IRS Issues Proposed Regulations on Limitations to the Suspension of Benefits Rules for Multiemployer Plans

Practical Law Legal Update w-001-4359 (Approx. 6 pages)

IRS Issues Proposed Regulations on Limitations to the Suspension of Benefits Rules for Multiemployer Plans

by Practical Law Employee Benefits & Executive Compensation

Multiemployer Pension Reform Act (MPRA)

Section 432(e)(9) of the Internal Revenue Code (Code) (26 U.S.C. § 432(e)(9)), as amended by MPRA, allows multiemployer plans in critical and declining status to reduce, by plan amendment, plan benefits payable to participants and beneficiaries if certain conditions are satisfied (see Legal Updates, President Signs Bill Reforming Multiemployer Pension Plan Rules and IRS Issues Guidance and Application Procedures on Suspension of Benefits for Plans in Critical and Declining Status). This reduction is referred to as a suspension of benefits.

Code Section 432(e)(9)(D)(vii) (26 U.S.C. § 432(e)(9)(D)(vii)) limits how a suspension of benefits is applied to plans that include benefits that are directly attributable to a participant's service with certain employers that have, before the date MPRA was enacted (December 16, 2014), withdrawn from a plan.

The proposed regulations apply to employers that have:

Withdrawn from the plan in a complete withdrawal under ERISA Section 4203 (29 U.S.C. § 1383).
Failed to pay the full amount of their withdrawal liability under ERISA Section 4201(b)(1) (29 U.S.C. § 1381(b)(1)) or an agreement with the plan.

This type of employer is referred to in the preamble to the proposed regulations as a sub-clause I employer.

The proposed regulations also apply to employers that have:

Withdrawn from the plan in a complete withdrawal under ERISA Section 4203 (29 U.S.C. § 1383).
Paid the full amount of the employer's withdrawal liability under either ERISA Section 4201(b)(1) (29 U.S.C. § 1381(b)(1)) or an agreement with the plan.
Pursuant to a CBA, assumed liability in a make-whole agreement to provide benefits to plan participants and beneficiaries under a separate, single-employer pension plan sponsored by the employer, in an amount equal to any amount of benefits for these participants and beneficiaries reduced as a result of the financial status of the plan.

(26 U.S.C. § 432(e)(9)(D)(vii)(III).) This type of employer is referred to in the preamble to the proposed regulations as a sub-clause III employer.

Under Code Section 432(e)(9)(D)(vii), a suspension of benefits must first be applied to the maximum extent permissible to benefits attributable to a participant's service with a sub-clause I employer. A suspension of benefits may be applied to other benefits attributable to a participant's service with other employers only if the suspension of benefits with a sub-clause I employer is not reasonably estimated to achieve the level that is necessary to permit the plan to avoid insolvency.

The temporary and proposed regulations issued in June 2015 on benefits suspensions for multiemployer plans provide general guidance on procedures for applying for a suspension of benefits but do not include guidance on this specific limitation in Code Section 432(e)(9)(D)(vii) (see Legal Update, IRS Issues Guidance and Application Procedures on Suspension of Benefits for Plans in Critical and Declining Status).

Proposed Regulations

Following consultation with the PBGC and DOL, the IRS proposed adding new paragraph (d)(8) (proposed regulations) to proposed 26 C.FR. Section 1.432(e)(9)-1 to provide guidance on Code Section 432(e)(9)(D)(vii) (26 U.S.C. § 432(e)(9)(D)(vii)).

Under the proposed regulations, a suspension of benefits under a plan that is subject to Code Section 432(e)(9)(D)(vii) is first applied to the maximum extent permissible to benefits attributable to service with a subclause I employer. The suspension may then apply to other benefits that are permitted to be suspended and that are attributable to a participant's service with other employers (under subclauses II and III) only if the subclause I suspension is not reasonably estimated to enable the plan to avoid insolvency.

However, the proposed regulations also provide that a suspension of benefits:

Described in subclause II need not be applied to the maximum extent permissible before a suspension is applied to benefits described in subclause III. However, it must be greater than or equal to the application of the suspension of benefits described in subclause III. (The IRS is requesting comments on whether a subclause II suspension should be applied "to the maximum extent permissible.")
Would not be permitted to reduce benefits directly attributable to service with a subclause III employer unless other benefits are first reduced to at least the same extent. Therefore, benefit suspensions for service with a subclause III employer cannot exceed suspensions of benefits attributable to service with other employers. This protects a subclause III employer from the possibility that the suspension would be expressly designed to take advantage of the employer's make-whole agreement.

The proposed regulations would also provide that the benefits described in subclause III are any benefits that are directly attributable to service with a subclause III employer, without regard to whether the employer has assumed liability (through a make-whole agreement) to providing benefits that were reduced as a result of the financial status of the plan through a separate single-employer plan.

The preamble to the proposed regulations mentions that the IRS is considering an alternative to the ordering rule in the proposed regulations that would require, following the maximum permissible suspension to benefits attributable to a subclause I employer, that any suspension of benefits provide for a lesser reduction in benefits that are directly attributable to service with a subclause III employer than to benefits that are attributable to any other service.

Effective Date

These regulations are proposed to be effective and apply to suspensions for which the approval or denial is issued on or after the date they are published as final regulations in the Federal Register.

Comment Deadline

Comments on the proposed regulations, and outlines of topics to be discussed at the public hearing scheduled for March 22, 2016, are due on March 15, 2016. The preamble to the proposed regulations explains how and where the comments should be submitted.

Practical Implications

Multiemployer plan fiduciaries that are considering suspending plan benefits should familiarize themselves with the proposed regulations. Aside from adding a new section, the proposed regulations do not affect the proposed regulations issued in June 2015.

The proposed regulations will be published in the Federal Register on February 11, 2016.

To learn more about multiemployer plans and the impact of the MPRA, see:

IRS Issues Proposed Regulations on Limitations to the Suspension of Benefits Rules for Multiemployer Plans | Practical Law