PBGC Final Rules on Special Financial Assistance: IRS Issues Revenue Ruling to Address Merger Question
The Pension Benefit Guaranty Corporation (“PBGC”) issued final regulations for the special financial assistance program under the American Rescue Plan Act (the Act). The final regulations make important changes to the provisions that were published last year in the PBGC’s Interim Final Rule.1 In addition, the Internal Revenue Service (IRS) issued Revenue Ruling 2022-13 (the revenue ruling) to address an issue concerning a plan that received special financial assistance that merged into another plan. This alert describes the important changes made by the final regulations on the special financial assistance program and the issue addressed by the revenue ruling.
Cheiron Observation: While the final regulations are a step in the right direction, they may still leave many plans receiving assistance insolvent by 2052. Plans that suspended benefits under the Multiemployer Pension Reform Act of 2014 (MPRA) will be able to restore suspended benefits and remain solvent.
The American Rescue Plan Act added section 4262 to ERISA to provide financial assistance to financially troubled multiemployer plans. On July 9, 2021, PBGC issued an Interim Final Rule setting forth the requirements for special financial assistance applications and related restrictions. The Interim Final Rule received many comments. PBGC has made substantial modifications in the final regulations after considering the comments.
The Final Regulations
The significant changes in the final regulations are:
- the determination of the date for calculating the amount of special financial assistance (“SFA”);
- the methodology to calculate the amount of SFA;
- the permissible investments of SFA funds;
- the withdrawal liability computation rules that apply to a plan that receives SFA; and
- the conditions applicable to a plan that merges with a plan that receives SFA.
The measurement date is the date used to calculate the amount of SFA. The final regulation changes this date from “the last day of the calendar quarter immediately preceding the date the plan’s application was filed” to “the last day of the third calendar month immediately preceding the date the plan’s initial application for special financial assistance was filed.” The PBGC is also allowing plans to file a “lock-in” application that will freeze the date even if a subsequent application is filed.
Calculation of the Amount of SFA
The PBGC made the most important changes in the methodology and factors used for calculating the amount of SFA. The overall methodology was changed from a present value approach to a projection approach. The projection approach applies differently for plans that suspended benefits under MPRA (MPRA plans) versus plans that did not suspend benefits and are therefore not MPRA plans. In general, the projection approach for plans that are not MPRA plans requires a projection to the end of each plan year through 2051 to test that the projected assets are greater than or equal to zero, and the amount of SFA is the lowest dollar amount (not less than zero) that would meet the test.
For MPRA plans, the same projection is made but, in addition, the projection is also made to test whether, as of the last day of the plan year ending in 2051, the projected assets are greater than the amount of projected assets as of the last day of the preceding plan year. For MPRA plans, the amount of SFA is the greatest of (1) the amount needed if the plan was not an MPRA plan, (2) the amount needed using the special projection for MPRA plans, and (3) the present value of benefits paid and expected to be paid attributable to the reinstatement of benefits previously suspended.
The Interim Final Rule prescribed one interest rate to be used for determining the present value of benefit payments, expenses, and contributions to determine the amount of assistance needed. Under the final regulation, the projection of investment return for projecting assets is different for SFA assets and non-SFA assets, and takes into account the requirement that SFA funds be kept in a separate account to be invested conservatively, which will result in a lower rate of return for those assets.
Cheiron Observation: The effect of this change is to allow plans that suspended benefits to receive sufficient SFA funds to restore all suspended benefits and be able to remain solvent past the 2051 plan year.
The final rule allows funds to invest up to 33% of the SFA funds in what PBGC designates as return seeking investments, which generally include publicly traded equities and equity funds.
The final rule provides that the PBGC interest rate for valuing terminating plans be used to determine the value of vested benefits for withdrawal liability, and that the SFA assets be included in the calculation of unfunded vested benefits on a phased-in basis over the projected period they will be used. Thus, if the SFA assets are expected to be able to pay benefits for 20 years, their inclusion in the calculation of unfunded vested benefits will be phased in over 20 years. The final regulation also retains the requirement that any settlement of withdrawal liability of $50 million or more must be submitted to PBGC for its approval.
Conditions for Merged Plans
The final rule provides that the restriction on future benefit increases, rules regarding the allocation of assets, and allocation of plan expenses do not apply to the surviving plan after a merger, and that plan can request a waiver of restrictions on retroactive benefit increases and contribution decreases.
Rev. Rul. 2022-13
The law provides that a plan that receives SFA remains in critical status. Rev. Rul. 2022-13 provides that if such a plan merges into another plan that has not received SFA and that plan is the surviving plan, the merged plan’s status will not be deemed to be critical simply as a result of absorbing the plan that received SFA.
Cheiron pension consultants can assist you in determining the impact of the final regulations on your plan.
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.
1See the prior Cheiron pension alerts of March 21, 2021, and July 1, 2021, for more information on the special financial assistance program and the PBGC’s Interim Final Rule.