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Measure addresses withdrawal liability; clarifies ERISA Section 4062(e) rules
Severely distressed multiemployer pensions will be able to reduce benefits paid to retirees under an amendment to the Continuing Resolution/omnibus spending bill (dubbed "cromnibus") that was signed into law by President Barack Obama on Dec. 16, 2014. H.R. 83, the Consolidated and Further Continuing Appropriations Act of 2015, had been approved by the U.S. Senate on Dec. 13, two days after House passage.
The pension measure included in the omnibus legislation, the Multiemployer Pension Reform Act of 2014, was negotiated by a bipartisan group of congressional leaders but opposed by some retiree advocates and their congressional allies. It is intended to let deeply underfunded multiemployer plans avoid bankruptcy and termination, and by doing so to keep solvent the multiemployer pension insurance fund overseen by the Pension Benefit Guaranty Corp. (PBGC), the federal pension insurance program.
The provisions apply only to multiemployer pensions and not to single-sponsor corporate pensions, which are subject to a different set of regulations and higher funding-level requirements. The PBGC maintains a separate insurance fund for single-sponsor pensions. Multiemployer, or "Taft-Hartley," pension plans commonly are administered by labor unions on behalf of their members and funded by multiple employers in a given industry, subject to collective bargaining contracts with the union.
As SHRM Online recently reported (see Multiemployer Pension Funding Crisis Looms), in November 2014 the PBGC issued a report indicating its multiemployer insurance program was almost certain to become insolvent in 10 years. Of the 1,400 multiemployer plans nationwide, 200 plans covering a total of 1 million participants are at risk of termination.
The measure will allowtrustees of financially troubled multiemployer pensions to cut retiree benefits to prevent plan insolvency. Financially troubled plans are those that are expected to not have enough money to pay 100 percent of benefits in 10 to 20 years. In some cases, the cuts could exceed 60 percent of a participant’s benefits.
Under the measure:
• Retirees who are age 80 or over, or are receiving a disability pension, are not subject to benefit cuts. Retirees ages 75-79 are subject to smaller cuts than retirees under age 75.
• Plan trustees have discretion in deciding how to allocate the cuts. For example, they can cut retirees’ benefits more than those of active workers, and decide whether to reduce survivors’ benefits.
• Plan trustees are exempt from fiduciary responsibility in making cuts.
• Trustees’ decisions to cut benefits can be reversed only by the Department of Treasury, and then only if the Treasury determines that the trustees’ decision to cut benefits or the extent of the benefit cuts is “clearly erroneous.”
• There is no provision for automatic restoration of lost benefits if a plan’s funding status improves.
• Plans with 10,000 or more participants must allow all participants to vote on cuts before they are implemented. A majority of all workers and retirees in a plan—not just a majority of the ones who vote—is required to block cuts. Ballots can be distributed by e-mail.
• Even if a majority of participants vote against cuts, the Treasury Department can override the vote and uphold the trustees’ decision to make cuts, if it concludes that a plan poses a “systemic” risk to the PBGC.
• The insurance premiums that multiemployer plans pay to the PBGC are increased from $13 to $26 per participant per year. (In contrast, premiums paid to the single-employer plan program are between $57 and $475 per participant per year.)
Also relevant to employers, “the new rules clarify that surcharges imposed pursuant to the Pension Protection Act do not count
towards calculation of withdrawal liability payments as the ‘highest contribution rate’ against which annual payment limits are calculated,” according to Keith R. McMurdy, an attorney with Fox Rothschild LLP, in a blog post. “This has been arbitrated and litigated for some time and it would serve in many instances to reduce withdrawal liability payments. [The new rules] also provide that contribution increases mandated by a rehabilitation or funding improvement plan will be disregarded in certain withdrawal circumstances,” McMurdy said.
What should employers contributing to multiemployer plans do now? According to a blog post by pension consultant and actuary Jim Lowell, "There is no perfect strategy, but for employers participating in reasonably well funded plans (green zone), there should not be much that is needed. For the remainder (red zone or yellow zone) of plans, however, employers may need to weigh their options." He advised those employers to consider doing some or all of the following:
• Review all of their collective bargaining agreements that cause them to be participating sponsors of multiemployer plans. Pay particular attention to the size of the plan and the plan's current zone status.
