The recently signed American Rescue Plan Act (ARPA) contains an assortment of benefit plan provisions, including a new COBRA assistance scheme and expanded dependent care provisions. It also includes several provisions aimed at helping multiemployer and single-employer plans fund retiree benefits.
For multiemployer plans, ARPA provides for direct financial assistance without a repayment obligation. It also provides opportunities to extend funding zone status, retain funding improvement and rehabilitation plans, and modify existing liability amortization requirements. For single-employer plans, ARPA also provides some limited funding relief.
Financial Assistance for Underfunded Multiemployer Pension Plans
For multiemployer plans, the headline is that ARPA establishes a financial assistance program for underfunded multiemployer pension plans. By almost any metric, multiemployer pension plans—defined benefit plans maintained in which multiple unrelated employers participate pursuant to a collective bargaining agreement—are facing a financial crisis.
Numerous multiemployer plans, as well as the Pension benefit Guarantee Corporation (PBGC) which insures those plans' benefits, are facing insolvency due to the total amount of unfunded vested liabilities owed to participants and beneficiaries.
ARPA allows certain multiemployer plans to receive lump sums to enable them to make benefit payments for the next 30 years, through 2051. In order to be eligible, a multiemployer pension plan must satisfy one of the following criteria:
- Be in critical and declining status in any plan year beginning in 2020 through 2022;
- Be approved for a suspension of benefits under the Multiemployer Pension Relief Act of 2014 (MRPA) as of the date of enactment of the ARPA;
- Be certified by the plan's actuary, in any plan year beginning between 2020 and 2022, to be in critical status, as having (i) a "modified" funded percentage of less than 40 percent and (ii) a ratio of active to inactive participants that is less than 2 to 3; or
- Be both insolvent and not yet terminated as of the date of enactment of the ARPA, which insolvency occurred after December 16, 2014.
Application for this financial assistance must be submitted no later than December 31, 2025. Once an application is approved, the aid will occur through a single, lump sum payment. The amount of financial assistance to be provided to a plan 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 2051, with generally no reduction in a participant's or beneficiary's accrued benefit. ARPA does not limit the amount to be provided to the PBGC to fund the program.
Financial assistance received by a plan (and the earnings on the payment) may be used to cover plan expenses, as well as make benefit payments. Plans are required to invest amounts received in investment-grade bonds or other investments as permitted by the PBGC. The PBGC has the authority to impose additional conditions on plans receiving financial assistance.
Any plan that receives financial assistance will be deemed to be in critical status until the plan year ending in 2051. The plan must also reinstate any previously suspended benefits under the MPRA. Plans accepting financial assistance will not be eligible to apply for a new suspension of benefits under the MRPA.
Early versions of the proposed law specified that any financial assistance received by a plan would be disregarded in calculating withdrawal liability until the first plan year beginning after the 15th anniversary of the plan's receipt of the financial assistance. The final version of the ARPA does not contain any similar requirements.
The PBGC, however, may condition financial assistance on a plan's agreement to implement a similar withdrawal liability rule. Such rules and the increased financial assistance may encourage employers to remain in the plans.
ARPA provides no direct relief to employers that previously withdrew from a plan and paid the withdrawal liability in a lump sum or are now paying the withdrawal liability in installments. However, there may still be other benefits to employers.
In the event of a mass withdrawal, the 20-year cap on installment payments comes off and an employer that previously withdrew could be assessed additional liability. The financial assistance given to these plans now makes it less likely that a mass withdrawal will occur and reduces the probability of additional exposure for withdrawn employers.
Other Multiemployer Pension Plan Provisions
Funding Zone Status
Under ARPA, a plan may elect to retain its 2019 plan funding status for plan years beginning in 2020 or 2021.
A plan in endangered or critical status is not required to update its plan or schedules until the plan year beginning March 1, 2021. Plans that make this election have additional notification requirements to participants, beneficiaries, the PBGC and the DOL.
Funding Improvement Plan and Rehabilitation Periods
Similarly, ARPA permits a plan in endangered or critical status to elect to extend its funding improvement period or rehabilitation period, as applicable, for five years.
This will give the plan additional time to improve its contribution rates, limit benefit accruals, and maintain plan funding. This relief applies to plan years beginning on or after December 31, 2019.
ARPA allows plans that satisfy a solvency test to elect to amortize net investment losses over 30 years, instead of 15 years, for the two plan years ending after February 29, 2020.
In addition to spreading out investment losses, the extended amortization period also applies to "other losses" related to COVID-19, including experience losses related to reductions in contributions, reductions in employment and changes in retirement rates. A plan that makes this election is subject to limitations on benefit increases.
PBGC Premium Rates
Starting in calendar year 2031, ARPA increases the PBGC multiemployer plan premium rate to $52 per participant.
The premium rate will be indexed for inflation in years after 2031. There is no change to single-employer plan premium rates.
Single-Employer Plan Provisions
ARPA contains two provisions that will provide funding relief for single-employer plans.
First, ARPA extends the amortization period for funding shortfalls to give plan sponsors a longer period over which to spread shortfalls. In particular, ARPA resets all prior shortfalls to zero for plan years beginning after December 31, 2021 (or an earlier date elected by the plan sponsor). Those shortfalls, as recalculated, along with future funding shortfalls, are amortized over a 15-year period rather than the generally applicable seven-year period.
Second, ARPA also contains provisions to further smooth single-employer plan funding. ARPA extends the pension funding stabilization percentages that were scheduled to start phasing out in 2021 through 2029.
It reduces the 10 percent interest rate corridor to 5 percent, effective in 2020, and extends the period before the range begins to phase out. A 5 percent floor is established on the 25-year interest rate averages.
The 25-year pension interest rate smoothing has the effect of raising interest rates for funding purposes, which reduces the amount of a plan's minimum required contribution. The decrease in contributions is projected to lead to an increase in taxable revenues which in turn may help pay for the financial assistance given to multiemployer plans.