Plan Sponsor Alert: PBGC Finalizes Rules to Assist Failing Multiemployer Plans

September 2022

The Pension Benefit Guaranty Corporation (PBGC) on July 6, 2022, announced a final rule implementing changes to the Special Financial Assistance (SFA) Program for financially troubled multiemployer pension plans. The final rule includes significant developments and amendments to the interim final rule (IFR).
 

A brief history on multiemployer plans

The PBGC has experienced solvency challenges since its inception in 1974. Within six years of the agency’s creation, Congress passed the Multiemployer Pension Plan Amendments Act of 1980 to help shore up the PBGC’s solvency issues. Congress again tried to stabilize multiemployer plans in 2014 by allowing sponsors whose plans were projected to run out of money to cut benefits under the Multiemployer Pension Reform Act of 2014 (MRPA). Even after this, the PBGC projected its multiemployer insurance program would go bankrupt by 2026.

In July 2022, the PBGC took a different approach when issuing its final rule on a multibillion-dollar financial assistance package to shore up funding issues and the future of the agency’s insurance program covering multiemployer plans. The SFA program went into effect on an interim basis as part of the $1.9 trillion American Rescue Plan Act passed in March 2021. 

Through the SFA program, the PBGC expects to grant between $74 billion and $91 billion to multiemployer plans that meet one of four conditions:
  • The plan is in critical and declining status from January 2020 to December 2022
  • The plan suspended benefits under the MPRA by March 11, 2021
  • The plan is in critical status, is less than 40% funded and has more inactive than active participants
  • The plan became insolvent after Dec. 16, 2014, but as of March 11, 2021, is still insolvent but not terminated

The SFA program, which became effective on Aug. 8, 2022, is open only to qualifying multiemployer plans, and funding is restricted to paying benefits and administrative expenses. All SFA program assistance and earnings must be kept separate from other plan assets, and no repayment is required. Plans receiving assistance have specific reporting requirements, including an annual statement showing compliance with the final rules. The PBGC can audit multiemployer plans that receive SFA funding.

As of July 6, the PBGC had approved more than $6.7 billion to plans covering 127,000 workers and retirees. Plans that received funding during the interim rule period but are eligible for additional funding under the final conditions can resubmit an application.
 

Significant changes to the SFA program following interim rule

The PBGC received more than 100 public comments after issuing the interim rule in July 2021 and made several significant changes in response to those comments.
  • Two interest rate assumptions to calculate SFA and non-SFA assets: The interim rule required only one interest rate assumption for all assets, which did not consider that the SFA funds had specific, conservative investment requirements. The final rule separates the assets and allows plans to use more realistic interest rates to project returns on all investments.
  • Investing SFA assets: The final rule allows plans to invest up to 33% of SFA assets in “return-seeking investments,” such as publicly traded common stock and equity funds. Up to 67% will be restricted to high-quality fixed income investments.
  • MPRA plans: The interim rule would have forced plans to choose between keeping reduced benefits to maintain solvency through 2051 or taking SFA funding and restoring benefits levels but risking future insolvency. The final rule allows plans that cut benefits under the MPRA to use a three-step revised methodology to determine the amount of funding they can take. Now, the rule is set up to fund these plans sufficiently to restore the reduced benefits and remain solvent through 2051.
  • Withdrawal liability: Employers who exit multiemployer plans must recoup those plans with a “withdrawal liability,” representing their share of the total unfunded benefits, so that remaining plan sponsors are not burdened with the exiting employer’s unfunded benefits. Under the final SFA rule, an exiting employer will not immediately benefit from an SFA infusion when determining its withdrawal liabilities. Plans will instead phase SFA funding into plan assets over 10 years when determining unfunded vested benefits. The interim rule would have otherwise immediately included SFA funding as plan assets, lowering withdrawal liabilities on day 1 for exiting employers. The PBGC has requested public comments on this provision of the rule.
  • Merged plans: The Internal Revenue Service (IRS) imposes special conditions for a plan that merges with another plan that has received SFA funds. In Revenue Ruling 2022-13, the IRS considered whether the ongoing plan is considered to be in critical status when a multiemployer plan that received SFA funds merges with another multiemployer plan that did not receive SFA assistance, and the non-SFA plan is considered the ongoing plan. In that case, the IRS said the ongoing plan should not be considered to be in critical status, but it should comply with the conditions used to qualify for SFA funding.
 

BDO Insight: Do your research, but get help if necessary

With a 57-page final rule, plan sponsors are expected to have questions, so the PBGC has set up an SFA website to help clarify issues. This is a lot of information to digest, and every situation is different. If you would like to discuss your plan’s situation, your BDO representative is available to help.