Pension Protection Act Multiemployer Pension Plan Funding & Disclosure Issues Barry Slevin, Slevin & Hart, P.C., Washington, DC Judith Mazo, The Segal Company, Washington, DC Bruce Perlin, IRS, Washington, DC Jani Rachelson, Cohen, Weiss and Simon, LLP, New York, NY Thomas Vasiljevich, Ogletree, Deakins, Nash, Smoak & Stewart, P.C., Chicago, IL American Bar Association Section of Labor and Employment Law Employee Benefits Committee 2009 Midwinter Meeting
Section 305 of ERISA, 432 of the Internal Revenue Code pension funds currently facing significant financial problems Three separate levels of financial problems Endangered (yellow zone) status Seriously Endangered (yellow zone) status Critical (red zone) status Pension funds must design and annually update schedules, provided to bargaining parties, to emerge from the status within the required period
The Worker, Retiree and Employer Recovery Act of 2008 (WRERA) Funds can elect to retain their 2008 status in 2009 Funds with plan years beginning in last quarter of 2008 can base 2008 status on certification using 2007 assets and liabilities Funds in critical or endangered status in 2008 (after freeze election) do not have to update their rehabilitation plan ( RP ) or funding improvement plan ( FIP ) in 2009 Funds in critical or endangered status in 2008 or 2009 may elect to have an additional 3 years to emerge from that status
WRERA Elections Elections to freeze zone-status and to extend correction period to be made at time and in manner as Treasury prescribes Freeze election can be made before or after actuary s required status certification, with notice of election due to Treasury with certification (if made before) or 30 days after the date of the election (if made after)
WRERA Notice Endangered or critical zone plans that elect to retain green status need not distribute notice of endangered or critical status Instead, electing plans send notice of election (with information to be prescribed) to participants, employers, DOL and PBGC by 30 days from certification (if election made before certification) or 30 days after election (if election made after certification) Critical zone plans that elect to retain endangered status distribute endangered status notice What if Treasury does not issue guidance before notice of critical/endangered status is due?
Funding Improvement Plan/ Rehabilitation Plan Adoption Period During adoption period no CBAs providing for: Reduction in contribution rates Suspension of contributions Exclusion of new hires For yellow-zone plans (but not red), these restraints on easing contributions continue to apply until plan emerges from endangered status Once a plan is certified in either zone, no plan amendments increasing benefits or liberalizing vesting unless: Consistent with and will not slow down the recovery plan, and Paid for with additional funding, Or required for tax qualification
Questions -- Can the collective bargaining parties negotiate a freeze of future accruals (resulting in no new entrants)? Can the collective bargaining parties negotiate only new hires into the multiemployer plan? Can the collective bargaining parties negotiate a withdrawal?
Benefit Restrictions A critical-status plan must stop paying benefits above the level of a monthly single life annuity, cannot buy annuities for retirees Applies to lump sums, partial lump sums, Social Security Level Income options Small benefit cashouts, RASD payments allowed WRERA clarifies that this applies only to people whose annuity starting date is after the critical-status certification notice is sent Proposed IRS regulation requires notice of this restriction in the initial zone notice, given no later than 30 days after the certification
Critical Status Rehabilitation Plan The default schedule provides for the maximum allowable reductions in future accruals and adjustable benefits necessary for the plan to emerge from critical status, with contribution increases only to the extent necessary after benefit reductions; IRC section 432(e) requires 30-days notice before a reduction in adjustable benefits The default schedule must be implemented if the bargaining parties do not reach an agreement by 180 days after expiration of the CBA; WRERA eliminates reference to DOL declaration of impasse Trustees may but are not required to offer one or more alternative schedules WRERA confirms that bargaining over benefits is not literally required WRERA confirms that contributions under an imposed default schedule are treated as delinquent contributions, under Section 515 of ERISA
Questions -- When does a CBA expire? Can a negotiated extension be effective to delay imposition of a schedule? Can an extension or reopener of a CBA change the start of the Funding Improvement or Rehabilitation Period? How is a Rehabilitation Plan (or Funding Improvement Plan) documented? Will the funding correction plan be reviewed or tested for statutory compliance? Who decides if falls short, and what are the consequences?