• If withdrawal from the plan is an option, request a withdrawal liability calculation to see how painful that strategy might be.
• Consider the pros and cons of remaining in the plan as part of the company's overall risk management strategy.
• Consider engaging an independent actuary (not affiliated with the plan's actuary) to assist with any strategy decisions. To the extent that the company is contemplating a strategy that could potentially inflame relations with one or more unions, it could make sense to engage this actuary through counsel.
“The pension provisions in the spending bill allow trustees of financially troubled multiemployer pension plans to reduce benefits of retirees by as much as 60 percent if there is a projection that plan assets might be depleted in 10 to 20 years—when many of today’s retirees will no longer be alive,” according to a critical statement by the Pension Rights Center, an advocacy group for pensioners. “Also extremely troubling is the secretive process by which these provisions were pushed through Congress, buried in a must-pass bill in the last days of a lame-duck session, without input from the pensioners whose lives could be devastated by the cutbacks authorized by the measure. The process was undemocratic and unfair.”
In a letter to House and Senate members, AARP also opposed passage, stating that “Permitting plans to break the fundamental requirement of the Employee Retirement Income Security Act (ERISA)—that plans must honor pension promises for benefits already earned and vested—not only would hurt retirees, it would also significantly weaken ERISA and set an undesirable precedent. This precedent could have a detrimental impact on other earned pensions, and the overall retirement income security of the nation.”
Sen. Ron Wyden, D-Ore., said in a statement, “Under this bill, for the first time, Congress will allow multiemployer plans to cut retirees’ earned pension benefits. This is unprecedented and I worry about the impact on retirees and the slippery slope we’re about to head down.”
But Rep. George Miller, D-Calif., who along with Rep. John Kline, R-Minn., put together the House coalition supporting the amendment, told The Washington Post, “We have to do something to allow these plans to make the corrections and adjustments they need to keep these plans viable.”
Randy G. DeFrehn, executive director of the National Coordinating Committee for Multiemployer Plans, an employer-union coalition, said in a statement that passage of the measure “recognizes the years of work that America’s unions and employers did to develop a solution that doesn’t require a massive taxpayer bailout and instead provides a path forward for these troubled pension plans.”
The Society for Human Resource Management (SHRM) is a member of several multiemployer pension coalitions that have been working on this issue for some time. “The issue of plan solvency has been one that we have been
concerned about and, along with others in our coalition, have been urging the need for pension reform,” noted Kathleen Coulombe, senior advisor for government relations at SHRM.
ERISA Pension Issue Addressed
In addition to the provisions relating to multiemployer plans, H.R. 83 also includes Other Retiremente-Related Modificaitons. This part of the law contains language clarifying the rules under Section 4062(e) of ERISA, which affects single-sponsor corporate pensions. Section 4062(e) requires companies to post security with the PBGC in the event the company shuts down a major facility and, as a result, lays off a substantial portion of its workforce.
“For the past few years, in direct meetings with the PBGC and several federal agencies—and in letters to key members of Congress and the PBGC board of directors—we have pointed out that enforcement of ERISA Section 4062(e) demonstrated a fundamental misinterpretation of the law,” said James A. Klein, president of the American Benefits Council, a trade association, in a released statement.
“While the purpose of Section 4062(e) is laudable, its enforcement has undermined the willingness of companies to continue maintaining pension plans,” according to the council. “For example, plan sponsors have been compelled to pay large amounts under Section 4062(e) when a small business unit has been sold although no employee layoffs resulted, and can be compelled to pay such amounts when a facility is temporarily closed due to re-tooling or repairs. These are not circumstances Section 4062(e) was enacted by Congress to address.”
According to the council, H.R. 83 addresses these problems, thus “removing a disincentive to maintain a plan and eliminating an inappropriate penalty on business transactions that are intended to strengthen companies and the economy.”
Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.
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