Funding Relief for Multi-Employer Pension Plans

After a short but circuitous journey through the House and Senate, pension funding relief for multiemployer pension plans devastated by the collapse of the global financial markets in the fall of 2008 became law on June 25, 2010 when President Obama signed H.R. 3962 — P.L. 111–192 — the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (the “Act” or “PRA”). The Act provides relief that targets the market investment losses that multiemployer plans incurred in their first plan year ending after August 31, 2008, or the following plan year (if a plan had the misfortune to suffer losses in both those years, the relief is available for the losses in both years) and is designed to give plans and their stakeholders more time to address and absorb these losses than is afforded under the funding rules of the Pension Protection Act of 2006 (“PPA”).

The Act provides three important options for addressing the funding issues these plans face under the PPA, provided the plan can pass a long term solvency test and the trustees are willing to live with a moratorium on most benefit increases for a period of up to two years and notify the participants and the PBGC of their actions. Any relief elected will be disregarded in apply the funding and zone status rules of the PPA to the first plan year beginning after August 31, 2008. Thus, if a calendar year plan was in critical or endangered status for the 2009 plan year, election of relief under PRA will not change that status.

As has been true with most of the multiemployer funding provisions of the PPA itself, there is a distinct possibility that trustees and their professional advisors will have to navigate the uncharted waters the Act spreads before them without the benefit of timely guidance from the federal regulators.

Relief Options

  • When determining the actuarial value of the plan’s assets, the actuary can use traditional asset smoothing techniques to spread recognition of the targeted market investment losses in either or both of the two specified plan years over an expanded period of up to 10 years instead of the maximum 5 years the Internal Revenue Service (the “Service”) currently allows.
  • For the targeted investment losses incurred in either or both of those two plan years, the actuary can amortize (i.e., provide funding for) those losses in the plan’s funding standard account over a longer period than the 15 years allowed by PPA. The portion of the targeted investment losses that is reflected in the actuarial value of the plan’s assets (AVA) in the first plan year (calculated using whatever smoothing method the plan chooses for those losses) is amortized over a period of 29 years. The portion reflected in the AVA in the second year is amortized over a period of 28 years, and so on. For plans using 5-year smoothing, the targeted market investment loss would be split into 5 portions, each with its own extended amortization period. Those extended amortization periods range from 29 years for the first portion down to 25 years for the 5th portion. With 10-year smoothing, the loss is split into 10 portions, each with its own extended amortization period ranging from 29 years for the first portion, down to 20 years for the 10th portion. This all can become more involved if a plan uses an asset valuation method that relies on other smoothing mechanisms. Because of the 80/120 corridor described next, the 5 or 10 portions of market loss will not necessarily be equal, with portions recognized in the first year or so being greater than the portions recognized in later years.
  • The plan can opt for a relaxation of the so-called 80/120 corridor rule that requires plans to limit the actuarial value of their assets to a value that is no greater than 120 percent of the market value of those assets. Under the relaxed corridor rule, the actuary can allow the actuarial value of plan assets to be as much as 130% of their market value for either or both of the first two plan years beginning after August 31, 2008.

The Act gives multiemployer plan sponsors (typically, the board of trustees) the flexibility to choose any one or more of these three options. It also give plan sponsors the additional flexibility to make those choices separately for either one or both of the two plan years for which relief is available. Because the markets started recovering in the second quarter of 2009, many multiemployer plans, particularly calendar year plans, will have suffered market investment losses only in the first plan year ending after August 31, 2008, and are not likely to benefit from electing either of the first two relief options for the second plan year. In some cases, those plans may benefit from opting for relaxation of the 80/120 corridor rule with respect to both of the plan years beginning after August 31, 2008. In any case, the trustees will want the actuary to analyze the degree to which each of the available options helps the plan’s funding status, but only after determining whether the plan qualifies to elect the relief under the Act’s solvency test.

Solvency Test

For a plan to satisfy the threshold solvency test, the actuary must be able to certify that the plan is projected to have sufficient assets to timely pay expected benefits and anticipated expenditures over “the amortization period” after taking into account whatever relief options the trustees want to elect. If the trustees elect extended amortization relief — with or without any of the other relief — then the amortization period used is the 29 plan years over which the relief will extend. If the expanded smoothing period relief or the relaxed corridor relief (or both) is elected, then the amortization period used to test for solvency likely is 15 years, because that is the period over which multiemployer plans must amortize investment losses under the PPA.

