Multiemployer funding relief enacted; Trustee decisions required
On Friday, June 25, 2010, President Obama signed the "Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010." The law provides pension funding relief for single-employer plans and multiemployer plans. This alert discusses the funding relief for multiemployer plans.
Highlights of the relief are:
- 30-year amortization, as specified, of the net investment losses incurred in either or both of the first two plan years ending after August 31, 2008,
- 10-year smoothing period for the difference between expected and actual returns for either or both of the first two plan years ending after August 31, 2008,
- 130% of market value upper limit on the actuarial value of plan assets for either or both of the first two plan years ending after August 31, 2008.
Under the law, the relevant net losses are amortized starting with the year recognized and ending 30 years after the year in which they were incurred. Also, the law provides that the net investment losses are to be determined in the manner prescribed by the Secretary of the Treasury on the basis of the difference between actual and expected returns (including any difference attributable to any criminally fraudulent investment arrangement).
Cheiron Observation: Due to a technical flaw in the wording of the law, the amortization period for the first amortization base is 29 years not 30. This is because a loss incurred in 2008 (assuming a calendar plan year) will be first recognized in 2009 and the 30-year period would end in 2038.
Cheiron Observation: It is not clear from the law how investment losses incurred in the relevant plan years are to be recognized in plan years following a plan year where the recognition under the asset valuation method is affected by the 120% or 130% of market value limitation on the assets. There are several possible ways to handle this situation.
The law provides that the asset valuation method changes are deemed approved by the Secretary of the Treasury. Also, a special rule provides that if a plan elects both the relief for net investment losses and one of the asset valuation method changes, then the reduction in unfunded accrued liability resulting from the asset method change is amortized over 30 years rather than the period that would otherwise apply.
Cheiron Observation: This special rule for 30-year amortization of the reduction in unfunded liability is to put the relief from the asset valuation change on the same basis as the treatment of net investment losses. In effect, the special rule lessens the positive impact that the change in asset valuation method might otherwise have.
There are two conditions for the 30-year amortization and asset valuation method relief:
- the plan actuary must certify that the plan is projected to have sufficient assets to timely pay expected benefits and anticipated expenditures over the amortization period (the "solvency test") taking into account the funding relief, and
effective June 25, the date of enactment, there can be no plan amendment increasing benefits for either of the two plan years following a year for which relief is elected unless the plan actuary certifies that
- the increase is paid for out of additional contributions not allocated to the plan immediately before the election of the relief, and the plan's funded percentage and projected credit balances for the 2 plan years are reasonably expected to be at least as high as such percentages would have been if the benefit increase had not been adopted, or
- the amendment is required as a condition of plan qualification or to comply with other applicable law.
The plan sponsor is to provide notice of the application of the relief to plan participants and beneficiaries, and inform the Pension Benefit Guaranty Corporation (PBGC) of such action in a form and manner to be prescribed.
Any election to apply the 30-year amortization and asset valuation relief is disregarded in determining the zone status of a plan for the first plan year beginning after August 31, 2008. That is, for a calendar year plan, the 2009 certification is made without regard to the relief, but the certifications for 2010 and following years can take into account the relief.
Cheiron Observation: The law makes no specific provision for recertifying the zone status of a plan for other years. Thus, any 2010 certification already made might have to stand, although the rehabilitation plan or funding improvement plan could be less onerous due to the relief.
Trustees Need to Make Decisions
Trustees of plans will need to decide whether to elect relief and/or change the asset valuation method under the new law. Because the government filings for 2009 calendar year plans are due not later than October 15, 2010, there is not much time for trustees to decide on a course of action.