Treasury Issues Final Suspension of Benefits Regulations under MPRA
On April 28, 2016, the Department of the Treasury (Treasury) issued final regulations on the suspension of benefits under the Multiemployer Pension Reform Act of 2014 (MPRA). A copy of the final regulations (which we will refer to herein as the regulations) is at this link. The regulations, which reflect several important changes from the proposed and temporary regulations, in combination with Treasury's recent rejection of the Central States Teamsters Pension Plan's application to suspend benefits, provide insight into how Treasury will evaluate applications to suspend benefits.
Action Needed Now: Sponsors of plans in critical and declining condition that are considering benefit suspensions to avoid insolvency should review the regulations to determine whether their plans can meet the criteria for benefit suspensions.
Background: MPRA changed the law to permit plan sponsors of multiemployer plans certified as "critical and declining" to apply to the Secretary of the Treasury for approval to suspend (i.e., reduce) benefits to avoid insolvency. A "suspension of benefits" is the temporary or permanent reduction of any current or future benefits for any participant or beneficiary under the plan, including persons in pay status. For an overview of the suspension of benefits rules, see Cheiron's Client Advisory at this link.
On June 19, 2015, Treasury and the IRS published both temporary and proposed regulations ("June 2015 regulations") regarding suspensions. The June 2015 regulations set forth the requirements for a plan sponsor to apply for a suspension of benefits and for Treasury to process such an application. On June 19, 2015, the IRS also released Rev. Proc. 2015-34, which details application procedures for a proposed suspension of benefits and contains a model notice to be sent to participants. A copy of Cheiron's prior alert discussing the June 2015 regulations and Rev. Proc. 2015-34 is at this link.
On September 2, 2015, Treasury and the IRS published temporary and proposed regulations on the provisions giving participants the right to vote on a proposed suspension (the "September 2015 regulations"). A copy of Cheiron's prior alert on the September 2015 regulations is at this link.
Also, on February 11, 2016, Treasury and the IRS published proposed regulations regarding the specific limitation on a suspension of benefits under Code § 432(e)(9)(D)(vii).1 On May 5, 2016, final regulations were published regarding this limitation (which, because of its limited impact, will not be discussed further in this alert).
The regulations adopt the provisions of the June 2015 regulations and the September 2015 proposed regulations (collectively, the "2015 regulations") with certain changes and clarifications.
Key Changes under the Regulations: The regulations contain both significant changes in the rules for determining whether a plan application qualifies for proposed suspension and clarification of several other rules.Significant Changes in the Requirements to Qualify for Suspension:2
- Actuarial Basis for Projections: The projection of the cash flows for a plan applying for benefit suspensions is crucial in determining whether the plan's proposed suspensions are reasonably expected to avoid insolvency. In this regard, the assumptions used to perform the cash flow projections are critical. The regulations replace the requirement that the actuarial projections be reasonable in accordance with the rules of Code § 431(c)(3) with a requirement that each of the actuarial assumptions and methods used, and the combination of those actuarial assumptions and methods, must be reasonable, taking into account the experience of the plan and reasonable expectations. In particular, to be reasonable, the actuarial assumptions and methods must be appropriate for the purpose of the measurement, i.e., projection of the plan's cash flows. In that respect, the preamble to the regulations states that use of an investment return assumption based on the time-weighted average of expected returns over the long term would not result in an "appropriate projection" of the plan's actual cash flows to the extent that the short-term expected returns (when plan assets are at their highest level) are anticipated to be larger or smaller than the long-term returns.
CHEIRON OBSERVATION: Critical and declining plans will usually be experiencing negative cash flows, which means that the near-term returns when assets are at their highest level are much more significant in determining the actual cash flows of the plan. Accordingly, it may be appropriate to consider using a select and ultimate set of interest assumptions when performing the cash flow projections.
- The regulations, which provide that the actuary may rely on information from the Trustees in projecting the future contribution base of the plan, also require demonstrations of the sensitivity of the projections to variances in experience in contribution base and investment return. The application must include projections based on an investment return 1% and 2% lower than that assumed in the actuarial certification, and also a projection of the results if the contribution base continues to change at the same rate as experienced by the plan over the past 10 years and also if that trend is a 1% steeper decline. With respect to calculating the sensitivity of actuarial projections to the assumptions of future contribution base units, the regulations clarify that it is permissible for the projections to be made without reflecting any adjustments to the projected benefit payments that result from those alternative assumptions regarding future contribution base units.
