Multiemployer defined benefit (DB) pension plans are feeling the effects of the economic recession. A survey from the nonprofit International Foundation of Employee Benefit Plans conducted during the week of April 13, 2009, shows that the number of multiemployer pension plans less than 80 percent funded has quadrupled from a year earlier. Survey responses were received from 237 International Foundation members in the United States, each representing a separate plan.
Multiemployer pension plans are defined benefit plans maintained by two or more employers as established through collective bargaining with a labor union. Most multiemployer plans are required to have an equal number of employer and union representatives on their board of trustees.
In 2008, 80 percent of multiemployer DB plans were certified as safe (in the "green zone"), while only 11 percent were endangered or seriously endangered (the "yellow" or "orange" zone) and 9 percent were critical (the "red zone"). For details on these certifications and related funding requirements, see the sidebar below.
For survey respondents who have calculated their plan status in 2009, only 20 percent remain in the safe zone. The majority of plans were endangered or seriously endangered (41 percent) or critical (38 percent).
In recent years, the aging population has caused DB plan liabilities to grow faster than assets. In an effort to ensure a secure retirement for those who are covered under multiemployer DB pension plans, Congress in 2006 inserted a requirement in the Pension Protection Act (PPA) that requires these plans to certify their funding status each year.
In general, a plan is certified as safe (or in the green zone) if it is at least 80 percent funded and critical if it’s less than 65 percent funded. Plans that fall in between are considered endangered or seriously endangered.
“Multiemployer DB plans had seen some improved funding levels in the last couple of years, but the economic meltdown has taken its toll,” says Julie Stich, senior information/research specialist at the International Foundation. “Unfortunately, more and more plans are facing a critical situation.”
To provide relief, near the end of 2008 Congress passed the Worker, Retiree and Employer Recovery Act, which offered multiemployer DB plans the option of a one-year funding status freeze. The one-year freeze option allows plans certified as safe for the 2008 plan year, but now certified as endangered or critical, to freeze their safe status for the 2009 plan year. Likewise, plans certified as endangered for 2008 but critical for 2009 may freeze their endangered status. (For more on the freeze option, see the sidebar below.)
It appears a large number of multiemployer DB plans intend to take the status freeze option. Of the respondents that have decided whether or not to freeze their DB plan, the majority (60 percent) are opting to take the freeze.
Survey respondents were asked more about their funding status freeze decision. Of those who had made the decision to freeze their plan, the main reasons include:
• Waiting to see if investment markets will rebound (63 percent).
• Allowing more time to fix funding on own terms, rather than as dictated by the PPA (42 percent).
• Waiting to see if the federal government will provide additional funding and relief (35 percent).
• Wanting additional time to update rehabilitation plan, funding improvement plan or contribution schedules for 2009 (30 percent).
• Allowing more time to see what happens with the PPA (25 percent).
Of those who have decided not to freeze their plan, the main reasons include:
• Did not want to delay by one year implementing changes to improve funding status; want to begin fixing the situation now (71 percent).
• Feel that waiting will only worsen finances and make finding solutions more difficult (29 percent).
• Collective bargaining agreement(s) will expire soon; need to renegotiate (25 percent).
• 2008 investment losses were manageable (25 percent).
• Want to take advantage of three-year extension for funding improvement/rehabilitation plan (25 percent).
Stephen Miller is an online editor/manager for SHRM.
Funding Rules—and Relief—for Multiemployer Defined Benefit Plans
By Jonathan J. Boyles and James G. Isaac of McDermott Will & Emery
In 2006, the Pension Protection Act (PPA) enacted new funding rules for multiemployer defined benefit plans. Each year, the plan’s actuary must certify the plan’s funded status as critical (red zone), endangered (yellow zone) or neither (green zone). The endangered yellow zone status applies when either the plan is less than 80 percent funded or the plan has an accumulated funding deficiency (the credit balance has been exhausted) or is expected to have a deficiency in any of the next six plan years (taking into consideration any amortization extensions). A plan that meets both of the yellow zone conditions is a seriously endangered “orange zone” plan.
