Modification to Procedures for Applications for Multiemployer Plan Benefit Suspensions
The Department of the Treasury (Treasury) has issued Revenue Procedure 2017-43, which modifies the application procedures for multiemployer plans that want to reduce benefits in order to avoid insolvency. Some of the changes that the revenue procedure makes to the information required to be submitted should modestly reduce the burden of preparing the application. The most significant change in the procedures involves the requirement to justify actuarial assumptions and provide detailed rationale for those assumptions. Treasury's denial letters cited "unreasonable" assumptions as a factor in reaching its decisions. The new procedure not only requests more detail regarding assumptions, but signals that the Treasury expects fewer applications. See our discussion below.
Action Required: Suspension applications filed on and after September 1, 2017 are required to comply with Revenue Procedure 2017-43.
The Multiemployer Pension Reform Act of 2014 (MPRA) created rules under which "critical and declining" multiemployer plans could apply to Treasury for permission to suspend (i.e., reduce) benefits in order to avoid insolvency. On April 28, 2016, Treasury published final regulations implementing those rules and issued Revenue Procedure 2016-27 prescribing the rules for submitting an application. Revenue Procedure 2017-43 replaces and supersedes Revenue Procedure 2016-27.
EXPERIENCE TO DATE
So far, fifteen plans have applied to reduce benefits1, but the Treasury Department has approved only two of the applications. Two applications were withdrawn and six are currently pending. In the other five cases, Treasury denied the requests finding issues with the actuarial assumptions (which were not necessarily the sole issues) used to demonstrate that the proposed benefit reductions satisfied the statutory requirements. The denial letters specifically noted that the actuarial assumptions used to support the application were not, in the Treasury's view, reasonable.
CHANGES IN THE NEW PROCEDURE
The revised procedure reflects Treasury's experience to date in evaluating applications. There are a number of changes not involving actuarial assumptions, and a significant change involving actuarial assumptions.
Changes Not Involving Actuarial Assumptions
Significant changes not involving actuarial assumptions include:
- Sample calculations showing the effect of the guarantee and disability-based limitations are only required for an individual currently receiving benefits in each category, a contingent beneficiary of such an individual, and a future retiree.
- Clarifications have been added regarding the age for categories for sample calculations of the age-based limitations, and the different categories of individuals with respect to whom sample notices must be provided as part of the application.
- The application must include a description of why the plan is in critical and declining status, and provide the accountant's report from the most recently filed Form 5500 (this is an addition to the requested information).
- The demonstration that the proposed benefit suspensions are equitably distributed has been eliminated for applications filed in conjunction with a request to the Pension Benefit Guaranty Corporation (PBGC) to partition the plan.
- Withdrawal liability payments must be broken down into employers who have already withdrawn and projected withdrawals, with the schedule of expected payments shown for each group.
Changes Involving Actuarial Assumptions -- New Appendix B
The most significant change in the procedure concerns the actuarial assumptions. Prior procedures required the application to describe the actuarial assumptions used in making projections of the plan's financial status. The revised procedure contains a new Appendix B, "Information on Actuarial Assumptions and Methods." The new Appendix requires a detailed description of each of the actuarial assumptions used to project the plan's status, including supporting data, the plan's past experience regarding each assumption, and justification of the assumptions in light of the experience.
For example, the application must include an allocation of the components of the target investment portfolio among 16 asset classes listed in the procedure, the expected return for each asset class, the standard deviation for each asset class, and the correlations among the classes. Detailed information is also required for the assumptions regarding mortality, age and form of benefit commencement, projected contributions, and new entrants.
Treasury carefully and rigorously evaluated the applications for benefit reductions submitted to date and found fault with many of the assumptions used to justify the proposed reductions. The revised revenue procedure asks for much more detail and support for the actuarial assumptions. Accordingly, professionals that work with critical and declining plans and who contemplate applying for permission to reduce benefits should carefully study the new requirements regarding actuarial assumptions and satisfy themselves that they have complete support for their assumptions and projection methodology before proceeding.
What is also noteworthy is the change in the number of expected respondents (applicants). The prior revenue procedure expected 28 respondents. Revenue Procedure 2017-43 estimates that the total number of respondents will be 10. We have estimated that there are approximately 110 multiemployer plans that are in critical and declining status. While the revised estimate may reflect the fact that 15 plans already have applied for a suspension of benefits, it appears that Treasury is not expecting many more applications from this group of plans.
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1 Three of the plans submitted applications, withdrew the applications, and then re-submitted the applications with revisions (which is why 18 applications are shown on Treasury's website).