CHEIRON OBSERVATION: It is not clear if the sensitivity analyses on the different investment returns and different contribution base trends are to be performed independently or in combination with each other. Logic would suggest that all combinations should be shown.
- Plan Sponsor Determinations: A plan sponsor may not suspend benefits unless the plan sponsor makes initial and annual determinations that the plan is projected to become insolvent unless benefits are suspended, although all reasonable measures to avoid insolvency have been taken. For both the initial and annual determinations, the standard, as clarified, is whether, absent a suspension of benefits, the plan would not be projected to avoid insolvency. The plan sponsor must keep a written record of its determination that all reasonable measures have been and continue to be exhausted, detailing the factors on which it bases the determination and the reasons therefore.
Equitable Distribution of Benefit Suspensions: The regulations contain extensive rules and examples regarding benefit suspensions that are not the same for all participants. Such suspensions satisfy the equitable distribution requirement only if:
- The participants and beneficiaries are divided into separate cohorts that are defined by the consistent treatment of persons within the each cohort, e.g., participants with benefit reductions of 10%, participants with benefit reductions of 20%, and participants with benefit reductions of 30%;
- The difference in treatment among the cohorts is based on reasonably selected relevant factors; and
- The difference in treatment is based on a reasonable application of those factors.
The factors that may be used include those in the statute plus any other relevant factor selected by the Trustees. The statutory factors are:
- Age and life expectancy
- The length of time the benefits have been in pay status
- The amount of benefits
- The type of benefit, such as normal retirement, early retirement, or survivor
- The extent to which the benefit is subsidized
- The extent to which an individual has received post-retirement increases
- The history of benefit increases and reductions
- The number of years to retirement
- Differences between active and retiree benefits
- The extent to which active participants are likely to withdraw support for the plan thereby increasing employer withdrawals and creating a risk of additional benefit reductions
- The extent to which an individual's benefits are attributable to service with a withdrawn employer that failed to pay its full withdrawal liability
The regulations require that the difference in treatment of the cohorts be reasonably related to the factor used to define the group. Examples include smaller benefit reductions for persons with lesser benefits or older persons. Correspondingly, use of the same factors to justify greater reductions for those persons who are younger or with lesser benefits would be unreasonable and violate the requirement that the benefit suspensions be equitably distributed.
Special rules apply when the pre-suspension benefits of participants are determined under a different benefit formula than the post-suspension benefits. In that case, all participants whose benefits are determined under a uniform pre-suspension benefit formula and whose post-suspension benefits are determined under a different post-suspension benefit formula are treated as single group, and the determination whether the suspensions are equitably distributed is based on a comparison of the pre-suspension benefits with the post-suspension benefits. For purposes of assigning individuals to groups, differences in benefits that occur because of different retirement ages do not cause the individual to be assigned to a different group, e.g., the early retirement benefit is determined under a uniform set of early retirement factors.
CHEIRON OBSERVATION: It is not clear how a plan sponsor can prove that suspensions are distributed equitably where the plan has multiple different groups based on various factors.
- Suspension Not Materially in Excess of Level Necessary to Avoid Insolvency: To determine whether a proposed suspension is not materially in excess of the amount needed to avoid insolvency, the regulations require the plan to test whether a suspension that is less than the proposed suspension by the greater of 5% of the amount by which benefits are reduced or 2% of the unreduced benefit will enable the plan to avoid insolvency. The effect of these lesser reductions must be tested over a period that is no shorter than the period used to demonstrate that the proposed suspensions are expected to avoid insolvency.
- Individual-Level Contingencies: Generally, if a plan provides that the amount of a suspension will change contingent upon the occurrence of any other specified future event, condition, or development, then the terms are inconsistent with Code § 432(e)(9). The regulations permit a suspension to take into account individual-level contingencies (such as retirement, death, or disability) for individuals who have not commenced benefits before the effective date of the suspension, provided that Code § 401(a) is satisfied. The effective date for a suspension subject to individual-level contingencies is the first date as of which the individual's entitlement to benefits is reduced as a result of the implementation of the suspension, regardless of whether the individual is eligible to commence benefits at that date.
