compliance alert

February 6, 2014

PPA'06 'Sunset': Just the Facts

In the Pension Protection Act of 2006 (PPA'06), Congress amended the Internal Revenue Code (IRC) and the Employee Retirement Income Security Act (ERISA) to make comprehensive changes to the pension funding rules for both multiemployer and single-employer defined benefit (DB) plans. Under PPA'06, the multiemployer funding rules were amended to encourage a long-term approach to funding and to give trustees tools to reach financial stability. The most significant change, however, was the creation of a new statutory framework that requires trustees of all plans to identify projected funding problems earlier, monitor them on an ongoing basis, and, for plans heading toward or already in financial distress, use a new remedial approach.1

Because this was a new framework, Congress included as a safeguard a "sunset" provision (with a "continuation clause" to keep the rules in place for plans currently operating under them) that would require it to revisit these rules to determine if they were working as anticipated.2 Except for plans that are in endangered status (in the "yellow zone") or critical status (in the "red zone") and "operating under" a funding improvement plan (FIP) or rehabilitation plan (RP) in the plan year beginning in 2014 (hereafter referred to as "the 2014 plan year"), those provisions are scheduled to expire (sunset) on the last day of the 2014 plan year (December 31, 2014 for calendar-year plans) unless Congress acts to extend or eliminate the deadline.

This Compliance Alert describes the continuation clause that extends the expiring provisions for plans that are in the yellow or red zone and operating under an FIP or RP in the 2014 plan year and some of the questions that will need to be answered if the sunset occurs.

A text box at the end of this Compliance Alert describes common misconceptions about the PPA'06 sunset. A supplement to this publication describes the PPA'06 provisions that are scheduled to sunset.

Continuation Clause for 2014 Yellow- and Red-Zone Plans

The sunset contains a continuation clause to keep the expiring provisions in place for plans that are in the yellow or red zone and are operating under an FIP or RP in the 2014 plan year. These plans are required to continue to operate under the FIP or RP, as applicable, during any period after the sunset date that the FIP or RP is "in effect," and all provisions of the IRC or ERISA relating to the operation of the FIP or RP will remain in effect during that period.3

Impact of the Sunset

If the sunset occurs, the impact on plans that were in the green zone in their 2014 plan year is relatively clear: these plans will continue to operate under the funding rules for financially healthy plans put into place by PPA'06.4They will not revert to the pre-PPA'06 funding rules, nor will the PPA'06 single-employer plan rules apply to them. However, these plans will no longer be required to annually certify their status, to provide notice of that status (if it would have been yellow or red in some future year), or take any other actions related to their status that was required under one of the expired provisions. Any of these plans that are in deteriorating financial health will no longer have access to the remedial actions offered under the zone rules. Instead, they will be able to address their financial condition only through traditional pre-PPA'06 methods such as future benefit reductions, contribution increases, and possible mergers with stronger plans until they recover or become insolvent. In addition, employers contributing to these plans will have no special rules to relieve them of their minimum funding obligations or any related excise tax on deficiencies.

The impact of the sunset on plans that are subject to the continuation clause is less clear. PPA'06 §221(c) states only that these plans must continue to operate under their FIP or RP during the period the FIP or RP is in effect, and that all provisions of the IRC or ERISA relating to the operation of the FIP or RP remain in effect during that period. While this directive might seem straightforward enough, there are many questions about how plans covered by the continuation clause rule will continue to operate, as discussed in the next section.5

Issues Needing Clarification

The issues identified in the following questions need to be clarified:

  • What does it mean for a plan to be "operating under" an FIP or RP for its 2014 plan year?  The answer to this question determines whether a yellow- or red-zone plan is covered by the continuation clause. While the answer is likely to be clear for a plan that has been in the yellow or red zone for a number of years, questions have been raised about plans becoming yellow or red in 2013 and 2014. For example, will a plan that becomes yellow or red and adopts its FIP or RP toward the end of the 2014 plan year be considered to have been operating under the FIP or RP for that year? Also, if no collective bargaining agreements were adopted incorporating an FIP or RP schedule before the 2015 year, will a plan be considered to have been operating under the FIP or RP in 2014?
  • For a plan that is covered by the continuation clause, which of the provisions that would otherwise sunset remain in effect after 2014?  For example, one of the PPA'06 provisions scheduled to sunset is the minimum funding contribution exemption for employers contributing to a red-zone plan complying with the terms of the RP. That exception protects those employers from being subject to an excise on funding deficiencies. Whether that protection would continue after the sunset is unclear. Failure to continue that exemption would be a serious issue for those plans. Also at stake is whether the other PPA'06 employer excise taxes will be available to enforce the remedial measures adopted in the FIP or RP, for example, the excise tax on employers that fail to make contributions required under a FIP or RP. If all measures that would otherwise sunset remain available, there arguably should be no change in how a plan operates immediately after the sunset deadline, at least for the period of time that the FIP or RP remains in effect, except those changes called for under the FIP or RP.
  • For purposes of the continuation clause, what is the period for which an FIP or RP remains in effect after the 2014 plan year?  The answer to this question determines how long the plan will be able to continue using the remedial  rules. The continuation clause is in effect for a plan for "any period after December 31, 2014 such [FIP] or [RP] is in effect."
 
