PBGC Issues Proposed Regulations on Mergers and Transfers Between Multiemployer Plans

Practical Law Legal Update w-002-5432 (Approx. 6 pages)

PBGC Issues Proposed Regulations on Mergers and Transfers Between Multiemployer Plans

by Practical Law Employee Benefits & Executive Compensation

Background

ERISA provides that a plan sponsor may merge a multiemployer plan with one or more multiemployer plans, or engage in a transfer of assets and liabilities to or from another multiemployer plan, if certain requirements are met (ERISA § 4231 (29 U.S.C. § 1411)). The PBGC provides financial assistance to multiemployer plans that are or will be insolvent, meaning that the plan is unable to pay benefits when due during the year. Before the enactment of the MPRA, the PBGC was rarely able to provide financial assistance to facilitate the merger of a soon-to-be insolvent multiemployer plan with a more financially secure multiemployer plan.

Effective December 2014, the MPRA provides various modifications to multiemployer pension plan rules and other remediation measures, including statutory reforms to assist financially troubled multiemployer plans (see Legal Update, President Signs Bill Reforming Multiemployer Pension Plan Rules). Among other things, the MPRA amended ERISA Section 4231 to add a new section clarifying the PBGC's authority to facilitate the merger of two or more multiemployer plans if certain statutory requirements are met and provide financial assistance to facilitate a merger in certain situations (29 U.S.C. § 1411(e)).

Specifically, under the MPRA, the PBGC may:

Facilitate a merger of two or more multiemployer plans upon request by the plan sponsors if it determines that the merger is:
- in the interests of the participants and beneficiaries of at least one of the plans; and
- not reasonably expected to be adverse to the overall interests of the participants and beneficiaries of any of the plans.
Facilitation may include training, technical assistance, mediation, communication with stakeholders, and support with related requests to other government agencies.
Provide financial assistance to facilitate a merger that it determines is necessary to enable one or more of the plans involved to avoid or postpone insolvency if certain conditions are met, including that one or more of the plans involved in the merger is in critical and declining status. Critical and declining status generally means a plan in critical status that is projected to become insolvent in the current plan year or within the next 14 plan years.

In February 2015, the PBGC published a request for information on issues the PBGC should consider in implementing the MPRA's changes to the merger rules under ERISA Section 4231. The PBGC issued these proposed regulations in response to comments.

New and Amended Definitions

The proposed regulations would add new definitions for the terms:

Facilitated merger.
Financial assistance.
Financial assistance merger.
Merged plan.

The proposed rule would also expand the definition of significantly affected plan to include plans in endangered or critical status that engage in non-de minimis transfers.

General Requirements for Mergers and Transfers

The proposed regulations would amend the current requirements for a multiemployer plan to enter into a merger or transfer under ERISA Section 4231 (29 U.S.C. § 1411). Specifically, the proposed regulations make certain modifications, including:

Allow plan sponsors to engage in informal consultations with the PBGC to discuss proposed mergers and transfers.
Require each plan involved in a merger or transfer to have an actuarial valuation performed for the plan year preceding the proposed effective date of the merger or transfer. If the valuation is not complete as of the date the plan sponsors file the notice of merger or transfer, the plan sponsors may provide the most recent actuarial valuation performed for the plans with the notice, and the required valuations when complete.
Amend and reorder the plan solvency tests used to demonstrate that a merger or transfer would not cause the benefits of participants and beneficiaries to be subject to suspension (see Plan Solvency Tests).
Extend the deadline for providing notice of a proposed facilitated merger from 120 days to 270 days before the proposed effective date of a facilitated merger.
Clarify that a request for a compliance determination must be filed contemporaneously with a notice of merger or transfer.

Plan Solvency Tests

ERISA Section 4231(b)(3) prohibits a merger or transfer unless the plan sponsor can demonstrate the plan's solvency after the merger or transfer (29 U.S.C. § 1411(b)(3)). The proposed rule would amend and reorder the current plan solvency tests used to make this demonstration. Specifically, the proposed rule provides that, for a plan that is not a significantly affected plan, the plan solvency requirement under ERISA Section 4231(b)(3) is satisfied if one of the following tests are met:

In each of the first ten plan years beginning on or after the proposed effective date of the merger or transfer, the plan's expected fair market value of assets plus expected contributions and investment earnings equal or exceed expected expenses and benefit payments for the plan year.
The expected fair market value of assets immediately after the merger or transfer equals or exceeds ten times the benefit payments for the last plan year ending before the proposed effective date of the merger or transfer.

