Articles | March 11, 2021
The American Rescue Plan Act of 2021 (the Rescue Plan) has been signed into law. The legislation includes COVID-19 relief measures, as well as relief for troubled multiemployer defined benefit (DB) pension plans and funding relief for single-employer DB pension plans.
Multiemployer plan sponsors will need to carefully review the provisions of the final legislation to determine whether their plans are eligible for the special financial assistance relief provided under the Rescue Plan and whether such assistance and various other forms of relief provided are appropriate for their plans. In addition to discussions with your Segal Consultant, plan sponsors should discuss the implications of the Rescue Plan with their legal, tax, and other advisors.
The final version of the legislation largely reflects the same pension-relief provisions as were included in earlier versions except that the final version of the legislation does not include a special rule on withdrawal liability and certain notice provisions.
The Congressional Budget Office estimates that 185 multiemployer pension plans will be eligible for relief in the form of special financial assistance under the Rescue Plan which is expected to provide $86 billion in aid to the plans. To offset some of the costs of that relief, the Rescue Plan reduces contribution requirements for single-employer pension plans and expands the number of executives covered by the $1 million deduction limit under Internal Revenue Code §162(m).
The multiemployer provisions are in Title IX, Subtitle H (Sections 9701-9704) of the Rescue Plan. Many aspects of the legislation are unclear (including, but not limited to, the determination of special financial assistance) and are subject to regulatory guidance that is not anticipated until July of this year.
This summary is for informational purposes only and does not constitute legal, tax or investment advice. In addition to discussions with your Segal consultant, you are encouraged to discuss the issues raised here with your legal, tax and other advisors before determining how the issues apply to your specific situation.
A plan may elect that its zone status for the first plan year beginning on or after March 1, 2020 and ending on February 28, 2021, or for the next succeeding plan year (in either case, the designated plan year), be the same status as for the plan year prior to the designated plan year.
If the plan was in endangered or critical zone status for the plan year preceding the designated plan year, the plan is not required to update its funding improvement plan, rehabilitation plan or schedules until the plan year following the designated plan year. (Sec. 9701)
Plans that are in endangered or critical zone status for a plan year beginning in 2020 or 2021 (determined after application of Sec. 9701) may elect to have the funding improvement or rehabilitation period extended by 5 years. (Sec. 9702)
If, as of February 29, 2020, the plan is projected to have sufficient assets to pay expected benefits and anticipated expenditures over the amortization period (taking into account changes in the funding standard account), the plan may:
Treasury must rely on plan sponsors’ calculations of plan losses unless calculations are clearly erroneous. Restrictions (as described under current law) on plan amendments that increase benefits apply. (Sec. 9703)
Federal funds are to be transferred from the Treasury to PBGC in the amount necessary to pay the costs of special financial assistance, including administrative expenses, to eligible plans. Funds may not be transferred from Treasury to PBGC after September 30, 2030.
Special financial assistance is provided in the form of a grant that does not need to be paid back.
Four types of plans are eligible for special financial assistance:
PBGC is required, within 120 days of enactment of the Rescue Plan, to issue regulations or guidance detailing the requirements for special financial assistance, including how to apply. Additionally, PBGC may, after consulting with Treasury, prioritize applications during the first two years following enactment so that it is possible that only certain eligible plans may file an application during that period. These are plans that --
Plans applying for priority consideration are required to submit an application to PBGC and Treasury. All applications must be submitted no later than December 31, 2025 (any revised application is required to be filed by December 31, 2026).
PBGC must accept the assumptions used by the plan to determine that it is in critical or critical and declining status for certifications completed before January 1, 2021, unless the assumptions are clearly erroneous. For certifications completed after December 31, 2020, a plan must determine whether it is in critical or critical and declining zone status by using the assumptions it used in its most recently completed zone certification before January 1, 2021, unless the assumptions (excluding the plan’s interest rate) are unreasonable.
Interest rate and other assumptions
In determining the amount of special financial assistance needed (as opposed to eligibility), plans must also use the interest rate and other assumptions used in its most recent zone certification completed before January 1, 2021. However, that interest rate cannot exceed the “interest rate limit” (defined as the 3rd segment bond rate of the 24-month average yield curve, without applying the 25-year corridor, for the month in which the application is filed or the preceding 3 months, plus 200 basis points). Currently, the interest rate limit is approximately 5.5% and trending downward.
A plan may change prior assumptions in its application if use of one or more of those assumptions is unreasonable. PBGC, in consultation with Treasury, will review the proposed change in assumptions.
Plans are precluded from changing either the interest rate required to be used to determine eligibility or the interest rate used for the amount of special financial assistance.
Determination of amount
The plan sponsor must use deterministic projections to determine the amount of special financial assistance needed to pay plan-level benefits due through 2051, with no reduction in participants’ benefits (except for the reduction of adjustable benefits already in place under a rehabilitation plan).
PBGC has 120 days to make a determination on an application or the application is deemed approved. Revised applications also are subject to a 120-day review period. Once approved, payments of special financial assistance are made in a single, lump-sum payment.
For plans with suspended benefits, in order to receive special financial assistance, the plan sponsor must reinstate benefits that were suspended, effective as of the first month following the date special financial assistance is provided. Benefit suspensions refer to benefits reduced in accordance with an approved MPRA suspension application or benefits reduced in accordance with current provisions that apply to ongoing insolvent plans. Treasury is to issue guidance regarding the reinstatement of benefits. For plans with a MPRA suspension, PBGC is required to consult with Treasury regarding the proposed method for reinstating suspended benefits and the amount of financial assistance needed.
Plans may choose whether participants receive retroactive payment of suspended benefits as a single lump sum issued within three months of the effective date of the special financial assistance, or over five years (without interest) commencing within three months of the effective date of the special financial assistance.
Amounts received as special financial assistance (and earnings on those amounts) must be segregated from other plan assets and invested in investment-grade bonds or as otherwise permitted by PBGC. Special financial assistance is also not taken into account for determining contributions for purposes of minimum funding requirements.
For plans that receive special financial assistance, PBGC, in consultation with Treasury, is permitted by regulation or other guidance to put reasonable restrictions on future accrual rates, retroactive benefit improvements, allocation of plan assets, reduction in contributions, diversion of contributions to other benefit plans, and withdrawal liability rules. PBGC is not permitted to impose conditions related to reduction in plan benefits, plan governance or funding rules. Plans must continue to pay PBGC premiums.
Plans that receive special financial assistance are considered to be in critical status until 2051 and may not seek a MPRA benefit suspension. If a plan becomes insolvent after receipt of special financial assistance, the plan is subject to the current rules (i.e., financial assistance is provided as a loan and benefits are required to be reduced to the PBGC guarantee).
The flat-rate premium, paid on a per-participant basis, is increased from $31 (indexed) to $52 (indexed) for plan years beginning in 2031. (Sec. 9704)
This page is for informational purposes only and does not constitute legal, tax or investment advice. You are encouraged to discuss the issues raised here with your legal, tax and other advisors before determining how the issues apply to your specific situations.
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