Introducing the Multiemployer Pension Reform Act of 2014

What participating employers should do to comply with the MPRA.

By Andrew Douglass and Bradley Kafka Mar 1, 2015
LIKE SAVE PRINT
Reuse Permissions

December Cover 

 

Times are tough for multiemployer pension plans. In recent years, they’ve teetered on the edge of insolvency due to a host of shifting market conditions, including employer bankruptcies, investment volatility, decreasing interest rates and a loss of market share by contributing union employers.

Demographic trends have also worked against them, as more people hit retirement age and the pool of active employees diminishes.

Help may be here at last. In December 2014, President Barack Obama signed the Multiemployer Pension Reform Act of 2014 (MPRA) into law. After several attempts by Congress to get multiemployer plans on sound financial footing over the years, this new legislation is, without question, the most significant for these plans since the enactment of the Multiemployer Pension Plan Amendments Act of 1980, which added employer withdrawal liability rules and other key provisions for such plans to the Employee Retirement Income Security Act.

The Plans and the PBGC

A multiemployer plan is defined as a collectively bargained plan maintained by more than one employer—usually within the same or related industries—and a labor union. The Pension Benefit Guaranty Corp. (PBGC) provides federal “insurance” against the possibility that the plans will become insolvent, but only up to a statutory maximum benefit of $12,870 per year—which is usually far less than the benefit amounts that have been promised by funds to participants.

Despite the PBGC’s relatively low benefit guarantees, its financial situation is very weak. In fact, the PBGC recently announced that its insurance program for multiemployer pension plans has a deficit of more than $40 billion and that it expects the entire program to become insolvent within the next 10 years. Absent significant changes by Congress, the PBGC warned, insolvency of the insurance program would result in large reductions to, or the outright elimination of, even the limited “guarantees” of pension benefits for participants under troubled multiemployer plans.

How the MPRA May Help

The legislation makes a number of changes aimed at improving the financial condition of “red zone” and “yellow zone” funds, which are multiemployer plans that are generally less than 80 percent funded, as determined under complex rules enacted under the Pension Protection Act of 2006. “Red zone” funds, also known as “critical status” funds, are plans whose assets are less than 65 percent of liabilities. “Yellow zone” funds, also known as “endangered status” funds, are funded at greater than 65 percent but less than 80 percent.

Perhaps the most controversial aspect of the MPRA is that it gives troubled funds the ability to reduce the pension benefits of plan participants, including for some retirees already receiving payments.

However, before that can happen, the fund’s actuary must certify that the fund is projected to become insolvent within a specified number of years. Retirees who are at least 80 years old and retirees with disabilities would be protected in full from the benefit cuts, and retirees between the ages of 75 and 80 would receive partial protections. All other plan participants would be subject to benefit reductions.

Key Changes

In addition to the rules allowing for benefit reductions, the Multiemployer Pension Reform Act (MPRA) also:

  • Gives additional flexibility to the Pension Benefit Guaranty Corp. (PBGC) to order the partition of multiemployer plans with significant “orphan” liabilities (that is, liabilities resulting from previously withdrawn employers that were unable to pay the full amounts of their withdrawal liabilities and/or delinquent contributions).
  • Enhances the authority of the PBGC to facilitate mergers of two or more multiemployer plans to improve their aggregate funded status.
  • Increases the likelihood that the PBGC will issue public notices and future regulations as to how it intends to use its expanded authority in these areas.
  • Creates new funding-based classifications and provides more flexibility to the funds when fund administrators are making their annual Pension Protection Act of 2006 (PPA) status determinations.
  • Repeals the PPA “sunset date” of Dec. 31, 2014, which effectively makes the PPA rules permanent.
  • Increases the annual PBGC insurance premiums for multiemployer plans from $13 per participant to $26 starting in 2015, with additional cost-of-living increases in future years.
  • May reduce liability for employers. Under the PPA, a “yellow zone” or “red zone” fund is required to increase employer contribution levels. Post-MPRA funds must disregard these so-called surcharges when calculating an employer’s withdrawal liability. Any resulting adjustment in liability will vary greatly from employer to employer and fund to fund.
  • Requires new and expanded disclosures of the plan’s documents and financial information to participants, participating employers and other interested parties.

As a partial curb on a pension fund’s new authority under the MPRA, the benefit reductions are subject to a mandatory vote by all plan participants—active employees, retirees and others. The vote must be conducted under detailed balloting and notice procedures, which require that a majority of all plan participants vote to reject the benefit reductions.

However, even if most participants reject the cuts, the vote can be overridden by the Treasury Department if the agency determines that the fund is a “systemically important” plan (in other words, a plan for which the PBGC projects the present value of its financial assistance needed to sustain the plan will exceed $1 billion if the reductions are not implemented).

In light of the complexity of these rules, and the strict time frames required under the MPRA, some funds, such as the Central States Pension Fund, which is currently a “red zone” fund covering over 400,000 participants, have already issued statements noting that it may take up to a year before any changes to benefit levels become effective.

Action Items

The changes for multiemployer plans will generally take effect for plan years beginning on or after Dec. 31, 2014. Due to the enormity of the changes, employers with collective bargaining agreements that require contributions to multiemployer pension funds should start planning now—particularly if they make contributions to “red zone” or “yellow zone” funds.

Specifically, these employers should consider the following actions:

Review the terms of each collective bargaining agreement that requires contributions for union employees to a multiemployer pension fund. In particular, any provisions that require minimum benefit levels for employees or that allow the company to reopen the contract due to changes in the law could become important, particularly if the fund seeks to reduce benefit levels under MPRA rules.

Review the funded status of each multiemployer pension fund and request an updated withdrawal liability estimate from each one, along with all supporting documentation that the company is entitled to receive under federal law.

Make inquiries through the fund’s employer trustees as to whether the fund will implement any of the changes under the MPRA.

Retain an independent actuary (through an attorney to retain privileged communications) who can analyze each plan’s funded status and determine projections for future years, considering both the plan’s current funded status and its funded status if it implements any of the changes under the MPRA.

  • Review any public statements made by union representatives in support of or in opposition to the changes under the act.
  • Monitor the status of any future regulatory guidance from the PBGC, Internal Revenue Service or Department of Labor regarding the changes made by the MPRA.
  • Review any single-employer plans that coordinate with benefits under a multiemployer pension plan (for example, any offset provisions for benefits under a multiemployer pension plan).
  • Re-evaluate the company’s risks of continuing to participate in the fund, and adjust its collective bargaining strategy accordingly.

The MPRA will dramatically affect troubled multiemployer plans. Employers can keep ahead of the game by preparing now and focusing on the many developments that will no doubt follow.

Andrew Douglass, in Chicago, and Bradley Kafka, in St. Louis, are attorneys with Polsinelli PC.

LIKE SAVE PRINT
Reuse Permissions

MEMBER BENEFITS

CA Resources at Your Fingertips

View all Resources Now

Job Finder

Find an HR Job Near You

SPONSOR OFFERS

Find the Right Vendor for Your HR Needs

SHRM’s HR Vendor Directory contains over 3,200 companies

Search & Connect