Final Regulations on Special Financial Assistance for Underfunded Multiemployer Defined Benefit Plans Released
On July 8, 2022, the Pension Benefit Guaranty Corporation (PBGC) released the final regulations for plans applying for Special Financial Assistance under the American Rescue Plan Act of 2021.
As we reported last year, ARPA ’21 included significant financial relief for certain underfunded Multiemployer Defined Benefit Plans. The funding, which will be a grant from Treasury and not a loan was originally estimated to provide $86 billion in financial relief for these troubled plans. Last year, the PBGC released Interim Final Regulations (IRF) allowing plans to begin filing (on a staggered basis) and receiving this much-needed relief. To date, 28 plans covering 148,600 participants have received $7.4 billion in relief.
For more background, please see:
2021 American Rescue Plan Part 2
As anticipated, the PBGC received comments on the interim regulations from various interested parties (Unions, Funds, Actuaries, Investment Consultants, etc.). As a member of the American Academy of Actuaries’ Multiemployer Plans Committee, we submitted comments/suggestions that, to a large extent, were addressed in the final regulations.
The final regulations:
Allow plans to invest up to 33 percent of their Special Financial Assistance (SFA) assets in return-seeking investments (for example, publicly traded stocks and funds that primarily invest in public shares) with the remaining 67 percent still restricted to high-quality fixed income investments.
Modify the application calculation method to use separate interest rates. One for estimating the expected return on the SFA assets and a different rate for the other (non-SFA) assets.
Provide added flexibility for the calculation of the value of SFA for plans that suspended payouts to pensioners under the Multiemployer Pension Reform Act of 2014 (MPRA). This is intended to remove a potential conflict these plans (and their Trustees) would face in deciding to apply for relief or not.
Add more flexibility for future benefit increases. The interim final rule only permitted prospective benefit improvements where contribution increases were sufficient to pay for the benefit increase. Under the final rules, retroactive and prospective benefit improvements will be permitted after 10 years (with PBGC approval) if the plan can demonstrate it will avoid insolvency.
Eases some of the merger conditions to better allow for beneficial plan mergers of an SFA plan with a non-SFA plan.
Allow for an allocation of contributions to health benefit plans. With PBGC approval, after five years SFA plans may temporarily allocate up to 10 percent of the amount of the contribution rate going to the pension plan to a health plan. The plan must demonstrate (i) that the allocation is needed for increases in healthcare costs resulting from a change in federal law and (ii) that the allocation does not increase the risk of insolvency for the pension plan.
Provide a way for plans to set their SFA measurement date so that assumptions and data can be set before submitting their application. This change is intended to eliminate (or minimize) the need to rework applications due to changes in the timing of an application submission. The final rule also changes the measurement date to ease data and timing conflicts.
Retain mandated use of specified interest rates (ERISA 4044 annuity rates) to determine unfunded liabilities in computing an employer’s withdrawal liability. This requirement applies for the later of 10 years or the projected SFA payout period, rather than actual depletion of SFA assets. Also, in determining underfunding for withdrawal liability purposes, the final rule adds a requirement that plans phase-in recognition of SFA assets over the projected SFA payout period. The condition helps to ensure that SFA funds do not subsidize employer withdrawals from participation in SFA plans. The final rule includes a 30-day request for additional public comments related to the phase-in withdrawal liability condition.
The final rules are effective August 8, 2022 and, generally, apply to new applications but are also available to plans that previously submitted SFA applications under the interim rule if the plan submits a revised or supplemented application under the final rule. This includes plans that have already received their SFA funding. These plans are not required to re-file but may if it is beneficial to do so.
In addition, the PBGC updated their cost estimate of this program to $74 to $91 billion. This reflects the impact of the final regulations along with favorable economic results through December 31, 2021. The range is intended to reflect recent (and potential prospective) economic volatility.
Conclusion
Zenith American Solutions will continue to monitor the results of this important legislation and are fully prepared to help our impacted clients. For more information, please feel free to contact your Zenith Client Services team. Additionally, as always, feel free to reach out to your plan’s actuary and/or fund counsel.
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