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 improvement plan.
- 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 available:
- 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 such application.
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 plans should:
- 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 respective unions.
- 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 Employee Benefits or Labor & Employment Teams.