June 26, 2014
The Pension Benefit Guaranty Corporation (PBGC) recently issued final rules that make three limited changes to certain valuation and notice requirements for targeted groups of multiemployer plans.1 This Compliance Alert provides details about the changes, which are effective June 27, 2014, including the PGBC’s rationale for making them. Although the changes provide relief only to the targeted plans, any reduction in the compliance burden that reduces plan and PBGC expenses is welcome.
Under the Employee Retirement Income Security Act (ERISA), a merger or transfer of assets and liabilities between multiemployer plans must satisfy certain requirements relating to the protection of participant benefits, plan valuations and the financial stability of the surviving plan.2 Information related to the satisfaction of these requirements currently must be provided to the PBGC for its review 120 days in advance of the merger or transfer in the form of a notice.3 Plans also are permitted to request that the PBGC make a determination (known as a “compliance determination”) that the merger or transfer satisfies the solvency requirements of ERISA §4231 and, as a result, is exempt from certain prohibited transactions.4 The new rule shortens the 120-day notice period to 45 days for plan mergers that do not involve a compliance determination.
Based on its experience, the PBGC determined that, for plans that do not request a compliance determination, a 45-day advance period would facilitate plan mergers by eliminating the need for many waiver requests and would be adequate for purposes of determining whether the basic notice requirements are satisfied. The change affects only plan mergers; the 120-day notice period remains in effect for transfers, whether or not a compliance determination is requested. The new rule applies to mergers planned to occur on or after the 45th day after June 27, 2014.
Under ERISA, a plan that terminates by mass withdrawal must provide a notice to the PBGC and participants in the year the plan becomes insolvent and an update to the insolvency notice each subsequent year.5 The new rule eliminates the requirement for the annual updates.
The original requirement for an annual update to the insolvency notice was based on the expectation that some insolvent plans would recover and information about their recovery should be provided to the PBGC and participants. Unfortunately, the experience has been that insolvent plans do not recover. As a result, the update did not appear to be serving a useful purpose and the PBGC determined that its elimination would not increase any risk of loss to PBGC or to participants and would help to preserve plan assets. The new rule applies to updates as of June 27, 2014.
Under ERISA, a multiemployer plan that terminates by mass withdrawal must value nonforfeitable benefits and plan assets as of the year in which the plan terminates and as of each following year.6 The new rule replaces the annual requirement with a required valuation every third year for a multiemployer plan that has terminated by mass withdrawal, is not insolvent, and has nonforfeitable benefits valued at $25 million or less. However, if at any time, the next required valuation shows that the plan’s nonforfeitable benefits are more than $25 million, the plan would have to be valued annually until the actuarial value of nonforfeitable benefits once again decreased to $25 million or less.
The PBGC made this change after concluding that, for plans in this category, limiting valuations to every third year, while still providing the agency with reasonably reliable data for its purposes, would help to preserve plans’ assets by limiting the costs associated with actuarial valuations. The new rule applies to the first post-termination valuation after June 27, 2014.
In light of these changes, trustees of affected plans might wish to consider taking the following steps:
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As with all issues involving the interpretation or application of laws and regulations, trustees should rely on their fund counsel for authoritative advice on the interpretation and application of these final rules.
2 See ERISA §4231; PBGC Reg. §4231.3, §4231.8, §4231.9. (Return to the Compliance Alert.)
3 See PBGC Reg. §4231.8. The PBGC may waive the 120-day requirement and allow a merger to occur with a shorter notice period. (Return to the Compliance Alert.)
4 See PBGC Reg. §4231.9. A compliance determination states that the merger does not violate the prohibited transaction rules of ERISA §406(a) (“party in interest” transactions) and §406(b)(2) (fiduciary “conflict of interest” transactions).The request is made by including certain additional actuarial information as part of the notice. (Return to the Compliance Alert.)
5 See ERISA §4281(b); PBGC Reg. §4041A.43–.44, and .46–.47. (Return to the Compliance Alert.)
6 See ERISA §4041A and §4281(b); PBGC Reg. §4041A.24. (Return to the Compliance Alert.)
7 See footnote 6. It is also important to remember that a compliance determination does not resolve all of the difficult issues that trustees must consider when considering a plan merger. For example, such a determination does not cover whether the merger satisfies the trustees’ general fiduciary obligations to act prudently and solely in the interest of plan participants and beneficiaries. (Return to the Compliance Alert.)
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