Adjustable Benefits One schedule shall be designated as the default schedule and such schedule shall assume that there are no increases in contributions under the plan other than the increases necessary to emerge from critical status after future benefit accruals and other benefits (other than benefits the reduction or elimination of which are not permitted under section 411(d)(6)) have been reduced to the maximum extent permitted by law. [Code 432(e)(1)(B) last ] (i) Notwithstanding section 411(d)(6), the plan sponsor shall, subject to the notice requirements in subparagraph (C), make any reductions to adjustable benefits which the plan sponsor deems appropriate, based upon the outcome of collective bargaining over the schedule or schedules.... [Code 432(e)(8)A)(i), as amended by WRERA] (Emphasis supplied.)
Questions -- Can protected adjustable benefits be reduced in the critical status default schedule? Is there a limit on how far in advance of a benefit reduction either a 204(h) notice or the statutory notice of adjustable benefit reductions can be provided? Once a plan is in the red zone, can the trustees reduce or freeze future accruals outside of the critical-status process? Can adjustable benefits of inactive participants be cut before bargaining over the schedules?
Application of Amortization Extension to Emergence from Critical Status (B) Emergence. A plan in critical status shall remain in such status until a plan year for which the plan actuary certifies... that the plan is not projected to have an accumulated funding deficiency for the plan year or any of the 9 succeeding plan years, without regard to the use of the shortfall method and taking into account any extension of amortization periods under section 431(d). [Code 432(e)(4)(B)] Compare, tests for critical status, e.g., (i) the plan has an accumulated funding deficiency for the current plan year, not taking into account any extension of amortization periods under section 431(d). [Code 432(b)(2)(B)(i)] IRS proposed regulation Comments to proposed regulation Development of RPs pending final regulation
Applying For An Amortization Extension Revenue Procedure 2008-67 (11/12/08) Notice Automatic 5 year extension Alternative 5 year extension (completed checklist) Requirement to wait for IRS approval to take extension into account in status certification Same user fee for automatic and alternative extension request Effective for plan years beginning on or after 1/1/08
Safety Valve Provision if the Plan sponsor determines that, based on reasonable actuarial assumptions and upon exhaustion of all reasonable measures, the plan can not reasonably be expected to emerge from critical status by the end of the rehabilitation period, [the rehabilitation plan shall include] reasonable measures to emerge from critical status at a later time or to forestall possible insolvency (within the meaning of section 4245 of [ERISA]). [Code 432(e)(3)(A)(ii)]
Questions -- What kinds of problems could enable a plan to qualify? What is needed to exhaust the plan s normal options? Industry analysis, merger quest, other? How should the exhaustion be documented? What contribution increases/benefit reductions are reasonable measures? Who can/will test the trustees judgments on these questions? Against what standard?
Red Zone Plan Employer Contribution Surcharges Surcharges automatically begin 30 days after employer notified that plan is in critical status 5% of Contribution Rate during remainder of first Plan year 10% of Contribution Rate during succeeding Plan years Surcharges end when employer has a CBA that includes terms consistent with one of the schedules under the Rehab Plan Surcharges may be inevitable if Trustees wait for the statutory deadline to adopt a Rehab Plan and schedules Surcharges may be lower than the contribution increases needed under the schedule most favorable to the employers, but pay now or pay later Negotiating strategies may include using interim allocation amounts to fund schedule or offsetting wages by amount of increased contribution Surcharges cannot be used to increase benefit accruals (e.g., in % of contributions plan) or in employer s withdrawal liability allocation Failure to Pay Surcharges Treated as a Delinquent Contribution (subject to Plan s collection procedures: liquidated damages, interest, attorneys fees)
Questions -- Are the surcharges owed on contributions due 30 days after the notice is given, contributions paid after that point, or contributions on work performed after that point? Does a pre-existing CBA that provides for a contribution rate that matches a schedule avoid the surcharges? Do the surcharges terminate when the employer begins to contribute under a default schedule that is imposed rather than agreed to in a CBA? Can the parties agree, in a CBA, that any surcharges payable by the employer will be offset by corresponding reductions in a participants wages?