- Retiree Representative: The regulations clarify that the role of the retiree representative begins at the time he or she is selected and continues throughout the suspension approval process. The plan must pay the reasonable expenses incurred by the retiree representative, including expenses incurred for communications with retired and deferred vested participants and beneficiaries.
- Limitations on suspensions: After applying the individual and aggregate limitations on a suspension of benefits under Code § 432(e)(9)(D), the overall size and distribution of the suspension is subject to the aggregate limitations of Code §§ 432(e)(9)(D)(iv) and (vi), and Treas. Reg. 1.432(e)(9)-1(d)(5) and (d)(6).
- Age-Based Limitations: With respect to a benefit payable to a beneficiary or alternate payee, the regulations clarify that the relevant date for determining the age of a participant, beneficiary, or alternate payee, as applicable, is the end of the month that includes the effective date of the suspension, rather than the effective date of the suspension.
- Disability-Based Limitation: A plan sponsor is permitted to use a broader definition of disability (or to protect beneficiaries of disabled individuals) when designing a suspension of benefits, provided that the suspension otherwise meets the applicable requirements. The regulations include a new example of such suspension design.
- Limitations on Benefit Increases for Those Not in Pay Status: The regulations require that the present value of the total liabilities for a benefit improvement for participants and beneficiaries in pay status is not less than the present value of the total liabilities for a benefit improvement for participants and beneficiaries who were not in pay status by that date. For this purpose, the present value is the present value as of the first day of the plan year in which the benefit improvement is proposed to take effect. The regulations clarify that the actuarial assumptions and methods used for the actuarial projections that are required must each be reasonable, and the combination of the actuarial assumptions and methods must be reasonable, taking into account the experience of the plan and reasonable expectations. In the case of a benefit increase that is an increase in the rate of future accrual, the calculation of present value of the liabilities for the benefit improvements must take into account the increase in accruals for current participants for all future years.
- Notice of Proposed Suspension: Code § 432(e)(9)(F) provides that the notice of proposed suspension must be given "concurrently" with the submission of an application to the Treasury Department, but does not specify a precise timeframe for satisfying this requirement. The regulations interpret "concurrently" to permit the sponsor to provide written notice a few days earlier than the electronic submission of the application (in order for the mailed notice and application to be received on or about the same date). The regulations thus permit a plan sponsor to give notice no earlier than four business days before and no later than two days after the submission of its application.
- Special Rules for Systemically Important Plans: The regulations clarify that the $1.0 billion threshold for systemically important plans is indexed for inflation and extend the deadline from 30 days to up to 44 days after Treasury's determination that the plan is systemically important for the Participant and Plan Sponsor Advocate to submit any recommendations to the Treasury.
CHEIRON OBSERVATION: The regulations provide more detailed guidance on the requirements for designing and getting approval of a suspension of benefits to avoid insolvency. Suspensions can be extremely simple, such as a 20% reduction in every benefit, or complicated, such as imposing different degrees of suspension on different groups of participants, e.g., participants whose employer failed to pay withdrawal liability vs. other participants. The regulations do not limit the number of different amounts of suspension, but they do require that each different group be defined by reference to one of the statutory criteria (or another relevant criterion chosen by the plan sponsor). Trustees contemplating using a suspension of benefits to avoid insolvency will need to decide how those suspensions are to be applied to different groups of participants, and be able to justify any differences in the degree of suspension.
Cheiron pension consultants can assist plan sponsors in determining whether benefit suspensions are a viable option for plans in critical and declining status and assist in developing a plan of suspensions that complies with the regulations.
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.
1 This specific limitation governs the application of a suspension of benefits under any plan that includes benefits directly attributable to a participant's service with any employer that has, prior to December 16, 2014, withdrawn from the plan in a complete withdrawal, paid its full withdrawal liability, and, pursuant to a collective bargaining agreement, assumed liability for providing benefits to participants and beneficiaries equal to any benefits for such participants and beneficiaries reduced as a result of the financial status of the plan. To the best of our knowledge, this provision of the law and the regulations applies only to the Central States plan. These final regulations are at this link.
2 This includes the requirement that the plan continue to meet the qualification requirements under Code § 401.