United States

IRS issues final pension suspension regulations

TAX ALERT  | 

The Multiemployer Pension Reform Act of 2014 (the Act) allows a multiemployer defined benefit pension plan to suspend benefits if the plan is in a critical and declining financial status. The IRS issued final Reg. section 1.432(e)(9)-1, effective April 28, 2016, and Rev. Proc. 2016-27 providing plan sponsors guidance with respect to utilizing this relief.

A multiemployer pension plan is a pension plan to which more than one employer contributes. The amount of the contributions are determined pursuant to collective bargaining agreements between the participating employers and a sponsoring union. In the typical arrangement, the plan will have a joint board of trustees, half of whom are appointed by a union and the other half of whom are appointed by the participating employers. The plans usually cover workers of a number of companies in the same industry in a designated geographic area. For example, a plan might cover all union carpenters working in the greater Chicago area.

Under the Act, a plan may propose a temporary or permanent reduction of pension benefits (including benefits in pay status) if the plan projects that it will run out of money before paying all promised benefits. So far, three multiemployer plans (Central States, Southeast and Southwest Areas Pension Plan, Teamsters Local 469 and Iron Workers Local 17) have submitted applications to the U.S. Treasury for permission to reduce the benefits that they are paying members.

The final regulations provide that the plan must determine, initially and again annually, that the plan will be insolvent in the absence of suspending benefits and that all other reasonable measures have been taken to prevent insolvency. If a plan can show this, the plan must notify (1) plan participants and beneficiaries who may be contacted by reasonable efforts, (2) each employer that has an obligation to contribute (within the meaning of section 4212(a) of ERISA) under the plan, and (3) each employee organization that represents plan participants employed by those employers for purposes of collective bargaining of the planned suspension. In addition, the plan sponsor must apply with governing bodies for approval of the suspension. Rev. Proc.  2016-27 includes the details of this application process, as well as a model application. If the application is approved, the suspension cannot take effect until participants have voted according to a specific procedure.

The Central States plan is by far the largest fund covering slightly more than 400,000 participants with approximately $17.9 billion in plan assets. However, the Central States plan is only 48 percent funded. If a multiemployer plan does fail, the Pension Benefit Guaranty Corporation (PBGC) will step in and provide guaranteed benefits. However, with respect to a multiemployer plan, the PBGC maximum benefit guaranty for a plan participant with 30 years of service cannot exceed $12,870 per year and may be less. This is a substantially lower benefit than what a participant with 30 years of participation in a multiemployer pension plan may have accrued.

As noted above, a suspension of benefits may not take effect unless the plan participants have voted on the suspension. This process will leave plan participants with the difficult choice of accepting a voluntary reduction in benefits under the Act or risk having the plan fail and then receiving even lower benefit payment amounts from the PBGC.

For employers that participate in a multiemployer pension plan, the funded status of these plans and consideration of adopting alternative defined contribution plans for future benefits will continue to be topics during the collective bargaining process.

 

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