The critical red zone status applies if any of the following conditions apply:
· The plan is less than 65 percent funded, and the sum of the plan’s assets and present value of contributions for the current and next six plan years is less than the present value of non-forfeitable benefits projected to be paid from the plan during the current and next six plan years.
· The plan has an accumulated funding deficiency (not taking into consideration any amortization extensions).
· The plan is expected to have an accumulated funding deficiency in any of the next three plan years (next four plan years if the plan is 65 percent or less funded) (not taking into consideration any amortization extensions).
· The plan’s normal cost for the current plan year, plus interest on unfunded benefit liabilities, exceeds the present value of anticipated employer contributions for the current plan year; the present value of non-forfeitable benefits of inactive participants is greater than the present value of non-forfeitable benefits of active participants; and the plan has an accumulated funding deficiency for the current plan year or is projected to have an accumulated funding deficiency for any of the four succeeding plan years (not taking into consideration any amortization extensions).
· The sum of the plan’s assets and present value of anticipated employer contributions for the current plan year and the four succeeding plan years is less than the present value of all benefits projected to be payable during the current plan year and the four succeeding plan years.
An endangered yellow zone status plan must adopt a funding improvement plan to increase, over a period of 10 years, its funded status by 33 percent of the difference between its first endangered yellow zone status and 100 percent. A seriously endangered orange zone status plan has a 15-year funding improvement plan, and the plan must be designed to improve its funded status by 20 percent of the difference between its first endangered yellow zone status and 100 percent. A critical red zone status plan must adopt a rehabilitation plan to emerge, over 10 years, from critical status. To achieve these ends, the rehabilitation plans may include reductions in plan expenditures, a reduction in future benefit accruals (if bargaining parties agree) or a combination of both.
The funding improvement plans include sets of contribution schedules that the actuary certifies are calculated reasonably to meet the funding standards required. For pension plans in critical red zone status, until the new contribution schedules are implemented, each contributing employer is subject initially to a 5 percent surcharge and then to a 10 percent surcharge after one year. While a pension plan is under a rehabilitation plan, it may be amended with respect to participants not in pay status to decrease early retirement subsidies, eliminate disability benefits and alter other adjustable benefits.
A pension plan in critical red zone status cannot be amended to increase benefits and cannot pay lump-sum benefits (or purchase annuities) other than lump-sum payments that do not require spousal consent.
Worker, Retiree and Employer Recovery Act
Prior to leaving office, President George W. Bush signed the Worker, Retiree and Employer Recovery Act of 2008 (WRERA), which provides temporary relief from certain PPA funding requirements. For multiemployer plan sponsors, WRERA provides the opportunity to “freeze” a plan’s status temporarily. Specifically, WRERA allows a multiemployer plan sponsor to elect to maintain the prior year’s plan status for the first plan year beginning between Oct. 1, 2008, and Sept. 30, 2009. For calendar-year plans, a multiemployer plan can maintain the 2008 plan year funding status for the 2009 plan year. Therefore, a plan that slipped from a green zone status and made the required WRERA election would not be required to adopt a funding improvement plan or a rehabilitation plan. Similarly, a plan that slipped to a critical red zone status and made the required WRERA election would not be required to limit lump sums and would not subject contributing employers to surcharges.
If the plan was not in green zone status in the prior year and the plan sponsor makes the WRERA election, the sponsor is not required to update its funding improvement plan, rehabilitation plan or schedules immediately as otherwise required. In addition, WRERA provides temporary relief by allowing the sponsor of a multiemployer plan in endangered or critical status to extend the plan’s funding improvement or rehabilitation period by three years.
IRS Notice 2009-31
On March 27, 2009, the IRS released Notice 2009-31, which provides instructions for plan sponsors related to the timing, submission and content of elections to freeze a plan’s status. Notice 2009-31 contains special notice requirements for plans that are not in endangered yellow zone or critical red zone status as a result of their freeze election.
Jonathan J. Boyles is a partner in the law firm of McDermott Will & Emery LLP and a member of the Employee Benefits Department. He is based in the firm's New York office. James G. Isaac is an associate in the firm and a member of the Employee Benefits Department. He is based in the firm’s Chicago office.
Originally published by McDermott Will & Emery LLP
Reposted with permission.
SHRM Online Benefits Discipline