Compliance News | July 19, 2021

Tax Rules for Multiemployer Special Financial Assistance

The IRS has issued guidance governing the tax treatment of special financial assistance (SFA) provided by the PBGC under a program created by the American Rescue Plan (ARP) Act. The SFA program provides federal grants to certain financially troubled multiemployer pension plans in the form of a one-time, single-sum payment.

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Generally, and subject to specific eligibility and timing rules recently announced by the PBGC, certain multiemployer pension plans may apply to receive SFA in an amount that is projected to be sufficient to pay plan-level benefits through 2051.

The IRS guidance is on certain tax-related issues under the SFA program. It addresses the reinstatement of full monthly pension benefits for individuals whose benefits were reduced under MPRA or insolvency suspensions; rollovers of lump-sum, make-up payments; the treatment of SFA for purposes of the minimum funding rules and the process by which “priority” SFA applications will be submitted to the Treasury Department (Treasury) (in addition to the PBGC) for its review.

The IRS guidance clarifies that:

  • Reinstatement and make up of suspended benefits will require plan amendments.
  • Most lump-sum, make-up payments will be eligible for rollover.
  • SFA has special treatment under the funding rules.
  • Submission of an application to the PBGC satisfies the Treasury submission requirement.

Reinstatement and make up of suspended benefits will require plan amendments

The IRS guidance, Notice 2021-38, which was issued and took effect on July 9, 2021, specifies the following plan amendments that may or will be required under the Internal Revenue Code because of the ARP SFA rules and provides additional information about the amounts that must reinstated or made up, and to whom:

  • If a plan receiving SFA was previously amended to suspend benefits under MPRA or insolvency, it must be amended to reinstate those benefits as of the month in which the SFA is paid to the plan.
  • If a plan receiving SFA had suspended benefits operationally because of insolvency without adopting a plan amendment, the plan must be amended to reinstate suspended benefits, effective as of the month in which the SFA is paid to the plan.
  • A plan that receives SFA must be amended to provide make-up payments to individuals who are participants or beneficiaries on, and who have commenced benefits by, the date SFA is paid to the plan. The amendment must also specify whether the plan proposes to provide the make-up payments, as a lump sum or in equal monthly installments (without interest) over five years, an issue that is identified as requiring PBGC and Treasury coordination and approval.

Most lump-sum, make-up payments will be eligible for rollover

Federal tax law allows certain payments to be rolled over to another eligible plan or IRA (and thus avoid immediate taxation) if the payments meet certain standards. Generally, no rollover is allowed with respect to substantially equal periodic payments, with a limited exception. Under these rules, payments over a five-year period to individuals already receiving annuity payments may not be rolled over, and are taxed when received.

With respect to lump-sum payments, the Notice treats most as being able to be rolled over. The limited exception are small lump-sum payments.

Plans must provide tax rollover notices (sometimes known as “402(f) notices”) for amounts that may be rolled over.

SFA has special treatment under the minimum funding rules

ARP provides that plan sponsors’ SFA assets may not be taken into account in determining contribution requirements. Consequently, for purposes of determining the contribution requirement for the year in which the plan receives the SFA and for future years, neither the fair market value of assets nor the actuarial value of assets may include the SFA.

For future years, the amount in the SFA account will be reduced by amounts paid from that account for benefits and expenses (and adjusted for investment return). To the extent that those payments occur, there will be a reduction in liabilities in the next actuarial valuation, but no corresponding reduction in plan assets (since SFA is ignored for the funding schedule). The actuary should treat that as an experience gain and amortize it over 15 years.

Submission of an application to the PBGC satisfies the Treasury submission requirement

ARP requires that “priority” status SFA applications be submitted to both the PBGC and Treasury. The Notice provides that properly filling the application with the PBGC will satisfy the statutory requirement because the PBGC will forward copies of such applications received to Treasury.

Action items for trustees

Trustees of multiemployer pension plans that apply for SFA must take these actions:

  • Operate in accordance with the SFA rules starting when SFA make-up payments are received, including providing rollover notices with most lump-sum, make-up payments.
  • Amend the plan by the date specified in the IRS’s Required Amendment List.
  • Have the plan’s actuary follow the special rules provided for SFA treatment with respect to contributions and funding standard account determinations.

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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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