This is the second of two installments on the American Rescue Plan Act of 2021 (ARPA). Mayer Brown’s first installment describes provisions of ARPA relating to COBRA premium subsidies, changes to the cap on pre-tax dependent care assistance benefits, changes to section 162(m) of the Internal Revenue Code relating to a corporation’s deduction for executive compensation, and updates to the employee retention credit (initially implemented as a part of the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act).
This installment focuses on the provisions of ARPA that provide relief to multiemployer and single employer defined benefit plans.
Multiemployer Plan Provisions
$86 Billion Rescue Package. There are approximately 1400 multiemployer defined benefit plans in the US with about 10 million participants. Pre-ARPA Congressional Research Service statistics indicate that roughly 10-15% of those participants are in plans that will become insolvent in the next 20 years, and, for some time, the multiemployer pension plan program of the Pension Benefit Guaranty Corporation (PBGC) has appeared to be headed toward insolvency. With this in mind, Congress included in ARPA an extensive relief package for multiemployer plans (Sections 9701-9704 of ARPA), the most significant of which is an estimated $86 billion program of direct payments to multiemployer plans. The “Special Assistance Financial Assistance Program” (Program) provides for the creation of a fund from which the PBGC is to provide payments to qualifying multiemployer plans. To the surprise of some, the amount payable to an eligible multiemployer plan will be an amount that will enable the plan to pay all benefits due through end of plan year 2051, including any previously-suspended benefits, which must be reinstated. The amount of special financial assistance that can be provided to a particular plan is not capped by the PBGC guaranteed benefit limit or otherwise. Hence, while the cost of this program is estimated at $86 billion, it could exceed that amount.
Grants under the Program, which will be paid in a lump sum, do not have to be repaid. Plans must apply to the PBGC (and in some cases the IRS) for special assistance by December 31, 2025, and have until December 31, 2026, to submit revised applications.
A multiemployer plan will be eligible for the Program only if at least one of the following conditions applies:
- The plan is in critical and declining status in any plan year beginning in 2020 through 2022;
- As of March 11, 2021 (ARPA’s enactment date), a suspension of benefits has been approved with respect to the plan in accordance with ERISA Section 305(e)(9), which requires, among other steps, approval by the Treasury Department in consultation with the PBGC and the Department of Labor;
- In any plan year beginning in 2020 through 2022, the plan’s actuary has certified that the plan is in critical status, has a modified funding percentage of less than 40 percent and has a ratio of active to inactive participants which is less than 2 to 3; or
- The plan became insolvent after December 31, 2014, and has not been terminated as of ARPA’s enactment date.
ARPA contains provisions with respect to the actuarial assumptions used for both determining eligibility for, and the amount of, financial assistance, with a limit on the interest rate used for purposes of determining the amount of financial assistance needed.
The PBGC is to issue regulations or guidance about the Program within 120 days of ARPA’s enactment. The PBGC may, in such regulation or guidance, limit applications during the first two years following enactment of ARPA to the following categories of plans:
- Multiemployer plans that are insolvent or are likely to become insolvent within 5 years;
- Multiemployer plans that the PBGC projects will each require financial assistance payments exceeding $1 billion unless special assistance is provided;
- Multiemployer plans that have suspended benefits; or
- Multiemployer plan with respect to which the PBGC makes a determination that priority is appropriate based on similar circumstances
Under ARPA, the PBGC (in consultation with Treasury) may impose further, reasonable conditions on plans that receive grants under the Program, such as conditions relating to increases in future accrual rates and retroactive benefits improvements, reductions in employer contributions, diversion of contributions to, and allocation of expenses to, other benefit plans, and withdrawal liability. Interestingly, ARPA also provides certain categories of conditions that the PBGC may not impose, including among others, conditions relating to plan governance such as the selection or removal of trustees, actuaries and investment managers.
ARPA appears to envision a streamlined application process: it directs the PBGC to limit required application materials to the minimum required to make its determination on the application. An application will be deemed approved unless the PBGC notifies the plan that the application is incomplete or deficient in certain other specified ways, and upon submission of a revised application, it will be deemed approved, unless, again, the PBGC notifies that plan that it is incomplete or deficient. The PBGC determines the date of grant, which may not be more than one year after the application is approved. No grants will be made after September 30, 2030. (In prescribing the application process and in the review of applications, the PBGC is to consult with the Treasury on certain aspects including an applicant’s proposed methods for the reinstatement of any previously suspended benefits and certain proposed changes in actuarial assumptions.)
To safeguard assets received by a plan under the Program and ensure their conservative investment, ARPA requires that such funds be segregated from other plan assets and invested only in investment-grade bonds or other PBGC-permitted investments. The assets may only be used to pay plan benefits and expenses.
Plans receiving special assistance must continue to pay all PBGC premiums, cannot apply to suspend benefits, and will be deemed to be in critical status until the plan year ending in 2051.
ARPA did not include the House bill’s requirement that an employer’s withdrawal liability from a plan that received financial assistance under the Program must be calculated without regard to the financial assistance for 15 plan years following the payment to the plan. There has been some thought that the PBGC may nonetheless adopt that requirement in regulations it issues to implement the Program.