The plan’s actuary probably will use a projection methodology similar to that used to make projections to determine a plan’s funding “zone” status under the PPA (Section 432 of the Internal Revenue Code). It is not entirely clear whether, in making the projection, the actuary can take into account contribution rate increases and benefit reductions that are likely to be put (or kept) in place after adjusting for the effects of whatever relief options the trustees intend to elect.

Moratorium on Most Plan Amendments Increasing Benefits

Funding relief from Congress or the Service rarely comes without some limitations, and the relief offered by PRA affords no exception. The Act provides that if a multiemployer plan elects any of the relief options, then no plan amendment increasing benefits can go into effect during the two plan years following a plan year for which the relief applies, unless the benefit increase falls within either of two narrow exceptions. The restriction takes effect on June 25, 2010, PRA’s date of enactment.

There are two exceptions to the restriction. The first applies if the plan amendment is required to comply with applicable law or to maintain the plan’s qualified status. The second applies if the plan actuary certifies that the benefit increase is paid for out of newly bargained contributions AND that the benefit increase will not have a negative effect on the plan’s funded percentage or projected credit balance during the two-year restriction period.

This description of the benefit increase restriction may seem deceptively simple (although no more so than the statutory language itself) but it masks a host of questions about the exact extent of the restrictions and the exceptions, including the following:

  • If a plan elects the maximum 29 years of extended amortization relief, is the benefit increase restriction in effect for 29 successive two-year periods, translating into an aggregate 30-year restriction period, or is there just one restriction period of two years starting the year after the first year in which the relief is effective (for calendar year plans, that would be 2009, with a restriction period ending on December 31, 2011)? For those involved in the effort to secure enactment of PRA’s multiemployer relief provisions, there is little doubt that Congress did not intend for multiemployer plans to subject themselves to an almost permanent moratorium on benefit increases in order to avail themselves of this relief. Unfortunately, because of the circumstances of the Act’s passage (an interesting story in itself, but for another time), efforts to obtain a clearer description of the benefit restriction’s scope and duration came to naught.
  • The effective date provisions of the Act specify that the restriction on benefit increases “takes effect” on June 25, 2010. Does this language mean that a plan amendment adopted before that date but taking effect thereafter is exempt from the restriction? If the restriction does apply to such a plan amendment, must the amendment be rescinded retroactively if the trustees want to maintain their ability to elect the relief afforded by the Act? What if rescission is not an option either practically speaking or for legal reasons?
  • What qualifies as a plan amendment increasing benefits? This analysis seems relatively straightforward (and will be for many plans, in any event) until one takes account of the following statement in the preamble to the final Treasury Regulations under the ERISA anti-cutback rules (ERISA sections 204(g) and 204(h) and Code sections 411(d)(6) and 4980F): “The IRS and Treasury believe that when a benefit formula in a plan document incorporates provisions of the collective bargaining agreement by reference, those provisions are part of the plan. Accordingly * * * if all or a part of a plan’s rate of future benefit accrual, or an early retirement benefit or retirement-type subsidy provided under the plan, depends on provisions in another document that are referenced in the plan document, a change in the provisions of the other document is an amendment of the plan.” For plans with benefit formulas driven at least in part by contribution rates, or with the availability of certain early retirement features (such as “30 & Out”) tied to a particular level of contributions, the question of whether the regulators will extend this broad view of plan amendments to the Act’s benefit restriction provisions can loom large. The answer may determine whether the trustees are in a position, either practically or legally, to elect any of PRA’s relief options given that such an election might require them to deny recognition to pension-related provisions in collective bargaining agreements negotiated months or even years before the Act passed.
  • When determining if a benefit increase qualifies for the benefit restriction exception, the plan’s actuary is required to look at the benefit increase’s potential impact on the plan’s funded percentage for the two year restriction period and the plan’s projected credit balance for those two years. Does the required credit balance projection include only the two years in the restriction period, or must the credit balance be projected out from the vantage point of each of those two years as far as the PPA funding rules require (a minimum of seven years)?