Other Important Questions Related to the Possible PPA'06 Sunset

These questions also need to be answered:

  • Can a plan move to a different zone after 2014?
  • Can a plan exit the yellow or red zone? When and how?
  • Are updates to the FIP or RP required or optional?
  • Can or must goals/annual standards be changed?
  • Can or must schedules be updated?
  • What happens if a plan fails to meet "scheduled progress" under a zone?
  • What happens if a plan fails to meet FIP benchmarks at end of the funding improvement period?
  • What happens if a plan fails to meet RP benchmarks for three consecutive years?
  • What happens if an employer fails to contribute in accordance with RP/FIP schedules?

Implications

The implementation of any statutory provision raises many interpretive and operational issues, and the PPA'06 sunset is no exception. It had been hoped that Congress would act in advance of 2014 so that there would be no need to address these issues. Absent regulatory or legislative guidance, Segal consultants can work with fund counsel to help trustees determine how to approach these questions.

 
Common Misconceptions about the PPA'06 Sunset

There are a number of misconceptions about the PPA'06 sunset:

  • The sunset makes all of PPA'06 expire. It does not. The only provisions that sunset are the provisions related to the multiemployer zone rules. (Those provisions are listed in a supplement to this publication.)
  • The sunset makes all multiemployer plans "green." It does not. Red- and yellow-zone plans operating under an FIP or RP in their 2014 plan year will continue to do so.
  • The sunset restores the pre-PPA'06 multiemployer funding rules. It does not. The general funding rules of IRC §431 and ERISA §304, as enacted under PPA'06, remain in effect. For example, the 15-year amortization rule remains in effect.
  • The sunset affects single-employer plans. It does not. Only multiemployer plans are affected.

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As with all issues involving the interpretation or application of laws and regulations, trustees should rely on fund counsel for authoritative advice related to the interpretation and application of PPA'06, including the sunset provision. Segal Consulting can be retained to work with trustees and fund counsel on these issues.

 

1 Generally, under the PPA'06 changes, trustees must review projections of a plan's financial status at least annually in order to identify potential issues before they otherwise materialize. If the projections reveal an emerging funding problem, the plan is classified as being in "endangered status" (referred to as the "yellow zone") or in "critical status" (the "red zone"). A plan that is in neither the yellow nor the red zone is in the "green zone." In the first year that a plan is certified to be in the yellow or red zone, trustees must adopt a course of action to improve the funded status of the plan: a funding improvement plan (FIP) for a yellow-zone plan or a rehabilitation plan (RP) for a red-zone plan. These plans must be reviewed annually thereafter and updated as needed. For more information on PPA'06, see Segal's August 2006 Bulletin, "Pension Protection Act of 2006's Key Multiemployer Plan Provisions" and December 2008 Bulletin, "Pension Relief Bill's Provisions Affecting Multiemployer Plans." (Return to the Compliance Alert.)

2 See PPA'06 §221(c):

(c)   SUNSET

(1)   IN GENERAL.—Except as provided in this subsection, notwithstanding any other provision of this Act, the provisions of, and the amendments made by, [PPA] sections 201(b), 202, and 212 shall not apply to plan years beginning after December 31, 2014.

(2)   FUNDING IMPROVEMENT AND REHABILITATION PLANS.—If a plan is operating under a funding improvement or rehabilitation plan under section 305 of such Act [ERISA] or 432 of such Code [IRC] for its last year beginning before January 1, 2015, such plan shall continue to operate under such funding improvement or rehabilitation plan during any period after December 31, 2014, such funding improvement or rehabilitation plan is in effect and all provisions of such Act or Code relating to the operation of such funding improvement or rehabilitation plan shall continue in effect during such period.

Although not included in §221(c), the automatic approval of five-year amortization extensions in IRC §431(d) and ERISA §304(d)(1) also expires for applications submitted after December 31, 2014. (Return to the Compliance Alert.)

 

3 PPA'06 legislative history indicates that amortization schedules in effect at the time of the sunset also continue. See page 72 of the Joint Committee on Taxation's Technical Explanation of H.R. 4, the "Pension Protection Act of 2006" August 3, 2006 (JCX-38-06). (Return to the Compliance Alert.)

4 See IRC §431 and ERISA §304. (Return to the Compliance Alert.)

5 A number of these questions were raised in Multiemployer Pension Plans: Report to Congress Required by the Pension Protection Act of 2006 (January 22, 2013) (Three-Agency Report). For example, see pp 50-51. See also Segal's February 2013 Bulletin, "Recently Released PBGC Reports Focus on Multiemployer Plans." (Return to the Compliance Alert.)

 

Compliance Alert, Segal Consulting’s periodic electronic publication summarizing important developments affecting benefit plan compliance, is for informational purposes only and should not be construed as legal advice or authoritative guidance. On all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on legal counsel for legal advice.

Compliance Alert, Segal Consulting’s periodic electronic newsletter summarizing important developments affecting benefit plan compliance, is for informational purposes only and should not be construed as legal advice. It is not intended to provide authoritative guidance. On all issues involving the interpretation or application of laws and regulations, trustees should rely on fund counsel for legal advice.

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