The proposed regulations would provide a more rigorous solvency test for significantly affected plans.

Additional Rules for Facilitated Mergers

A plan sponsor may request that the PBGC facilitate a merger if certain additional requirements are met. Under the proposed rules, a request for a facilitated merger, including a financial assistance merger, must satisfy both:

The general criteria for a merger or transfer under ERISA Section 4231(b) (29 U.S.C. § 1411(b)).
Certain additional criteria for a facilitated merger under ERISA Section 4231(e) (29 U.S.C. § 1411(e)), which were added by the MPRA.

The proposed regulations explain that the PBGC may in its discretion provide financial assistance to facilitate a merger, subject to certain limitations. The PBGC notes that while it expects that in most cases the financial assistance it provides in a facilitated merger will be in the form of periodic payments, the structure of financial assistance will be decided on a case-by-case basis.

Additionally, the proposed rule would require certain information to be submitted with a request for a facilitated merger, including:

A notice of the merger or transfer.
A request for a compliance determination.
A detailed narrative description with supporting documentation demonstrating that the proposed merger is in the interests of participants and beneficiaries of at least one of the plans and is not reasonably expected to be adverse to the overall interests of the participants and beneficiaries of any of the plans.
Certain additional information if a financial assistance merger is requested (see Information Requirements for Financial Assistance Mergers).

Plan sponsors must notify the PBGC in writing if any material fact or representation contained in or relating to the request, or in any supporting document, is no longer accurate or has been omitted.

Information Requirements for Financial Assistance Mergers

The proposed regulations also provide guidance on the additional information requirements for financial assistance mergers. Under the proposed regulations, in addition to the above, a request for a financial assistance merger must contain information including:

Certain plan information.
Information relating to the proposed structure of a financial assistance merger, including:
- a detailed description of the financial assistance merger;
- the estimated total amount of financial assistance the plan sponsors request for each year;
- a narrative description of the events that led to the sponsors' decision to request a financial assistance merger; and
- a narrative description of the significant risks and assumptions relating to the proposed financial assistance merger and the projections provided.
Actuarial and financial information, including but not limited to:
- a copy of certain plan actuarial reports and actuarial certifications;
- for each critical and declining status plan, a statement that its projected date of insolvency without the merger is sooner than the projected date of insolvency of the merged plan; and
- a demonstration that financial assistance is necessary for the merged plan to become or remain solvent (see Demonstrations for Plans in Critical Status After Merger).
Participant census data.

Demonstrations for Plans in Critical Status After Merger

Under the proposed rule, the type of projection required to demonstrate that financial assistance is necessary for a merged plan to become or remain solvent will depend on whether the merged plan would be in critical status immediately following the merger (without taking the proposed financial assistance into account). The proposed rule would provide a more rigorous solvency standard for merged plans in critical status. The plan's enrolled actuary may use any reasonable estimation for determining the expected funded status of the merged plan.

Additional Provisions

Additionally, the proposed regulations would describe:

The manner in which the PBGC will notify a plan sponsor of its decision on a request for a facilitated merger.
The PBGC's jurisdiction over the merged plan resulting from a financial assistance merger.

Effective Date and Applicability Date

The proposed rule would be applicable to mergers and transfers for which a notice, and, if applicable, request for a facilitated merger are filed with the PBGC on or after the effective date of the final rule. If a plan sponsor chooses to submit an application for a facilitated merger before the issuance of a final rule, the plan sponsor may need to revise or supplement its request to take into account the requirements under the final rule.

Practical Implications

Plan sponsors that wish to request a facilitated merger, including a request for financial assistance, should take note of these proposed regulations and familiarize themselves with the additional requirements. Plan sponsors may submit an application before the effective date of the final rule, but may be required to revise the application before it will be reviewed by the PBGC.

Additionally, the PBGC requests comments on the provisions of the proposed rule. In particular, the PBGC is interested in comments on:

Whether a plan's enrolled actuary should be permitted to use any reasonable estimation for determining the expected funded status of the merged plan or an alternative method should be used. In particular, the PBGC invites comments on the methods to determine whether the merged plan would be in critical status.
The solvency standards for critical and non-critical status plans, including alternative approaches or methods to demonstrate plan solvency.
Any area in which additional guidance may be needed.

PBGC Issues Proposed Regulations on Mergers and Transfers Between Multiemployer Plans | Practical Law