PBGC Issues Final Partition Rule
On December 23, 2015, the Pension Benefit Guaranty Corporation (PBGC) published a final regulation on the application process and notice requirements for partitions of multiemployer plans under the Multiemployer Pension Reform Act of 2014 (MPRA). This final regulation makes changes to the interim regulation published in June 2015, but the preamble explanation accompanying the final regulation emphasizes that the PBGC will examine closely whether all reasonable measures have been exhausted in evaluating any application for partition.
Action Needed: Sponsors of multiemployer plans that are considering a partition should take notice of the final regulation and the changes that have been made.
Prior to MPRA, the PBGC could partition a plan only based on finding that a bankruptcy or similar proceeding caused a substantial reduction in plan contributions, that contributions would need to be increased significantly to meet the funding rules, that the plan was likely to become insolvent, and that partition would avoid insolvency. Only the benefits attributable to service with the bankrupt entity(ies) would be placed in the partitioned portion, which would be treated as a terminated multiemployer plan. Participants in the continuing portion of the plan were not required to have their benefits reduced.
MPRA amended the partition rules to change the circumstances under which PBGC could partition a plan. The new rules allow the PBGC to partition a plan that is in critical and declining status even if there is no employer bankruptcy. The revised provisions contain extensive rules governing applications for partition, notice to participants and interested parties, and requirements for certain PBGC findings as a precondition for the partition of a plan. In addition, benefits of all participants must be reduced.
In June 2015, the PBGC published an interim regulation to implement the new partition scheme and now has finalized that regulation.
Modifications of the Interim Rule
In response to comments received regarding the interim rule, the PBGC made several technical and clarifying changes to the interim rule. These are:
- Application Missing Required Information. An application that is missing some of the required information is not automatically deemed incomplete. Rather, the final regulation gives PBGC the discretion to go forward even if the application does not contain all of the required information.
Cheiron Observation: We expect that the PBGC will only go forward in instances where the required information is not available and is not critical for making the determinations required of PBGC by the law.
- Determination That All Reasonable Measures Have Been Exhausted. PBGC notes that the regulation requires the applicant to submit sufficient information to support its determination that all reasonable measures have been exhausted. Simple assertions will not form a sufficient basis for the PBGC determination. Rather, the applicant must provide a detailed description of the measures the plan took to avoid insolvency, those measures that were considered but not taken, and "'all relevant documentation' relating to those determinations."
Cheiron Observation: In most instances, the conclusion by the Trustees that they have exhausted all reasonable measures rests on a determination that the employers will not or cannot tolerate having the contribution rate raised to a level sufficient to avoid insolvency. The PBGC discussion makes it clear that the application must contain sufficient documentation information to support the Trustees' conclusion, and the PBGC will make its own determination whether all reasonable measures have been exhausted. The PBGC's determination will be made after consultation with the Participant and Plan Sponsor Advocate. This raises the questions of the level of documentation needed to support the Trustees' conclusions and the consequences of a negative determination by the PBGC.
- Actuarial and Financial Information. The final rule is revised to require the application to include benefit payment information separately for each of the following participant categories: active; retiree; terminated vested; and beneficiary. This is to permit the PBGC to determine the aggregate amount of benefits subject to transfer to the terminated plan as a result of the partition.
- Projections. The final rule requires the application to include long-term projections of pre-partition benefit disbursements at the guarantee level and, if relevant, at the maximum suspendable benefit level.
- Participant Census Data. The final regulation requires the participant census data provided with the partition application to identify the gender of each participant.
- Initial Review Deadline. The final regulation imposes a 14 day period for the PBGC to complete its initial review of an application to determine if it is complete.
- Conditional Approval. The final regulation clarifies that in cases in which a partition application is made in combination with an application for suspension of benefits, the effective date of the proposed partition will be prior to the effective date of any suspension of benefits, thus satisfying ERISA section 305(e)(9)(D)(v), which requires that the partition occur before the effective date of any suspension of benefits. Furthermore, PBGC reports that Treasury has advised that the PBGC's issuance of a conditional approval of a partition before the end of Treasury's review of the suspension application will satisfy this statutory requirement.
Although the final rule is little changed from the interim regulation, PBGC's discussion raises questions regarding the extent to which the PBGC will challenge the Trustees' determination that all reasonable measures have been exhausted. The parties to any partition application therefore should make a thorough record of all the elements they considered in reaching their determinations including the reasons for rejecting various options. It is also not clear as to the ramifications of a decision by the PBGC that all reasonable measures have not been exhausted. Accordingly, the parties may wish to be very sure of their ground before applying for a partition order.
Cheiron consultants can assist you in assessing whether your plan is a candidate for a partition.
Cheiron is an actuarial consulting firm that provides actuarial and consulting advice. However, we are neither attorneys nor accountants. Accordingly, we do not provide legal services or tax advice.