Required Notice to Participants and PBGC

As was true in the case of the temporary relief options that came with the Worker, Retiree and Employer Recovery Act of 2008 (“WRERA”), plans that elect any of the Act’s relief options must provide notice of the election to all participants and beneficiaries and the PBGC. Unlike WRERA, notice to contributing employers, unions representing participants and the Department of Labor, is not required. The Act specifies neither the content of the participant notice, nor the time for distribution.

Guidance from Treasury — Definition of Net Investment Losses Qualifying for Extended Amortization

The PRA is notably silent about those aspects of the multiemployer relief provisions for which Treasury is expected to issue clarifying or amplifying guidance, except in one important area: Central to the extended amortization relief provisions is the concept of “net investment losses,” which the statute specifies shall be “determined in the manner prescribed by the Secretary of the Treasury on the basis of the difference between actual and expected returns.” Given the focus of PRA on the market investment losses plans incurred starting in the fall of 2008, one might imagine that what is meant by the term “net investment losses” should not warrant such special attention from Treasury, but rather should be taken as naturally and logically referring to the difference between the actual market rate of return achieved by the plan’s investments for the targeted plan year and the market rate of return the plan’s actuary expected the assets to achieve for that year, adjusted for contribution income and benefit payments and administrative expenses. Indeed, one can only wonder why Congress felt the need to impose on Treasury a requirement to promulgate guidance on just this one important, but seemingly straightforward, element of the multiemployer relief package.

Some have suggested that if Congress believed Treasury guidance was crucial on this one relatively narrow aspect of the relief package, perhaps they had in mind some other, less obvious definition than market loss (one focusing instead on losses flowing from actual versus expected return on actuarial value of a plan’s assets). The intricacies and import of this argument are enough to confound actuaries and lawyers alike; suffice to say that if this view were to find favor with Treasury and the Service, for many multiemployer plans it would cut the value of the Act’s relief package roughly in half.

Fortunately, more than common sense is available to support the view that the term “net investment losses” refers to market losses, not actuarial losses (although frankly, common sense should be enough). Support can also be found in a careful analysis of the short but robust legislative history of the extended amortization relief proposal from its introduction in the House in October 2009 to its consideration and adoption by the Senate in the first ten days of March 2010 and its enactment in June 2010. At one point during the Senate’s initial consideration of the multiemployer relief package, an amendment was introduced that would have explicitly limited the extended amortization relief to just the portion of the market losses that were reflected in the actuarial value of a plan’s assets in the first two plan years after 2008 (essentially embracing the “actuarial loss” point of view). When it was pointed out that this amendment would preclude extended amortization for as much as half the 2008 market losses — not what proponents of the relief package had been advocating for — the members of the Senate Finance Committee carrying the bill offered a further amendment eliminating the more restrictive language and clarifying that relief would be available for the entirety of those market losses regardless of the year in which any portion showed up in the plan’s experience gains and losses (recognizing that some elements of the market loss could show up in that experience as many as 10 years after the loss was incurred). This revised wording is what ended up in the legislation that passed Congress in June.

For those who prefer to limit their quest for the meaning of a statutory provision to the four corners of the legislation, rather than resort to legislative history, one need look no further than the expanded smoothing relief provisions of the Act which immediately follow the amortization relief provisions. Under these provisions, a plan may change its asset valuation method “in a manner which * * *spreads the difference between expected and actual returns for either or both of the first 2 plan years ending after August 31, 2008, over a period of not more than 10 years * * *.” Most actuaries will agree that at least for multiemployer plans using “smoothed market value” to determine actuarial value of assets — perhaps the most common form of smoothing in use by multiemployer plans — the phrase “difference between expected and actual returns” can mean just one thing: the difference between expected return on the market value of the plan’s assets and the plan’s actual return on those assets. Indeed, the Revenue Procedure that gives automatic IRS approval for the use of smoothed market value to determine actuarial value of assets says that “[u]nder this method, a gain or loss for a year is determined by calculating the difference between the expected value of the assets for the year and the market value of the assets * * * [I]f the expected value is greater than the market value, the difference is a loss” (Revenue Procedure 2000–40, Section 3.15).

Generally speaking, when a phrase is used more than once within the same section of a statute, courts will hold that the phrase must be given the same meaning in both places it appears, absent some clear and unmistakable indication from the surrounding legislative language that the legislators intended a different result. Admittedly, the extended amortization provision uses the phrase “the difference between actual and expected returns” whereas the expanded smoothing provision uses the phrase “the difference between expected and actual returns.” But can it be seriously argued that the differing order of appearance of “actual” and “expected” in the otherwise identical phrase in two adjacent subparagraphs of the same statute would permit an interpretation in one that is diametrically opposed to the other?

