IRS Issues Final Regulations on the Suspension of Benefits Rules for Certain Multiemployer Plans | Practical Law

IRS Issues Final Regulations on the Suspension of Benefits Rules for Certain Multiemployer Plans | Practical Law

The Treasury Department and Internal Revenue Service (IRS) issued final regulations specifying additional limitations that apply to benefit suspensions for multiemployer plans. The final regulations largely adopt the provisions of the proposed regulations, issued in February 2016.

IRS Issues Final Regulations on the Suspension of Benefits Rules for Certain Multiemployer Plans

by Practical Law Employee Benefits & Executive Compensation
Published on 09 May 2016 • USA (National/Federal)
The Treasury Department and Internal Revenue Service (IRS) issued final regulations specifying additional limitations that apply to benefit suspensions for multiemployer plans. The final regulations largely adopt the provisions of the proposed regulations, issued in February 2016.
On May 3, 2016, the Treasury Department and Internal Revenue Service (IRS) issued final regulations specifying additional limitations that apply to benefit suspensions for multiemployer plans (81 Fed. Reg. 27011). The regulations specify additional limitations that apply to benefits suspensions for multiemployer plan benefits directly attributable to a participant's service with an employer that has:
  • Withdrawn from the plan in a complete withdrawal.
  • Paid its full withdrawal liability.
  • Under a collective bargaining agreement (CBA), assumed liability to provide benefits to participants and beneficiaries equal to any benefits reduced as a result of the financial status of the multiemployer plan.
These regulations affect sponsors of, and contributing employers to, multiemployer pension plans in critical and declining status as well as active, retired, and deferred vested participants in these plans. For more information on multiemployer pension plans, see Practice Note, Multiemployer Pension Plans.

Background

Section 432(e)(9) of the Internal Revenue Code (Code), as amended by MPRA, allows sponsors of 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). The 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 the plan.
The final 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.
(26 U.S.C. § 432(e)(9)(D)(vii)(I).) This type of employer is referred to in the preamble to the final regulations as a subclause I employer.
The final 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 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 participants and beneficiaries under a separate, single-employer 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 of the final regulations as a subclause III employer.
An employer that is neither a subclause I employer or a subclause III employer is referred to in the preamble of the final regulations as a subclause II 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 subclause 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 subclause I employer is not reasonably estimated to achieve the level that is necessary to permit the plan to avoid insolvency.
In June 2015, the IRS issued temporary and proposed regulations on benefits suspensions for multiemployer plans that 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).
In February 2016, the IRS published proposed regulations on a specific limitation in Code Section 432 (e)(9)(D)(vii) (see Legal Update, IRS Issues Proposed Regulations on Limitations to the Suspension of Benefits Rules for Multiemployer Plans). After considering the comments received, the IRS issued these final regulations which adopt the proposed regulations with certain modifications.

Final Regulations

The final regulations interpret Code Section 432(e)(9)(D)(vii) in the context of Code Section 432(e)(9) as a whole which requires, among other things, that any suspension be equitably distributed across the participant and beneficiary population. The final regulations largely adopt the proposed regulations with certain clarifications.
The final regulations adopt the rule under the proposed regulations:
  • Regarding the application of a suspension of benefits to subclause I benefits. Under the final 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.
  • 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 a suspension of benefits described in subclause III.
  • That a suspension of benefits would not be permitted to reduce subclause III benefits unless subclause II benefits were reduced to at least the same extent as subclause III benefits were reduced. Therefore, benefit suspensions for service with a subclause III employer cannot exceed suspensions of benefits attributable to service with a subclause II employer. However, in response to comments, the final regulations clarify that a suspension of benefits is permissible under the rule if no individual's subclause III benefits are reduced more than that individual's benefits would have been reduced if those benefits were attributable to service with any other employer, holding constant the benefit formula, work history, and all other relevant factors used to determine the individual's benefits.
  • That benefits described in subclause III are any benefits that are directly attributable to a participant's service with a subclause III employer, without regard to whether the employer has assumed liability (through a make-whole agreement) for providing benefits that were reduced as a result of the financial status of the plan through a separate single-employer plan. In other words, subclause III refers to benefits directly attributable to service with a subclause III employer and not only to benefits covered by the make-whole agreement.

Effective Date

The final regulations are effective on May 5, 2016. They apply to suspensions for which the approval or denial is issued on or after April 26, 2016. In the case of a systemically important plan, the final regulations apply with respect to any modified suspension implemented on or after April 26, 2016. A systemically important plan is a plan for which the present value of its financial assistance payments will exceed $1.0 billion, indexed for inflation, if the suspension is not implemented.

Practical Implications

Multiemployer plan fiduciaries of plans in critical and declining status that are considering suspending benefits should familiarize themselves with the final regulations, which are substantially the same as the proposed regulations. Fiduciaries should also be aware of the other guidance on the suspension of benefit rules recently issued. For more information, see Legal Update, IRS Issues Final Suspension of Benefits Regulations Under MPRA.