Seyfarth Synopsis: On March 11, 2021, President Biden signed into law the American Rescue Plan Act of 2021 ("ARPA"), the $1.9 trillion COVID-19 relief bill. ARPA includes various forms of multiemployer and single employer pension plan relief, as well as certain executive compensation changes under Section 162(m) of the Internal Revenue Code (“Code”), which are discussed further below. Please see our companion Client Alert on the other employee benefit items of interest in ARPA here.
Multiemployer Pension Plan Relief
ARPA retains the key provisions of the Butch Lewis Emergency Pension Relief Act of 2021 (the “Butch Lewis Act of 2021”), providing relief to financially troubled multiemployer pension plans. The Butch Lewis Act of 2021 was a continuation of multiple prior legislative efforts aimed at addressing the multiemployer pension plan crisis, including its earlier iterations (the Butch Lewis Act of 2017, the Butch Lewis Act of 2019), the Emergency Pension Plan Relief Act of 2020, the Chris Allen Multiemployer Pension Recapitalization and Reform Act, and other legislative proposals. Most notably, ARPA includes the provision of the Butch Lewis Act of 2021 for direct financial assistance without a repayment obligation. ARPA also gives multiemployer plans the opportunity to extend zone status, extend funding improvement and rehabilitation plans, and provides amortization relief .
1. Special Financial Assistance
ARPA creates a “special financial assistance fund” under the Treasury Department from which the Pension Benefit Guaranty Corporation (“PBGC”) will be able to make grants to financially troubled multiemployer pension plans. As noted above, any multiemployer pension plan receiving relief would not have to repay those funds. To be eligible for financial relief, a multiemployer pension plan would need to satisfy one of the following criteria:
(A) The multiemployer pension plan is in critical and declining status in any plan year beginning in 2020 through 2022;
(B) The multiemployer pension plan suspended benefits in accordance with the process set forth in the Multiemployer Pension Reform Act of 2014 (“MPRA”);
(C) The multiemployer pension plan is certified by the plan actuary to be in critical status in any plan year beginning in 2020 through 2022, has a “modified funded percentage” (defined as the percentage equal to a fraction, the numerator of which is current value of plan assets and the denominator of which is current liabilities) of less than 40%, and has a ratio of active to inactive participants which is less than 2 to 3; or
(D) The multiemployer pension plan became “insolvent” after December 16, 2014, as defined under Code Section 418E, and has remained so insolvent and has not been terminated as of the date of enactment of ARPA.
Under this program, multiemployer pension plans seeking special financial assistance must apply no later than December 31, 2025, with revised applications submitted no later than December 31, 2026. ARPA also allows the PBGC to limit applications during the first two years following enactment to certain plans, such as those that are insolvent or are likely to be insolvent within five years.
The amount of financial assistance provided to eligible multiemployer pension plans is equal to the amount required to pay all benefits, without reduction, due from the date of payment of the special financial assistance through the last day of the plan year ending in 2051. The payment to the multiemployer pension plan would be a single, lump-sum payment. Interestingly, there is no noted cap on the amount of financial assistance available per plan or the order which the PBGC will prioritize applications for financial assistance. The PBGC is expected to issue further guidance shortly.
ARPA places certain restrictions on plans receiving special financial assistance. The money received (and earnings on such amounts) must be segregated from other plan assets, and may only be invested in investment-grade bonds or other investments as permitted by the PBGC. The PBGC is authorized to impose additional conditions on plans receiving special financial assistance. These restrictions relate to (1) increases in future accrual rates and any retroactive benefit improvements; (2) allocation of plan assets; (3) reductions in employer contribution rates; (4) diversion of contributions to, and allocation of expenses to, other benefit plans; and (5) withdrawal liability.
Any multiemployer pension plan that receives special financial assistance will be deemed to be in critical status until the last plan year ending in 2051, and must also reinstate any previously suspended benefits under the MPRA (either as a lump sum or in equal monthly installments paid over five years). Multiemployer pension plans accepting special financial assistance will not be eligible to apply for a new suspension of benefits under the MPRA.
ARPA also provides for an increase in PBGC premium rates for multiemployer plans from the currently indexed annual per participant rate (which is $31 per participant for plan years beginning in 2021) to $52 per participant for plan years beginning after December 31, 2030, with indexing for inflation tied to the Social Security Act’s national wage index.
