PBGC Final Rule on Multiemployer Plan Partitions

Practical Law Legal Update w-001-1064 (Approx. 6 pages)

PBGC Final Rule on Multiemployer Plan Partitions

by Practical Law Employee Benefits & Executive Compensation

Multiemployer Pension Plan Partitions under MPRA

The MPRA was enacted in December 2014 and provides significant modifications to multiemployer pension plan rules relating to financially troubled plans (see Legal Update, President Signs Bill Reforming Multiemployer Pension Plan Rules).

Section 122 of the MPRA replaced the existing partition rules with a new framework of rules. As amended by the MPRA, ERISA Section 4233(a)(1) provides that if the plan sponsor of an "eligible multiemployer plan" applies for a partition of the plan, the PBGC must make a determination on the application not later than 270 days after the date the application was filed (29 U.S.C. § 1403(a)(1)) . Under ERISA Section 4233(a)(2), the plan sponsor must notify plan participants of the application within 30 days after submission.

Eligible Plans for Partitions

Under ERISA Section 4233(b), a plan is an eligible multiemployer plan if:

The plan is in critical and declining status (see Practice Note, Multiemployer Pension Plans: Additional Funding Rules for Plans in Critical or Endangered Status).
The PBGC determines that the plan sponsor has taken (or is taking concurrently with an application for partition) all reasonable measures to avoid insolvency.
The PBGC reasonably expects that partition:
- is necessary for the plan to remain solvent; and
- will reduce expected long-term plan losses for the PBGC.
The PBGC certifies to Congress that its ability to meet existing financial assistance obligations to other plans will not be impaired.
The cost of the partition is paid exclusively from the fund for basic benefits guaranteed for multiemployer plans.

(29 U.S.C. § 1403(b).)

Under ERISA Section 4233(c), following the PBGC's approval of a partition application, the PBGC partition order will provide for a transfer to the plan created by the partition order (successor plan) of the minimum amount of the original plan's liabilities necessary for the original plan to remain solvent (29 U.S.C. § 1403(c)). The plan sponsor and plan administrator of the original plan remain the sponsor and administrator of the successor plan.

Partition Withdrawal Liability Rule

ERISA Section 4223 provides a new withdrawal liability rule that provides that if an employer withdraws from the original plan:

Within 10 years following the date of the partition, withdrawal liability is computed under ERISA Section 4201 (29 U.S.C. § 1381) for the original plan and the successor plan.
More than 10 years following the date of the partition order, withdrawal liability is computed under ERISA Section 4201 only for the original plan.

The withdrawal liability is payable to the original plan in both cases. For more information on withdrawal liability generally, see Practice Note, Multiemployer Pension Plans: Withdrawal Liability.

Continuing Payment Obligation

ERISA Section 4223(e)(1) imposes an ongoing benefit payment obligation on the original plan for each participant or beneficiary whose guarantee amount was transferred to the successor plan under the partition order (29 U.S.C. § 1403(e)(1)). The original plan must pay these individuals a monthly benefit for each month in which the benefit is in pay status following the partition in an amount equal to the greater of:

The monthly benefit that would be paid to that individual under the terms of the plan if the partition had not occurred.
The monthly benefit that is guaranteed under Section 4022A.

There are also required benefit improvement payments to the PBGC and a special premium rule.

For more information, see Legal Update, President Signs Bill Reforming Multiemployer Pension Plan Rules: Plan Partitions.

Interim Final Rule

The PBGC issued the interim final rule under MPRA Section 122 to effectuate the changes made by MPRA to ERISA Section 4233. The PBGC worked with the Labor and Treasury Departments to develop the interim final rule.

The interim final rule adds new Part 4233 to the PBGC regulations (29 C.F.R. § 4233), and it covers, among other topics:

The application process.
The initial review of the application.
Notice requirements.
The PBGC's determination process.

The procedures outlined by the rule will be the exclusive means by which the PBGC reviews multiemployer pension plan partition applications. The PBGC will review partition applications on a case by case basis according to the criteria in ERISA Section 4233(b) (29 U.S.C. § 1403(b)). .

Part 4233 includes a glossary of terms and a series of regulations that provide the various requirements for the partitioning process, with a strong emphasis on the application requirements and notice requirements.

For a summary of the provisions of the interim final rule that remain unchanged, see Legal Update, PBGC Issues Interim Final Rule on Multiemployer Pension Plan Partitions under the MPRA.

Regulatory Changes to Interim Final Rule

There were minor changes made from the interim final rule regarding:

Application requirements.
Required actuarial and financial information.
Gender information for participant census data.
A new 14-day review period for the PBGC's initial review of the partition application.
Clarifications relating to the effect of a conditional approval of partition for plan sponsors who file applications for partitions and benefit suspensions.

