The American Rescue Plan Act of 2021 (ARPA) provides “special financial assistance” (SFA) for certain troubled multiemployer defined benefit pension plans (MEPPs). Although ARPA outlined the big picture of how these troubled plans would be rescued, it offered few specifics.

On July 9, 2021 the Pension Benefit Guaranty Corporation (PBGC) published an Interim Final Rule (IFR) that provides very detailed and technical rulemaking. For employers that contribute to plans eligible for SFA, the guidance is very relevant and may impact long and short-term planning, and more broadly inform strategy concerning MEPP participation in general.

PBGC was tasked under ARPA with developing regulations to fill in critical details, such as how the amount of SFA would be calculated, how SFA would be factored in, or not, for purposes of calculating withdrawal liability, and what other conditions would be imposed on plans that receive SFA.

Although the IFR is characterized as “interim” and subject to a 30-day comment period, PBGC hinted that it was interested in comments on additional guidance that may be needed, and not in arguments against its rulemaking.

Troubled Plans

ARPA was enacted in large part in response to provisions of the Multiemployer Pension Reform Act (MPRA) that allowed plans to suspend benefits and led to public outcry and considerable political pressure. In addition, large plans were facing insolvency, most notably the Central States Teamsters Pension Fund, that could overwhelm the PBGC and leave it without sufficient funds to provide PBGC guaranteed benefits.

ARPA solved these problems by creating a separate fund under the Department of Treasury to provide SFA to these plans. The PBGC estimates that more than $94 billion in SFA will be provided to more than 200 plans.

The plans that are eligible for SFA are, in general, in declining financial health and present solvency risks. The four categories of eligible plans under ARPA are:

• Plans in “critical and declining” status in any plan year beginning in 2020 through 2022
• Plans with a benefit suspension under MPRA approved before March 11, 2021
• Plans in critical status, with a modified funded percentage of less than 40% and a ratio of active to inactive participants which is less than 2 to 3
• Plans that became insolvent after December 16, 2014 and remained insolvent but not terminated as of March 11, 2021

For plans in critical and declining status that are applying based on a certification completed prior to January 1, 2021, the PBGC guidance clarified that the assumptions incorporated into that certification are accepted unless clearly erroneous. But for certifications completed after that date, the assumptions used must be the same as those used before January 1, 2021, unless the plan sponsor demonstrates to the satisfaction of the PBGC that those assumptions are unreasonable. Thus, plan sponsors cannot automatically adjust assumptions to qualify for a larger amount of SFA.

Amount of Special Financial Assistance

The amount of SFA that eligible plans would receive was described in ARPA in such broad terms that it led to a wide range of interpretations. Interested parties submitted comments to PBGC on a construction of the statutory language they urged the PBGC to follow.

In the IFR, the PBGC adopted a very narrow reading of the statute. The effect of the PBGC’s interpretation is that eligible plans will receive less SFA than many anticipated, and their permanent solvency remains uncertain.

ARPA states that the amount of SFA is “the amount required for the plan to pay all benefits due during the period beginning on the date of payment of the special financial assistance payment … and ending on the last day of the plan year ending in 2051.” At issue – and subject to differing interpretations – is whether the plan’s current assets and anticipated future receivables should be considered when determining the amount of SFA or whether current assets should be disregarded.

The IFR confirms that the amount of the plan’s resources must be considered.

The SFA a plan is eligible for is the difference in the present value of the plan’s benefit payments and administrative expenses until 2051, and the plan’s resources.

The plan’s obligations include all benefits that are due, including benefits suspended under MPRA that must be restored. Additionally, the obligations are valued using the lesser of the funding standard account projections used for the most recent zone status certification, or 200 basis points plus the third segment rate in the four months prior to filing their application. For many plans, this higher discount rate will yield a lower present value and less SFA.

The plan’s resources include the fair market value of the plan assets and the present value of future contributions and withdrawal liability payments.

This very narrow reading adopted by the PBGC raises significant questions of whether the eligible plans will be able to survive, or if this is merely a 30-year band-aid. From a policy perspective, the PBGC’s decision-making is curious as it suggests that eligible plans will receive just enough SFA to cover their obligations until 2051, and thereafter the plans will presumably be in the same position they are today or worse.