Earlier versions of the Butch Lewis Act of 2021 included provisions stating that any participating employer that withdraws within 15 calendar years from the effective date of when a plan receives special financial assistance would not see any reduction in its withdrawal liability assessment due to the special financial assistance. The relief bill as passed, however, no longer appears to include this carve out for withdrawal liability. As passed, ARPA would not otherwise change how withdrawal liability is calculated, including application of the withdrawal liability payment schedule, the 20-year cap on payments, or the mass withdrawal liability rules. As noted above, however, ARPA gives the PBGC authority to impose additional conditions with respect to withdrawal liability.
2. Temporary Funding Status Relief.
Under ARPA, eligible multiemployer pension plans may elect to retain for plan year 2020 or 2021 (known as the “designated plan year”) the zone status that applied for the previous year. In addition, any multiemployer plans that were in endangered or critical status in the year prior to their designated plan year would not be required to update their funding improvement plan, rehabilitation plan, or corresponding schedules, until the year following the designated year.
If a multiemployer plan is not considered to be in endangered or critical status as a result of an election, no further notification is required regarding its endangered or critical status, but such plan must provide notice to its participants, beneficiaries, the PBGC, and the DOL of its election under ARPA.
3. Funding Improvement Plan and Rehabilitation Plan Relief.
ARPA allows multiemployer pension plans that are already in endangered or critical status to extend any applicable funding improvement plan or rehabilitation plan for five years. This relief applies to plan years beginning on or after December 31, 2019.
4. Amortization Relief.
Similar to relief provided in 2008 and 2009, ARPA allows multiemployer pension plans to amortize investment losses for plan years ending on or after February 29, 2020 over a 30-year period (instead of 15 or less). In addition to 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 deviations from anticipated retirement rates.
Single Employer Pension Plan Relief
ARPA has two sections that grant some funding relief to single-employer defined benefit pension plans. First, ARPA extends the amortization period for certain funding shortfalls under the minimum funding requirements and resets certain prior shortfall amounts to zero. Single-employer pension plans are subject to minimum funding requirements under the Code and ERISA. One of the items included in the required minimum funding calculation is a shortfall amortization charge, which allows plans to spread the charge for funding shortfalls over a certain number of years. Before ARPA’s adoption, the amortization period used to determine this charge was generally 7 years. ARPA has extended this period to 15 years. ARPA also sets all prior shortfall amounts to zero for plan years beginning after December 31, 2021 (or an earlier year as elected by the plan sponsor), so any shortfall amount will be recalculated and spread over a longer time period.
Additionally, ARPA extends the funding stabilization changes that were enacted by Congress over the past 10 years, beginning with the MAP-21 changes in 2012, that were scheduled to start phasing out in 2021. Under these funding stabilization rules, the interest rates used for determining the present value of plan liabilities are subject to maximum and minimum percentages and the difference between the maximum and minimum percentages gradually increases (i.e., phases out) over time. ARPA shrinks the difference between the two percentages and extends the period before the range begins to phase out, which further stabilizes the funding calculations. ARPA also creates a 5% floor for the 25-year average of the interest rate that is subject to the minimum and maximum percentages. If an increase to the otherwise effective interest rate occurs due to the floor, this would decrease the present value of plan liabilities. These changes are effective for plan years beginning after December 31, 2019, but a plan sponsor may elect to wait to apply the changes for all purposes, or just for purposes of determining the application of the benefit restrictions under Code Section 436 until the 2021 or 2022 plan year.
162(m) Changes
The earlier version of the bill that passed the House contained a section freezing the cost of living adjustments for Code Section 415 and 401(a)(17) (i.e., the limits on “Annual Additions” and annual “Compensation” that may be considered under a qualified retirement plan) for calendar years beginning after 2030. However, this section was removed from the bill in the Senate and replaced with an expansion of the $1 million deduction limitation on compensation under Code Section 162(m), described further below.
Code Section 162(m) prohibits publicly held corporations from deducting wages or other compensation in excess of $1 million paid annually to certain covered employees. Currently, the limitation applies to anyone who has served as CEO, CFO or one of the next three highest compensated officers during any tax year beginning after December 31, 2016. ARPA expands the application of the $1 million deductibility cap to include the next five highest compensated employees, in addition to the CEO, CFO and the three other highest compensated officers. Unlike other covered employees, ARPA does not require that these additional five employees be permanently treated as covered employees; rather, this group of five additional covered employees would be re-determined based on compensation levels each year. This change will take effect for tax years beginning after December 31, 2026.
