December 14, 2010
IRS Guidance on Pension Funding Relief for Multiemployer Plans
On November 26, 2010 (the day after Thanksgiving), the Internal Revenue Service (IRS) released Notice 2010-83,1 providing fairly comprehensive guidance in a question-and-answer format on the multiemployer pension funding relief provisions of last summer's Pension Relief Act.2 The guidance clarifies and confirms much of what the multiemployer community had advocated when the legislation was under consideration in Congress, although it stops short on some important points. Predictably, Notice 2010-83 does not match every good-faith interpretation that practitioners had adopted in order to help funds while awaiting official guidance, but much of what it has to say is very welcome.
This Compliance Alert provides an initial overview of Notice 2010-83. The guidance is gathered under the topics that address them in Notice 2010-83.
As always, but especially in this delicate area where each answer seems to give rise to more questions, trustees should be guided by their fund counsel on the meaning and impact of the IRS guidance in their specific situation.
Extended Amortization Period for Eligible Net Investment Losses: Guidance on Net Investment Loss and Actuarial Method
The focus of the funding relief is on the plan's "net investment loss." Notice 2010-83 confirms that this loss is determined on a market-value basis. That is, the difference between the actual market value of the plan's assets as of the end of the relevant plan year (the plan year beginning in the interval October 2007 to September 2008, and, in some cases, the following plan year) and the expected market value if the plan had achieved its actuarially assumed rate of return, adjusted for cash flow during the plan year.3 The eligible net investment loss includes losses attributable to a criminally fraudulent investment arrangement, as that term is defined in Section 165 of the IRC.
Notice 2010-83 goes into considerable detail, with lengthy examples, on the actuarial methodology to be used to take the extended amortization of the net investment loss into account in the funding standard account over time. Once a plan chooses an approved approach, that becomes part of the plan's funding method and can only be changed with IRS approval.
Asset Valuation Rules: Guidance on Asset Smoothing
As directed by the statute, Notice 2010-83 also allows plans to extend the period over which the 2008-09 losses are recognized in the assets for funding purposes. They can be "smoothed in" to the actuarial value of assets for up to 10 years (rather than the usual five years), again with limitations that may apply to specific types of certain smoothing methods. Plans may also elect to use actuarial asset values that are as much as 130 percent of market value (up from the standard 120 percent), for two plan years.
Solvency Test: Guidance on Solvency Period and Actuarial Basis
For a plan to qualify for the extended-amortization relief, the actuary must certify that the plan is projected to be solvent for 30 plan years from the year the eligible loss was incurred (usually, from 2008). If the plan only uses the extended smoothing and/or 130 percent corridor, it only needs to be certified as likely to be solvent for 10 plan years. The actuary must make the solvency certification before the trustees formally decide to use the relief.
Notice 2010-83 says that, for the solvency projection, the actuary must use the same assumptions, data and Funding-Improvement or Rehabilitation Plan terms that were used for the zone certification for the plan year in which the solvency certification is made. Most actuaries expected to have more flexibility, and, in particular, to be able to rely on yellow- and red-zone4 remedial plans, as most recently updated. Unless the IRS clarifies that the actual requirement is not as stringent as the language in Notice 2010-83 suggests, this could prevent many plans from using the relief.
Benefit Increase Restrictions: Guidance on the Restriction, its Length and the Effective Date
For a period after the relief is used, plan amendments increasing benefits may only go into effect if the increase is:
- Paid for out of new contributions, not previously allocated to the plan, and
- Not reasonably expected to have a negative effect on the plan's credit balance or funded percentage for the next two plan years.
If the extended amortization is elected, it appears from the technical language of Notice 2010-83 that the benefit-increase restrictions could remain in place for roughly six to seven years, or as much as eight to 10 years if extended smoothing is also chosen. That period can be shortened if the trustees opt out of the relief early.
On the other hand, if only the extended smoothing/130 percent corridor is chosen, the restriction on benefit increases appears to apply only for the first two plan years after the relief is first used.
Benefit-increase amendments that go into effect after June 25, 2010 (the day President Obama signed the Pension Relief Act) are subject to the restrictions, according to Notice 2010-83, even if they were adopted before that date.
Electing Relief: Guidance on the Procedure, the Deadline and Opting Out
Trustees elect relief by adopting a formal, binding resolution to do so. No IRS procedure is required. Notice 2010-83 refers to it as the "decision" to use relief.
