New Multiemployer Pension Reform Proposal Released
On November 20, 2019, the Chairmen of the Senate Finance Committee and the Senate Health, Education, Labor, and Pensions Committee released a new white paper and accompanying technical explanation proposing multiemployer pension reform. The proposal, called the "Multiemployer Pension Recapitalization and Reform Plan", would substantially modify the multiemployer provisions of the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code (IRC). The text of the white paper can be found at this link and text of the technical explanation can be found at this link.
This alert briefly describes our current understanding of some of the key provisions of the proposal.1 The proposal has an uncertain future and may well draw opposition because the changes would have a significant impact on all multiemployer plans, participants, and beneficiaries. We encourage you to discuss the impact with your Cheiron consultant.
Comments on the reform proposal may be submitted to: MultiemployerReform2019@finance.senate.gov.
Changes to PBGC Authority and Guarantees
- Expand the partition authority of the PBGC:
- Three plans, the Central States Plan, the Road Carriers Local 707 Pension Plan, and the United Mine Workers of America (UMWA) plan would be automatically eligible for partition.
- Other plans would need to satisfy certain eligibility criteria.
- PBGC must determine that the plan sponsor has adopted all reasonable measures to avoid insolvency, including benefit suspensions no greater than 10 percent.
- Increases the PBGC maximum guarantee amount to $56 a month per year of service, or $20,160 a year for 30 years of service, up from $12,870 a year currently.
- Requires plans projected to become insolvent within 5 years to terminate (cease crediting service for any purpose), and reduce benefit payments to the guarantee level.
- Substantially increases the PBGC multiemployer program revenue by:
- Raising the Flat rate premium per participant from $29 to $80 per participant,
- Adding a Variable rate premium based upon 1% of a plan's unfunded "current liability," which uses a low interest rate, capped at $250 per participant,
- Imposes a $2.50 per month premium on both the employer and union (total of $5 per month) for each covered active employee,
- Requires monthly retiree premiums in the amount of either 3%, 5%, 7% or 10% of benefit payments based upon the plan's zone and partition status except that
- Retirees and beneficiaries over 80 years old and disability retirees would have no co-payments, and
- Phase-out of co-payments is to be provided from age 75 to age 80.
- Caps the discount rate used for minimum funding calculations at the lesser of the 24-month average of the 3rd segment rate plus 2%, or 6%, but apply a 5-year phase-in. (Most recent 24-month average is 4.33% so the 6% would apply currently.)
- Revises and updates the zone status as follows:
- Unrestricted status – Not endangered, critical, or declining, and either (1) the projected funded percentage in 15 years is at least 115% or (2) "current liability" funded percentage for the current plan year is at least 80%,
- Stable status – Not in unrestricted, endangered, critical, or declining status,
- Endangered status – Not critical or declining and either (or both) funded percentage less than 80% or projected funding deficiency in current or next 9 years (no more seriously endangered),
- Critical status – Not in declining status and either (i) has a funded percentage less than 65% at the beginning of the plan year; (ii) has a projected funding deficiency in current or next 6 years, or (iii) the plan's projected funded percentage in 15 years is less than 80%, and
- Declining – Plan is projected to be insolvent within the next 30 years or was in critical status for the immediately preceding plan year and is operating under a rehabilitation plan that targets forestallment of insolvency (as opposed to emergence).
- Provides benefit increase restrictions based upon new zone status including, in some cases, restrictions on increases because of increased compensation or higher contribution rates.
Changes to Withdrawal Liability Rules
- Modifies the withdrawal liability rules to replace calculations under current law with payments based upon:
- A liability measurement based on the funding discount rate (as modified by proposal),
- An annual payment equal to the highest contribution rate in the last 10 years multiplied by the highest contribution base units in past 20 (current law uses 3 years) years, but not less than the highest amount the employer has contributed in past 20 years, and
- The number of payments limited based on plan's funding status.
Plan Governance, Reporting, and Other Changes
- Provides governance conditions for partitioned plans including the authority of the PBGC to appoint an independent trustee, or remove the board of trustees if past actions are deemed to have been mismanagement of plan assets, and also places limitations on the service of the trustees and the executive director.
- Directs the PBGC to revise reportable events for multiemployer plans and to include advance notice of creation of new plans that substantially overlap with the active participants in a plan.
- Substantially modifies the rules for annual funding notices, notices of zone certification, and the actuary's certification of zone status.
- Modifies the MPRA suspension rules including changing the voting rules so that only returned ballots are counted.
- Establishes a "composite plan" that is exempt from PBGC guarantees, premiums, withdrawal liability, and funding requirements. This plan limits a participating employer's annual contribution to a fixed negotiated level with investment risk fully borne by plan participants via benefit adjustments.
Changes to PBGC Premiums
Changes to Minimum Funding and Zone Status
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 There are inconsistencies and ambiguities in some parts of the technical explanation. We have based our descriptions on our best current understanding of the proposal.