ARPA’s Impact on Multi-employer Pension Plans and Contributing Employers
On March 11, 2021, President Biden signed the American Rescue Plan Act of 2021 (“ARPA”). ARPA is the latest COVID-19-related stimulus legislation passed by Congress, but, unlike prior legislation, ARPA provides expansive funding rule changes and significant financial assistance to deeply underfunded multiemployer pension plans, including a one-time payment to certain plans from the Pension Benefit Guaranty Corporation (“PBGC”) without any repayment obligations.
ARPA’s provisions regarding multiemployer pension plans focus primarily on the plans themselves as well as their participants and beneficiaries. Nevertheless, employers who are contributing or who contemplate future contributions to a multiemployer pension plan (including those employers contemplating withdrawal) should all be cognizant of ARPA’s impact.
Relief to Improve Financial Status of Multiemployer Pension Plans
Under ARPA, eligible multiemployer pension plans may elect to retain for plan year 2020 or 2021 (known as the “designated plan year”) the zone status that applied to the plan for the prior year. This pertains to the requirements set forth under the Internal Revenue Code Section 432 and ERISA Section 305, which provide funding rules for multiemployer pension plans in endangered, critical, or critical, and declining status. In general, multiemployer pension plans that are less than 80 percent, but not less than 65 percent, funded are referred to as being in endangered status (aka “yellow zone”), and plans that are less than 65 percent funded are referred to as being in critical status (aka “red zone”). Plans that are in critical and declining status are plans that generally are less than 65 percent funded and projected to be insolvent in the next 10 years.
ARPA allows plans to freeze their funding status in a designated plan year, despite changes that occurred to their financial status since that election, thereby enhancing the stability of their regulatory treatment. For example, if a plan was in endangered status for the plan year ending December 31, 2020, the plan can elect to retain its endangered status from 2019, despite any changes in other financial circumstances. In addition, ARPA provides plans that are in endangered or critical status and that have already implemented funding improvement plans or rehabilitation plans, respectively, with the option to extend those plans by five years to allow more time to reach their funding targets. This allows plans to delay taking any action to offset losses incurred as a result of the COVID-19 pandemic.
Relatedly, ARPA also allows trustees of underfunded plans to elect to amortize experience losses related to COVID-19 over 30 years (rather than the current 15) for either or both of the two plan years ending after February 29, 2020. In addition, investment losses, losses due to reductions in contributions or employment, and deviations from assumed retirement rates can be recognized over the extended period. Trustees of eligible plans may also elect to smooth asset losses incurred in either or both years over a period of 10 years (rather than 5) in determining the actuarial value of assets. Essentially, this relief allows multiemployer pension plans to reduce detrimental COVID-19-related financial losses in a given year’s annual accounting.
That said, ARPA’s relief is subject to various limitations. Certain of these elective provisions are available only if the plan is not receiving the financial assistance described below and otherwise passes a solvency test. In addition, the plan may not improve benefits and simultaneously reap relief provided for under ARPA, unless the plan’s actuary certifies that certain tests have been met.
Financial Assistance to Multiemployer Pension Plans
Of particular note, ARPA also provides relief in the form of a lump sum cash payment to severely distressed plans. The law establishes a special financial assistance program that provides eligible underfunded multiemployer pension plans with direct financial support from the PBGC to help plans pay their participants’ benefits through 2051. The relief, however, applies only to plans that are severely financially distressed and that meet one or more of the following criteria:
“the plan is in critical and declining status … in any plan year beginning in 2020 through 2022”;
the plan has been previously approved for “a suspension of benefits” under the Multiemployer Pension Reform Act of 2014 (“MPRA”);
the plan is in critical status, as certified by an actuary, for “any plan year beginning in 2020 through 2022,” with a current liability funded percentage below 40% and with the plan having a ratio of active plan participants to inactive plan participants of less than two to three; and/or
“the plan became insolvent … after December 16, 2014, and has remained so insolvent and has not been terminated as of [March 11, 2021].”
The deadline for plans to apply for special financial assistance is December 31, 2025, with revised applications due no later than December 31, 2026. ARPA allows the PBGC to prioritize applications from plans that are within 5 years of failure, have unfunded liabilities eligible for guarantee by PBGC in excess of $1 billion, or have previously implemented benefit suspensions. The PBGC may restrict applications to such priority plans during the 2-year period following ARPA’s enactment. Under ARPA, the PBGC has 120 days to review an application, after which the application will be deemed to be approved if the PBGC has not acted on it.
Plans in critical and declining status and insolvent plans that receive assistance must reinstate suspended benefits. In addition, the plans must provide participants and beneficiaries with retroactive payments―either in a lump sum or in level monthly payments over five years―for past benefits that were suspended (i.e., not paid).
Of importance, ARPA does not require multiemployer pension plans receiving financial assistance to repay the PBGC for any amount of the financial assistance payment; however, plans may use the financial assistance payments only for such things as benefit payments and plan expenses.
As explicitly directed by ARPA, the PBGC must publish regulations or guidance regarding the law by July 9, 2021 (i.e., within 120 days of ARPA’s March 11, 2021 enactment), to establish conditions plans must meet to receive financial assistance payments. These may include, for example, conditions relating to increases in future accrual rates and any retroactive benefit improvements, allocation of plan assets, reductions in employer contribution rates, diversion of contributions to, and allocation of expenses to, other benefit plans, and withdrawal liability. In addition, the PBGC may require repayment of some or all of the financial assistance payments, if a plan fails to satisfy the required conditions.
ARPA’s Impact on Employers
ARPA’s primary impact on employers is to call their attention to anticipated regulatory developments and potential changes in plans’ policies resulting from plan elections allowed by ARPA discussed earlier in this article. As previously stated, Congress has directed the PBGC to issue “regulations or guidance” over the coming months, and more clarity on the potential impact of ARPA on multiemployer pension plans and employers is expected. In the meantime, employers that are contributing to a multiemployer pension plan that elects one or more elements of ARPA’s funding relief should monitor possible changes in the plan’s policies affecting employer contributions. Similarly, employers that are contemplating withdrawal from a plan that elects one or more elements of ARPA’s funding relief, or that receives financial assistance under ARPA, should also monitor the directions of ARPA rulemaking and guidance, and the effect they may have on how the plan deals with employers that are withdrawing from the plan and on withdrawal liability calculations.