For contributing employers to plans that receive SFA, the uncertainty about these plans’ ability to maintain solvency in the long term will continue. At the same time, union members and plan participants may be less interested in continuing to participate in these SFA-eligible MEPPs that face long-term solvency risks. Younger workers may question whether the MEPPs they are asked to contribute to today will be able to provide a retirement benefit at the end of their career. Taken together, the future for SFA-eligible plans is less promising than it was before the IFR was released.

Withdrawal Liability

ARPA gave the PBGC authority to regulate the conditions of a plan’s receipt of SFA, including withdrawal liability. This rulemaking was highly anticipated, and many interested parties submitted comments on conditions they believed would be appropriate.

Plans eligible for SFA are by their very nature distressed and have significant unfunded vested benefits. In many cases the withdrawal liability owed by contributing employers to these SFA-eligible plans is so significant that they cannot afford to withdraw from the plan. At the same time, the employer contribution base for SFA-eligible plans is not growing, the ratio of inactive to active participants grows larger, and contributing employers’ withdrawal liability increases.

The IFR makes clear that the SFA was not intended to subsidize employer’s withdrawal liability or otherwise indirectly transfer SFA to employers. Moreover, from a policy perspective, if the SFA incentivized employers to exit these distressed plans it would exacerbate the challenges.

PBGC determined that for withdrawals in the plan year following the year in which a plan receives SFA, and for the following 10 plan years, the plan must calculate withdrawal liability using the same rates used in a mass withdrawal. These rates, which are generally in line with annuity purchase rates, are low (2-3%) and have the effect of significantly increasing a plan’s liabilities.

For plans that currently use the plan’s funding rate or even a blended rate to value liabilities, a change to the PBGC rates will cause the plan’s liabilities to rise significantly. But other plans that use a lower funding rate, or even currently use the PBGC rates, the effect will be less significant.

While the plan’s liabilities may or may not change, the plan’s assets will certainly increase when the SFA is reflected.

The question confronting most contributing employers to SFA-eligible plans is: will the withdrawal liability to that plan change and how? The answer is that it is plan specific. It requires an assessment of a plan’s individual circumstances.

On one hand, the plan’s liabilities may increase because of the different interest rate assumptions required; on the other hand, the plan’s assets will increase upon receipt of the SFA. Will the increase in liabilities be in direct proportion to the increase in the plan’s assets? This requires a closer examination.

Another more fundamental aspect to consider is that employers’ withdrawal liability for many SFA-eligible plans is commonly subject to the 20-year limitation on withdrawal liability payments. If an employer’s withdrawal liability to a plan is subject to the 20-year limitation prior to the receipt of SFA, it will likely be similarly capped after receipt of the SFA.

Whether an employer’s withdrawal liability will increase or decrease is unclear. For many employers, however, liability to an SFA-eligible plan was likely subject to the 20-year cap and that isn’t likely to change after the receipt of SFA. The liability an employer could be obligated to pay in the event of a withdrawal may be the same after the plan receives SFA as it was before.

Contribution Rates

At the same time that withdrawal liability may make it is too expensive for employers to leave a plan, increasing contribution rates sometimes make it too expensive to stay.

ARPA requires that a plan that receives SFA remain in critical status. Critical status plans are required to adopt rehabilitation plans, which generally involve a combination of benefit adjustments and contribution rate increases.

The IFR makes clear that plans which receive SFA cannot decrease contribution rates. However, it does not address whether the plans must continue contribution rate increases required under rehabilitation plans or update those plans to meet new critical status zone benchmarks.

MEPP Participation Generally

There continue to be significant challenges for many MEPPs, not just those plans eligible for SFA. Many MEPPs have seen a declining employer contribution base, with no ability to attract new contributing employers. Some of this is perhaps attributable to a decline in the number of private sector union workers, but it is also due in part to employers exiting and avoiding MEPPs because of withdrawal liability.

In the legislative process many groups advocated for the inclusion of composite plan design, which would reduce withdrawal liability over time and, they argued, facilitate new employers joining MEPPs. However, ARPA did not include composite plans. The IFR did not offer any remedies to address the structural challenges facing the MEPP system.

Relatedly, the IFR contained a footnote where the PBGC indicated that it will be issuing a separate rule of “general applicability … to prescribe actuarial assumptions which may be used by a plan actuary in determining an employer’s withdrawal liability.” What prompted this, and the intent, are unclear. The lack of consistency in the discount rates used by plans, and the staggering impact small differences make in withdrawal liability, has spurred extensive litigation.

The PBGC’s rulemaking will be closely watched.

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