Delay of Change in Funding Status. Under present law, multiemployer plans are categorized by funding risk zones of green, yellow (endangered and seriously endangered zone), and red (critical zone). A multiemployer plan that is in endangered status (yellow zone plans) must adopt a funding improvement plan and a multiemployer plan that is in critical status (red funding zone plans) must adopt a rehabilitation plan. In the case of both a funding improvement plan and a rehabilitation plan, a multiemployer plan must provide contributing employers and participating unions with schedules that include specific measures for improving funding status, including proposals for increased contributions and reductions in future benefits.
ARPA allows a multiemployer plan to elect to retain, for the first plan year beginning during the period beginning on March 1, 2020, and ending on February 28, 2021, or for the next succeeding plan year (the “designated year”) the same funding zone status as that of the year preceding the designated year. This will allow some plans to avoid endangered or critical funding zone status during the designated year and the additional requirements and limitations imposed upon plans in critical status.
For a plan that was already in endangered or critical funding zone status for the plan year preceding the designated plan year, the plan does not have to update its funding improvement plan or schedules (for plans in endangered status) or rehabilitation plan or schedules (for plans in critical status) until the year following the designated plan year.
Extension of Funding Improvement and Rehabilitation Plan Periods. Under ARPA, plans that are in endangered or critical status for a plan year beginning in 2020 or 2021 (after application of any delay in change of funding status election) may elect to extend the plan’s funding improvement plan or rehabilitation plan by five years.
Extension of Funding Standard Account Loss Amortization Periods. ARPA allows multiemployer plans that meet a specified solvency requirement to amortize, over 30 years, net investment losses and various COVID 19 related losses incurred in either of the first two plan years beginning after February 29, 2020, and permits such plans to adjust their asset valuation method to smooth, over 10 years, the difference between actual and expected returns in either or both of those two plan years beginning after February 29, 2020. This relief is not available to a plan that has received special financial assistance under the Program (described above).
Increase in PBGC Premiums. ARPA increases the per participant PBGC premium paid by multiemployer plans to $52 beginning in 2031. As in the case of current PBGC premiums, this amount will be indexed for inflation in the year after it takes effect.
Single-Employer Plan Provisions
Extended Amortization Period for Funding Shortfalls. A plan sponsor’s annual minimum required contribution to a single-employer defined benefit plan includes, inter alia, the installments due with respect to the “shortfall amortization base” (very generally the shortfall in funding), if any, for the plan year and the shortfall amortization base for each of the preceding six plan years. The installments required with respect to a shortfall amortization base for a plan year are the annual amounts necessary to amortize that shortfall amortization base in level annual installments over the 7-year period beginning with that plan year. Consequently, plans will typically have “layers” of shortfall amortization bases and related installments, with each amortization base being amortized over its applicable period. ARPA increases the amortization period from seven to 15 years and provides single-employer plans with a “fresh start” by reducing to zero existing shortfall amortization bases and the installments determined under each such amortization base; in other words, plans begin anew. These changes will result in lower required annual contributions for plan sponsors. These changes are effective for the first plan year beginning after December 31, 2021, but plan sponsors may elect to have the provisions apply starting with the 2019, 2020, or 2021 plan year.
Changes to the Interest-Rate Corridor. Defined benefit plans calculate the present value of future pension benefits using three specified “segment” interest rates, determined under Code Section 430, which are a function of the corporate bond yield curve. The lower the interest rates, the larger a plan’s accrued liabilities for minimum funding purposes. Prior to certain legislation known colloquially as “MAP 21,” a 24 month average was typically used for purposes of determining each of the applicable segment rates. In response to a period of low interest rates, MAP-21, which was effective in 2012, established an “interest rate corridor” pursuant to which each segment rate had to come within a specified percentage (initially no more than 10%) above and below the 25-year average for that segment rate. Because interest rates over the last few decades have generally declined, the effect of MAP-21 was to increase the interest rates used to discount pension liabilities, thereby reducing liabilities and corresponding funding obligations.
As originally established, the funding corridor was slated to widen over the years 2013 through 2016, which, in turn, would have resulted in the use of lower interest rates to calculate benefit liabilities. Subsequent legislation delayed the date when this was to occur. Section 430, as modified by that subsequent legislation, retained the 10% corridor through the 2020 plan year, expanding it by 5% per year beginning in 2021 until reaching 30% for plan years beginning in 2024.
ARPA reduces the interest rate corridor to 5% for plan years 2020 through 2025. ARPA also delays the gradual expansion of the interest rate corridor, which was to commence with the 2021 plan year; under ARPA, the expansion of the interest rate corridor will not commence until the 2026 plan year, with the maximum 30% corridor being reached for the 2030 plan year. Because interest rates continue to be at historic lows, the narrowing of the corridor is at least initially likely to result in higher segment rates than would otherwise apply in the absence of ARPA. Note, however, that the narrowing of the corridor and the delay in its expansion could actually result in lower segment rates than would otherwise apply if interest rates increase sufficiently.
Finally, ARPA provides that the 25-year average of each of the three segment rates (to which the applicable interest rate corridor applies) shall be deemed to be no less than 5%.
The changes related to the interest rate corridor apply to plan years beginning in 2020 and thereafter, provided that ARPA permits a plan sponsor to elect not to apply the changes to plan years beginning in 2020 and 2021; the election may apply for all purposes or only for purposes of determining the adjusted funding target attainment percentage used for benefit restrictions.