larry R. Goldstein, or any other member of the McGuireWoods employee benefits team.