Sanctions Endangered/Seriously Endangered Critical Funds $1,100 per day for actuary s failure to certify zone on time, trustees failure to adopt FIP or RP on time Employers that do not pay contributions required by the FIP or RP owe excise tax equal to amount of contribution Expedited Resolution of Plan Sponsor Decisions. If, within 60 days of the due date for adoption of a funding improvement plan or a rehabilitation plan under subsection (e), the plan sponsor of a plan in endangered status or a plan in critical status has not agreed on a funding improvement plan or rehabilitation plan, then any member of the board or group that constitutes the plan sponsor may require that the plan sponsor enter into an expedited dispute resolution procedure for the development and adoption of a funding improvement plan or rehabilitation plan. [Code 432(g)]
Zone Status Endangered (yellow) Seriously Endangered (yellow) Critical (red) Penalties for Failure To Adopt RP or FIP DOL penalty of up to $1,100 per day, assessed against the plan sponsor ERISA sec. 502(c)(8)(A) DOL penalty of up to $1,100 per day, assessed against the plan sponsor ERISA sec. 502(c)(8)(A) DOL penalty of up to $1,100 per day, assessed against the plan sponsor ERISA sec. 502(c)(8)(A). Tax, assessed against the plan sponsor, equal to the greater of (a) the 5% excise tax on any accumulated funding deficiency; or (b) $1,100 multiplied by the number of days after the 240 day period to adopt a RP and up to the day the plan is adopted - IRC sec. 4971(g)(4). (No waiver option with Treasury on 4971(g)(4) tax.) Penalty for Failure To Achieve For failure to meet FIP benchmarks: DOL penalty of up to $1,100 per day, assessed against plan sponsor ERISA sec. 502(c)(8)(B). For failure to meet FIP benchmarks: a tax assessed against the employers, equal to the greater of (a) the contributions required to meet the benchmarks; or (b) the Fund s actual accumulated funding deficiency - IRC sec. 4971(g)(3). Treasury Secretary may waive all or part of tax if failure is due to reasonable cause and not willful neglect. For failure to meet requirements of, or make scheduled progress under, RP: a tax assessed against the employers, equal to the greater of (a) contributions necessary to meet requirements/make progress; or (b) the Fund s actual accumulated funding deficiency - IRC sec. 4971(g)(3). Treasury Secretary may waive all or part of tax if failure is due to reasonable cause and not willful neglect. IRC sec. 4971(g)(2) tax assessed against employer for failure to make the required contribution under the RP or FIP. Tax is equal to the amount of the required contribution the employer failed to make in a timely manner. Can be waived (all or part) by Treasury if due to reasonable cause and not to willful neglect.
Questions -- By when must arbitration commence? What happens if the arbitration has not resulted in a decision by the deadline to adopt the FIP or RP? To what required contributions does the delinquency excise tax apply? How does it coordinate with the plan s collection procedures?
Reporting and Disclosure Each administrator of a multiemployer plan shall, upon written request, furnish... (A) (B) a copy of any periodic actuarial report (including any sensitivity testing) received by the plan for any plan year which has been in the plan s possession for at least 30 days, a copy of any quarterly, semi-annual, or annual financial report prepared for the plan by any plan investment manager or advisor or other fiduciary which has been in the plan s possession for at least 30 days, and. [ERISA Section 101(k)] (Emphasis supplied.)
Reporting and Disclosure The information shall not (i) include any individually identifiable information regarding any plan participant, beneficiary, employee, fiduciary or contributing employer, or (ii) reveal any proprietary information regarding the plan, any contributing employer, or entity providing services to the plan [ERISA Section 101(k)(2)(c)] The WRERA permits the identification of investment managers or advisors whose performance is being reported or evaluated, despite the ban on disclosing individually identifiable information
Reporting and Disclosure Which actuarial reports must be disclosed? Retroactive period for disclosure of reports? Can/should the plan rely on the actuary and investment professionals to exclude individual or proprietary information? Should the actuary s and investment professionals contracts be revised to require them to do this?
Reporting and Disclosure The WRERA repeals 4221(e) of ERISA, making clear that Only the Section 101(l) costs can be charged for withdrawal liability estimates and Only the Section 101(l) information must be disclosed Question: Does this make a substantive change, or just eliminate overlap? PPA section 503 details additional reporting requirements. These requirements are reflected in the 2008 Schedules MB and R and their instructions. Mockups of these schedules are on the DOL website