Multiemployer Pension Plan Changes in the American Rescue Plan Act

Jackson Walker

Jackson Walker

To relieve an administrative burden during the pandemic, the American Rescue Plan Act (the “Relief Act”) lets a plan sponsor of a multiemployer pension plan elect to delay its designation as an endangered plan, critical plan, or critical and declining status plan by allowing it to retain its funding status in the first plan year beginning on or after March 1, 2020, and ending on February 28, 2021, or for the next succeeding plan year to be the same status as it was in for the plan year prior to the designated plan year. This means the funding status of a multiemployer plan electing this relief may not be updated until the first plan year beginning on or after March 1, 2021. While an election is in place, the funding status may not reflect the actual funding status for the plan, and employers contracting with multiemployer plans or engaged in corporate transactions will want to know whether or not an election was made to delay a change in the funding status designation of the multiemployer plan.

If, as the result of such an election, the multiemployer plan’s status is not endangered or critical, the plan must provide a notice of the election with specified contents to the participants. If the multiemployer plan is certified to be in a critical status, but is treated as endangered due to this election, the multiemployer plan will be required to provide notice only of the endangered status. (Relief Act 9701)

The Relief Act included other special relief stretching out funding obligations and providing assistance from the Pension Benefit Guaranty Corporation. Companies engaging in corporate transactions with other entities that participate in multiemployer plans will need to understand the elections made by the multiemployer plan(s), the terms and conditions of the relief provided to the multiemployer plan, and how that impacts the company.

Single Employer Pension Plan Funding Changes

Effective for plan years beginning after December 31, 2018, changes were made to the calculation of the minimum funding requirements for single employer pension plans. While the section of the Relief Act making changes to the minimum funding requirements for single employer plans was effective as a whole for plan years beginning after December 31, 2018, the employer may elect within the section to implement the changes for any plan year beginning on or after December 31, 2018, 2019, or 2020. This change requires the amortization of the shortfall amortization bases over 15 years instead of 7 years, permitting a longer period to make up prior years’ shortfalls in funding. The change also reduces to zero all shortfall amortization installments and the shortfall amortization basis for all plan years before the first plan year beginning after December 31, 2021, or such earlier date as elected by the employer under section 9705 of the Relief Act.

For purposes of calculating the minimum funding requirements, segment rates have been used without any minimum rate. Because the decline in interest rates in recent years has increased funding applications from employers with defined benefit plans, the Relief Act adds a floor to the interest rates used in the calculation so that a minimum interest rate of 5% will apply in the funding calculations, instead of the 25-year average if it drops below 5%. This will provide for more stable contribution calculations when interest rates drop to very low rates; however, all this reduces contributions. If interest rates remain low, employers will need to contribute more as the funding requirement is calculated in an environment with low market interest rates. In addition, previous statutory provisions phasing in the segment rates have been extended to continue through 2029.

An employer can elect out of the funding changes for any plan year prior to January 1, 2022, either by electing to not use the changes in the funding segment rates or to use the floor on the segment rates. The employer may instead elect to apply such changes solely for the purposes of determining the adjusted funding target attainment percentage under section 436 of the Code and 206(g) of the Employee Retirement Income Security Act of 1974 (ERISA) for the plan year. Any plan should not be treated as failing to meet the anti-cutback requirements of section 204(g) of ERISA and section 411(d)(6) of the Code solely because they made an election under this provision of the Relief Act.

Executive Compensation Deduction Limit Changes

For tax years after December 31, 2026, the limitation on deductions for compensation paid above $1 million will apply to not only the chief financial officer, chief executive officer, and the next three most highly compensated employees, but also to the next five most highly compensated employees beyond the initial five mentioned above. This means the compensation deduction will now be limited to $1 million for 10 individuals each year, plus any individual for whom the deduction was limited in any prior year because they were amongst the chief executive officer, chief financial officer, or the next three most highly compensated officers. The “once-in, always-in” provision first became effective after December 31, 2017, and it only applies to the chief executive officer, chief financial officer, or the next three most highly compensated officers. This list of employees subject to the deduction limit on compensation of $1 million is expanded, and one list grows with any change to the list of officers, and the other list of the next five most highly compensated is new each year, but is not a cumulative list. This is only a high-level summary that does not consider transition rules related to the addition of the “once-in, always-in” rule by the Tax Cuts and Jobs Act.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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