Application Requirements

Filing a complete application is a very important part of the partition process. Sections 4233.3 to 4233.11, which were part of the interim final rule, cover the application requirements for multiemployer plan partitions. These regulations prescribe the method of filing an application (29 C.F.R. § 4233.3).

Section 4233.5(g) requires a plan sponsor to provide the most recent IRS determination letter in order for the application to be viewed as complete. Commentators suggested that satisfying this requirement may be difficult given the IRS announcement of impending changes to the determination letter program (see Legal Update, IRS Announcement 2015-19 Changes Determination Letter Program for Individually Designed Plans).

The PBGC believes this requirement is reasonable given that most plans will have at some point received a favorable determination letter from the IRS and the requirement is limited to the plan's "most recent" determination letter, regardless of the date. It also commented in the preamble that a multiemployer plan that had never received a determination letter would not "undo the entire partition application process" because the plan's inability to provide the information would not be due to an oversight or a refusal to provide the information.

However, in response to this concern, it amended the regulation to provide that if any of the required information is missing from the application, the application "may not" (rather than "will not") be considered complete.

Actuarial and Financial Information

The interim final rule identifies actuarial and financial information that is necessary for a partition application. Although there were no comments on this information, the PBGC is amending the final regulation to require:

That benefit payment information is organized by participant status (that is, active, retiree, terminated vested, beneficiary). Organizing benefit payment information in this manner is necessary to determine the aggregate amount of benefits subject to transfer.
Long-term projections of pre-partition benefit disbursements at the PBGC-guarantee level.
If applicable, maximum benefit suspensions under ERISA Section 305(e)(9) (29 U.S.C. § 1085(e)(9)).

(29 C.F.R. § 4233.7.)

Participant Census Data

The interim final rule identifies the types of participant census data to include with a partition application (29 C.F.R. § 4233.8).

The final rule requires gender information to be included as part of the required census data information because it is needed to accurately determine the present value of plan liabilities.

New PBGC Time Limit for Initial Review

The interim final rule provides for an initial review process by the PBGC to notify plan sponsors of its determination on a partition application (29 C.F.R. § 4233.12). Several commentators noted that the interim final rule did not impose a time limit for the PBGC to make an initial determination on whether an application was complete and expressed concern that this process could go on indefinitely.

The PBGC amended the final rule to impose a 14-calendar day review period for the PBGC to complete its initial review of an application under Section 4233.10.

This should provide plan sponsors with more certainty on when the 270-day statutory review period for partitions under ERISA Section 4233(a)(1) and the 30-day notice period under ERISA Section 4233(a)(2), will begin (29 U.S.C. § 1403(a)(1)-(2)).

Conditional Determination Process Clarifications

The interim final rule also provides a conditional approval process for plan sponsors who file applications for partition and suspensions of benefits. Under the special rule, the PBGC may, in its discretion, approve an application for partition conditioned on Treasury's final authorization to suspend benefits under ERISA Section 305(e)(9) (29 U.S.C. § 1085(e)(9)).

One commentator noted that it was not clear if this conditional approval would satisfy the requirement in Temp. Treas. Reg. § 1.432(e)(9)-1T(d)(7) that the partition order must be provided to the Secretary of Treasury by the last day of the 225-day period described in ERISA Section 305(e)(9)(G) in order to satisfy the requirement that a suspension of benefits not take effect before the effect date of the partition.

The PBGC consulted with Treasury and agreed that clarifications were necessary. The PBGC amended the final partition regulation to clarify that in any case in which an application for partition is made in combination with a suspension of benefits, the effective date of the proposed partition must satisfy the requirements of ERISA Section 305(e)(9)(D)(v).

Regarding the effect of a conditional approval of partition under the Treasury rule, the PBGC was advised by Treasury that PBGC's issuance of a conditional approval within the 225-day period under ERISA Section 305(e)(9)(G) will be deemed to satisfy the requirement set forth in the temporary Treasury regulation.

Practical Implications

As was the case with the interim final rule, sponsors of multiemployer plans and their counsel should become familiar with the new partition requirements. As the PBGC discusses in the preamble to the rule, a significant minority of financially troubled multiemployer plans are projected to become insolvent over the next two decades. Plans that seek to maintain solvency may need to rely on the tools provided by MPRA, including plan partitions and suspension of benefits. As the preamble notes, most plans that will require a partition will also require a benefit suspension.

The PBGC's plan partition requirements under the interim final rule began to apply to partition applications submitted to the PBGC on or after June 19, 2015. The changes made in the final rule will apply to applications for partition submitted to the PBGC on or after January 22, 2016.

PBGC Final Rule on Multiemployer Plan Partitions | Practical Law