In general, the deadline for electing relief is the earliest of the following:
- The deadline for the plan's zone certification for the first plan year beginning on or after January 1, 2011,
- The date of the actual zone certification for that plan year, or
- June 30, 2011.
However, if the trustees deadlock, the deadline is extended until 30 days after completion of the arbitration that resolves the issue.
The trustees may decide at any time to opt out of any or all of the relief provisions they had elected. The change will not affect the application of the relief for periods before the opt-out date.
The freedom to opt out of relief early is cited in Notice 2010-83 as a way for plans that get much of the benefit of the relief in the first few years to avoid extended restrictions, such as those on benefit-increase amendments.
Notices: Guidance on Participant and Pension Benefit Guaranty Corporation (PBGC) Notices
Notice that relief has been elected must be given to participants and beneficiaries within 30 days after the deadline for making the decision. This makes it possible for calendar-year plans and others whose plan years begin in the first half of the calendar year to combine this notice with the 2011 zone notice or the 2010 Annual Funding Notice.
The participant notice must provide, at a minimum, the following information:
- Plan identification data,
- A description of the special relief rules chosen,
- A general description of how the relief will affect the plan, including the fact that applying the special rules will reduce the statutory minimum funding requirement that is considered when negotiating employer minimum contributions and may affect the plan's zone status,
- A statement that benefit increases will be restricted for a period after the relief goes into effect, and
- The name and contact information for a person to call for more information.
The notice can be provided electronically, in accordance with Department of Labor (DOL) standards for electronic communications, as well as included with other notices.
Notice of the decision to use the relief must be provided to the PBGC by the later of 30 days after the trustees make the formal decision, or January 18, 2011. According to the IRS guidance, a copy of the notice to participants must be attached to the PBGC notice. Curiously, in some cases that would require preparation of the participant notice well before its stated deadline.
Re-Certification of 2010 Zone Status: Guidance on the Option and the Deadline
Trustees have the option to ask the plan actuary to re-determine the zone status for the 2010 plan year, taking the effect of the relief into account in those calculations. The re-determined status will apply to the whole year if relevant notices are given and any measures taken earlier in the year that would not be permitted under the new status are reversed. This would include restrictions on distribution forms, reductions in benefits that are protected under the anti-cutback rules, and the imposition of employer surcharges. In addition, the plan actuary must certify that reversing those changes will not cause the plan to fail the solvency test.
As a practical matter, the issue of reversing actions taken before the re-certification is mainly relevant only if a plan was certified as in the red zone, and with relief, will move to the yellow or green zone.5 That is because plans only have special authority over benefits or employer payments if they are in the red zone.
A revised zone certification must be made by the actuary and sent to the trustees and the IRS before the end of the 2010 plan year. Notice of the change must also be sent to the participants, employers, unions, the DOL and the PBGC, within 30 days after the revised certification is made.
Presumably, this notice could be combined with the notice to participants and PBGC of the decision to use the funding relief.
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As pointed out at the beginning of this Compliance Alert, trustees should rely on their fund counsel for authoritative advice on the interpretation of IRS Notice 2010-83.
- Notice 2010-83 is available on the IRS Website. (Return to the Compliance Alert.)
- These provisions, referred to as PRA 2010, were in Section 211 of the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (Public Law No. 111-192). They added a new paragraph (8) to Section 431(b) of the Internal Revenue Code (IRC), and a parallel addition to Section 304(b) of the Employee Retirement Income Security Act (ERISA). IRS rulings and interpretations are binding under Section 304 of ERISA, as well. For a summary, refer to The Segal Company's July 2010 Bulletin, "Temporary Pension Funding Relief for Multiemployer Plans." (Return to the Compliance Alert.)
- There is a variation on this, where a particular asset smoothing method is used for funding. (Return to the Compliance Alert.)
- These zones represent plans that are in endangered or critical status, respectively, according to criteria established by the Pension Protection Act of 2006. (Return to the Compliance Alert.)
- Plans that are neither in endangered nor critical status are considered to be in the green zone. (Return to the Compliance Alert.)
Compliance Alert, The Segal Company's periodic electronic newsletter summarizing important developments affecting benefit plan compliance, is for informational purposes only. It is not intended to provide authoritative guidance. On all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for legal advice.