July 2010

Temporary Pension Funding Relief for Multiemployer Plans

At the end of June, Congress passed short-term pension funding relief as part of the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (the "Relief Act").1 The Relief Act was propelled to passage in order to prevent a 21 percent cut in the fees paid to doctors serving patients covered by Medicare. It includes the funding relief provisions for single-employer and multiemployer pension plans that the Senate had approved back in March, as part of a more ambitious jobs-related package.

For multiemployer plans, the law now offers trustees a choice to use any or all of three different funding adjustments that would provide their plans more time to make up for the 2008-2009 investment losses.2 These include: (1) almost doubling the period over which those losses must be amortized; (2) permitting plans to smooth the recognition of those losses in their actuarial value of assets over up to 10 years; and (3) for two years, allowing plans to use asset values for funding purposes that are as much as 30 percent higher than market value (this is called a 130 percent corridor). The relief may help some plans stay out of the yellow or red zone. Other plans may find that the relief lets them meet their zone-related recovery goals with less severe benefit cuts or contribution increases.

However, the funding relief is only available to plans that are expected to recover from their financial challenges. A plan that is projected to become insolvent cannot use it.

The multiemployer relief itself is fairly brief. It sets out the basic rules, but does not fill in many operational details. This Bulletin outlines the funding relief, points out some of the open questions and suggests possible solutions. At some point, the Internal Revenue Service (IRS) and Treasury Department are likely to provide some guidance to fill in the gaps, but plans that want to act on the relief in the meantime will need to rely on their attorneys' advice on what the law appears to permit or require.

SOLVENCY TEST: THE GATEWAY TO RELIEF

As noted, a plan can only use the relief if its actuary certifies that the plan is projected to have enough assets to pay expected benefits and expenses over the amortization period. (Essentially the same test applies when a plan takes an automatic five-year amortization extension.) So, a plan cannot use the special extended amortization period for its 2008 losses unless the actuary projects that the plan will continue paying benefits for that full period.

Open Questions

How long does the plan need to be projected to stay solvent when the trustees do not opt to extend the loss amortization, but only choose a longer asset-smoothing period or the 130 percent corridor? As with the extended amortization, it seems likely that the actuary should project plan solvency over the period in which the relief will be in effect.

If a plan is in critical or endangered status, should the actuary take into account the changes that the trustees have called for in the Rehabilitation or Funding Improvement Plan? It seems reasonable to conclude that the actuary should take into account all factors that will affect the plan's future, including the Rehabilitation or Funding Improvement Plan if the actuary believes that the bargaining parties will adopt the proposed remedial measures. This means that a plan could pass the solvency test by adopting a corrective program that is designed with that in mind.

EXTENDED AMORTIZATION OF LOSSES

Oddly, although there are references to a 30-year period — up from the standard 15 years — as drafted the law only seems to authorize a 29-year amortization period.

The investment losses for which funding can be stretched out include losses due to "any criminally fraudulent investment arrangement." This is a technical term under the tax code. It was intended to help plans deal with losses from investment schemes run by Madoff and others.

Open Questions

How are these investment losses measured? The law says they are to be determined in accordance with Treasury guidance, based on the difference between actual and expected returns. Many practitioners believe this looks at the gap between the market value of the assets and what that value would have been if the plan had achieved the returns assumed by the actuary for funding.

Can a plan extend the amortization even further, with an automatic extension? Perhaps an automatic extension could be used to stretch the 29-year period to 30 years, but beyond that the law makes clear that if this relief is used, no other extension can apply for these particular losses.

BENEFIT INCREASE RESTRICTIONS

The price of using the relief is a partial moratorium on benefit increases. When a plan uses the relief, no amendments that increase benefits may go into effect in the following two plan years unless the increase is fully paid for. This is similar to the restrictions that apply when a plan is in endangered or critical status, except that the bar is set a little higher: an increase is only allowed if (a) it will be paid for out of additional contributions not previously allocated to the pension fund and (b) during the two years that the restriction applies, the plan's funding percentage and credit balance are projected to be at least as high as they would have been without the benefit increase. (Legally required benefit increases are also allowed.)

Open Questions

How long does the restriction last? It appears to apply only for the first two years after the plan adopts a relief measure rather than the whole time that the relief is in effect, although the law is not clear.

What if a plan had adopted a benefit increase before the law was passed that does not meet these terms? Legal counsel will have to advise on whether the increase can be canceled, rescinded or modified, so that the plan can qualify for the funding relief.

EFFECTIVE DATE — ELECTING RELIEF

The Relief Act goes into effect as of the start of the 2008 plan year, but the law declares that the changes do not affect a plan's 2009 zone status or benefit increases that took effect before June 25, 2010, the date President Obama signed the law. A plan that elects to use the relief must notify its participants and beneficiaries, and the Pension Benefit Guaranty Corporation.

Open Questions

Can a plan use the relief to change its zone status for 2010, even if it has already been certified in the yellow or red zone? Although ordinarily actuaries would not revise a zone certification because of subsequent events, many attorneys have reached the conclusion that it is permissible here, given the special statutory circumstances. If the trustees decide to change their 2010 zone status retroactively, they will need to look to counsel for advice on reversing any steps already taken pursuant to the previous zone certification.

What do the trustees have to do to elect the relief? The law does not spell out a process, although it is likely the IRS will prescribe one. Based on what IRS has called for in other contexts, it is fair to assume that the trustees' decision will need to be formally documented and signed.

IMPLICATIONS

The usefulness of the funding relief will vary greatly from plan to plan. Trustees will want to weigh the variables carefully when deciding whether to use the relief and which features to adopt. They will need to consider, for example, what changes would be needed to pass the solvency test, the benefit-increase restrictions, how the relief would affect decisions already made by the trustees and bargaining parties, and how much difference the relief would make.

•  •  •

As with all issues involving the interpretation or application of laws and regulations, trustees of multiemployer pension plans should rely on fund counsel for authoritative advice on the interpretation and application of the Relief Act.3 The Segal Company can help trustees determine whether their plan can use the relief and what its impact would be.

1
The Relief Act (Public Law 111-192) is available on the following page of the Government Printing Office's Web site: http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_public_laws&docid=f:publ192.111.pdf. The multiemployer relief is in Section 211.
2
As part of the funding rules, the relief provisions apply on a plan-year basis. The law gives plans extra time to deal with the investment losses incurred in the first two plan years ending after August 31, 2008. For a calendar-year plan, those are the plan years beginning January 1, 2008 and January 1, 2009. The relief allows plans to change the way those losses are handled in the funding standard account for the first two plan years beginning after August 31, 2008 — the plan years beginning January 1, 2009 and January 1, 2010. Depending on the month in which a plan year begins, the relevant periods will begin and end in different calendar years. For convenience, this Bulletin refers to the first set as the 2008 and 2009 plan years and the second as the 2009 and 2010 plan years.
3
Fund Counsel may find it helpful to consult the statement of Chairman Levin of the House Ways and Means Committee, in the June 30, 2010 Congressional Record at page E1257. That issue can be accessed from http://www.gpoaccess.gov/crecord/10crpgs.html.

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