There is no reason to expect that Treasury will shun the common sense interpretation of the phrase “net investment losses” as meaning market losses, and instead embrace a more restrictive interpretation that ignores the legislative history and well established principles of statutory construction. But the final outcome of the debate will have to await regulatory action of some sort. This raises a greater concern: Will Treasury be able to develop and promulgate guidance on any aspect of the Act’s multiemployer relief package in time for that guidance to be of help to trustees and plan professionals who are faced with making decisions in the coming weeks and months on whether to elect some or all of the relief options?

Guidance from Treasury — What We Have So Far and What We Can Expect

On July 30, 2010, the IRS issued its first, and so far only, pronouncement on the multiemployer relief provisions of the Act. In Notice 2010–56, the Service announced that plan trustees can file their Form 5500 and Schedule MB for plan years to which PRA relief might apply — if elected — without having made such an election or the actuary having reflected that election on Schedule MB for that year. The Notice stipulates that for any plan year ending before the Service issues guidance on the multiemployer relief provisions of PRA, trustees will be able to make and implement relief elections without regard to whether they have filed the Form 5500 and Schedule MB for that year. This is important because generally speaking, retroactive elections on funding compliance issues are not permitted.

The Notice also tells us that the Service “anticipates” issuing future guidance on the PRA relief rules and that such guidance “may” include guidance on “determination of the portion of the experience loss or gain attributable to net investment losses incurred in either or both of the first two plan years ending after August 31, 2008,” the participant notice requirement and the effect of PRA elections on the actuary’s certification of a plan’s PPA zone status (critical, endangered, or neither), including certifications already made.

The Notice says that the “amortization period” over which a plan’s solvency must be tested to qualify for relief is that which takes into account the changes in the funding standard account that would result from any relief elections under the Act. This suggests that the shortest amortization period for which solvency must be certified is 15 years. If the trustees elect extended amortization relief, the amortization period for which solvency must be certified would be 29 years,

On August 2, 2010, the Service published one of its periodic Employee Plans News in which it briefly summarizes the salient aspects of the Notice and of PRA. There is little of note in this publication, other than a statement, clearly at odds with the requirements of the statute, to the effect that extended amortization can be elected only after notice has been given to participants. This statement would also seem to imply that the notice requirement does not apply at all to the election of the expanded smoothing period relief or the relaxed corridor relief, again an intimation not supported by the statute. Participant notice is required in the case of any relief election, but only after the election has been made. For a preview of what guidance the Service may give on the form and timing of the participant notice required by the Act, one might review the guidance issued by Treasury on the details of the WRERA notice plans were required to provide if they elected to temporarily freeze their zone status (IRS Notice 2009–31, April 20, 2009).

The one thing Notice 2010–56 does make abundantly clear is that plan trustees and their professional advisors do not have to wait until Treasury issues guidance before they make the relief elections allowed under PRA. These elections can be made now or in the coming few months, when the relief will have a real and immediate impact on the plan’s funded status under PPA (for example allowing the plan to retain its green zone status for 2011 and perhaps several years beyond) and on any funding improvement plan or rehabilitation plan that trustees might otherwise be required to develop and implement. Waiting for guidance from the regulators, which could be many months away, and then making retroactive relief elections is simply not an option for plans that in the meantime would have to develop and implement funding improvement or rehabilitation plans — actions that the relief elections might completely eliminate the need for or, at a minimum, materially alter.

The concern is that once decisions have been made, and actions taken by the trustees and the bargaining parties based on the best judgment of the trustees and their professional advisors on what PRA means, the Service might promulgate guidance that contradicts that best judgment and requires that those decisions and actions be revisited. One can hope that the regulators will be prompt in issuing needed guidance. At the same time, it is hard to suppress the sentiment that unless guidance is forthcoming in the next few weeks, which seems unlikely, perhaps it would be better if the Service issued no guidance at all. After all, we have survived so far without the benefit of guidance from the regulators on almost every aspect of the multiemployer funding rules of the PPA, which just celebrated its fourth anniversary.