In a prior alert, we detailed how the Interim Final Rule (IFR) from the Pension Benefit Guaranty Corporation (PBGC) regarding the special financial assistance (SFA) provided under American Rescue Plan Act of 2021 (ARPA) would apply to certain multiemployer pension funds (MEPPs).

The PBGC has since issued its Final Rule that addresses certain important items for contributing employers.

Withdrawal Liability

Under ARPA, the PBGC is permitted to impose “reasonable conditions” on a MEPP that receives SFA.

One such condition in the IFR related to how MEPPs that received SFA would be required to use mass withdrawal interest rates published by the PBGC when calculating contributing employers’ withdrawal liability.

The Final Rule incorporates the IFR’s requirement that, for withdrawals in the plan year after the plan year in which the MEPP received SFA, liabilities must be calculated using the PBGC’s rates used for mass withdrawal liability calculations. Use of the lower rates will likely increase a MEPP’s liabilities, and, in turn, a withdrawing employer’s withdrawal liability.

There are two practical points related to this.

• First, in the current interest rate environment, the PBGC rates have increased and are likely to increase further. This means the liabilities won’t increase as much had this been with the recent historically low interest rate period.
• Second, because of their deteriorating condition, many of the MEPPs eligible to receive SFA have adjusted their asset allocations and in turn reduced their assumed rates of return. The change to the PBGC rates may not be a significant change.

Under the Final Rule, a MEPP is required to use the PBGC rates until the later of: (1) 10 years after the end of the plan year in which the MEPP receives the SFA and (2) the last day of the plan year when the MEPP projects it will fully deplete the SFA and any earnings thereon.

The PBGC also responded to concerns that employers would be incentivized to withdraw from MEPPs immediately after the SFA is received. The PBGC has proposed to phase-in recognition of the SFA as a plan asset for purposes of withdrawal liability calculations beginning in the first plan year that the MEPP receives the SFA through the end of the plan year when it is expected to be exhausted. It requested comment on this phase-in approach, which means it may change.

Contribution Rates

The Final Rule also clarifies that a condition on the receipt of SFA is that a MEPP may not accept a collective bargaining agreement that allows for a reduction in the contribution rate, or a change in the basis on which the contributions are made that would yield a contribution obligation reduction, from what was set forth in a collective bargaining agreement as of March 11, 2021, including agreed-to contribution increases in those agreements.

When it can be shown that there is a risk of loss to plan participants through maintaining the existing contributions, the rate may be changed. If the reduction affects more than $10 million in annual contributions, granting this change may be subject to PBGC approval.

The Final Rule retains the requirement that MEPPs receiving SFA remain in critical status, and accordingly be required to maintain a rehabilitation plan. It is unclear whether a MEPP’s rehabilitation plan that required continuing contribution rate increases must remain unchanged from what was in effect as of March 11, 2021. The Final Rule indicates that rates set forth in collective bargaining agreements cannot be decreased but does not offer clarity on whether that extends to a rehabilitation plan.

Some MEPPs had adopted rehabilitation plans with burdensome contribution rate increases. Those MEPPs may determine that the rate increases under the rehabilitation plan present a risk of loss to plan participants because the increasing rates may be unsustainable for the contributing employers and threaten their financial solvency.

[View source.]