The Honorable Gordon Hartogensis
Pension Benefit Guaranty Corporation
1200 K St NW
Washington, DC 20005
Re: Special Financial Assistance Program for Financially Troubled Multiemployer Plans
On behalf of the U.S. Chamber of Commerce (the Chamber), we appreciate the opportunity to work with the Pension Benefit Guaranty Corporation (PBGC) as it issues guidance and regulations and implements the Special Financial Assistance Program for Financially Troubled Multiemployer Plans (Program) enacted as Section 9704 of the American Rescue Plan Act (ARPA).
Millions of workers rely on multiemployer pension plans for their retirement security. However, because of a confluence of events, over one million retirees are in danger of losing benefits because they participate in multiemployer plans that are facing insolvency. The pension funding crisis is bigger than these plans and retirees. The crisis negatively impacts employers, active workers, and the economy. It limits an employer’s ability to grow its business and expand its workforce. Without a solution, billions of dollars in retirement benefits could be lost, which would not only severely harm current retirees, but also would inevitably hurt current employees, employers, their communities and the overall economy.
In your December 2019 appearance before the Senate Finance Committee, you prioritized three goals for a long-term solution to the multiemployer crisis:
- Protect retirees and prevent the collapse of distressed plans;
- Save the Federal backstop (PBGC); and
- Prevent a future crisis.
The Program is the first step in solving this problem by creating a special fund within PBGC to pay special financial assistance (SFA) as a one-time lump sum payment to eligible plans. In implementing the Program, it is imperative that any guidance or regulations ensure the financial security of the plans, the participants (both retirees and active employees) and the contributing employers.
This letter addresses perhaps the most important aspects of the Program: the amount of the SFA and the conditions on plans that receive SFA.
The Amount of Special Financial Assistance
The ARPA amends the Employee Retirement Income Security Act of 1974, as amended (ERISA), to add Section 4262(j). This section provides that:
The amount of financial assistance provided to a multiemployer plan eligible for financial assistance under this section shall be such 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 under this section and ending on the last day of the plan year ending in 2051, with no reduction in the participant’s or beneficiary’s accrued benefit as of the date of enactment of this section, ….. (Emphasis added).
The statutory language is subject to different interpretations which could result in more or less amounts of SFA. In interpreting and applying this language, PBGC should keep in mind the following principles:
- A reasonable interpretation of the statutory language would be to provide sufficient SFA to assure every eligible plan remains solvent through 2051 so that PBGC will not be required to pay SFA now and regular financial assistance to each plan starting in 2052, which would be the inevitable result if the ARPA only provided the minimum SFA necessary to maintain plan solvency through 2051.
- The overall solvency of the current PBGC multiemployer program will not be directly impacted by the amount of SFA because ARPA creates an eighth fund that will be credited with amounts from Treasury “necessary for the cost of providing financial assistance ”2
- If Congress only intended for the SFA to extend plan solvency until 2051, Congress could have simply allowed these plans to go insolvent and establish a temporary increase in the PBGC guarantee through 2051 and allow PBGC to pay insolvent plans financial assistance on a monthly or quarterly basis in the amount necessary to pay plan level benefits when those plans became insolvent.
- A plan that meets the eligibility requirements for SFA, should be eligible for some amount of SFA.
- Some of a plan’s current assets are needed to pay current accrued benefits beyond 2051 and should not be take into account in determining the amount of SFA.
- Comparing the Program to PBGC’s existing financial assistance to determine the amount of the SFA is not a reasonable comparison. The current financial assistance program provides ongoing financial assistance that PBGC adjusts monthly or quarterly to take into consideration the ebbs and flows of plan assets and the plan’s needs. However, the SFA is a one-time lump sum payment, which must account for the fact that a plan may not have certain assets and PBGC does not have the authority to make a second payment.
- In determining the SFA amount, a reasonable approach would be for PBGC to provide some flexibility for the use of assumptions consistent with the reasonable expectations of the bargaining parties (e.g. adjusted contribution assumptions that encourage plan participation).
- The ARPA recognizes that it is the plan sponsor that determines the amount needed by stating that the amount is the “amount as demonstrated by the plan sponsor on its applications….”
- To keep contributing employers in these plans, PBGC should consider giving the plans flexibility to alleviate the current financial strain on employers who are now paying for past service obligations of employers that left these plans years ago, in many cases without paying any amount toward their share of the underfunding of these liabilities.
- If the SFA is only going to extend solvency to 2051, and then leave these plans to go insolvent and reduce benefits to the PBGC maximum, there is also no reason for unions to push for the continuance of these plans.
- The SFA should reduce any perceived future insolvency risk and allow employers to cater to younger active employees who can accrue meaningful benefits and anticipate that the plan’s assets will be able to support their benefits through retirement age.4
- If future anticipated contributions on behalf of active employees are included in determining the amount of SFA, current and future active employees will be discouraged from plan participation, especially if each eligible plan projects insolvency in 2052. Moreover, if those anticipated contributions do not actually occur, a decision made now to factor such contributions into the SFA may result in an amount that is not large enough to meet a plan’s need
Conditions on Plans
The ARPA added ERISA Section 4262(m) which provides that PBGC
May impose …. reasonable conditions on an eligible multiemployer plan that receives special financial assistance relating to increases in future accrual rates and any retroactive benefit improvements, allocation of plan assets, reduction in employer contribution rates, diversion of contributions to, and allocation of expenses to, other benefit plans, and withdrawal liability. (Emphasis added).
Although Section 4262(m) allows PBGC to impose reasonable conditions, any conditions must be consistent with other provisions of law.
Critical status and employer contributions and diversion of contributions
Under ARPA, a plan that receives SFA will be considered to be in critical status through the 2051 plan year. A plan that is in critical status must have a rehabilitation plan that provides for a reduction in future benefit accruals and/or an increase in contributions so that the plan may emerge from critical status by the end of the rehabilitation period (i.e. 10 years or longer if a plan cannot emerge within 10 years).6 Special rules apply between the period the plan is certified as critical and before the rehabilitation plan is adopted by an employer in a collective bargaining agreement (CBA). During this time, the trustees cannot accept a CBA that provides for a reduction in the level of contributions for any participant, a suspension of contribution with regard to any period of service or any new or indirect exclusion of younger or newly hired employees from plan participation.7 These restrictions do not apply after the rehabilitation plan is adopted. After the first year, the trustees must annually update the rehabilitation plan, including updating the schedule of contributions rates to reflect the plan experience.
Congress clearly delegated the responsibility of setting employer contribution rates to the plan trustees of a plan in critical status, not PBGC. As such, although ARPA states that PBGC may impose a reasonable condition on employer contributions for plans receiving SFA, because these plans are also considered critical, such a condition should not interfere with the trustees’ authority to set the contribution rate under the rehabilitation plan, including considering how the SFA impacts the rehabilitation plan and the economic impact the rate will have on the contributing employers.8 Statutory provisions should be read as
a harmonious whole and should not unnecessarily be construed as being in conflict with one another. Specific statutory provisions also trump more general ones, meaning that Congress’s specific treatment of employer contribution rates should control.
With respect to “diversion of contributions to other benefits plans”, under current law, there is nothing that limits the parties’ bargaining power after the rehabilitation plan is accepted with respect to new hires. Given that Congress knew how to limit a plan’s ability to accept a CBA that limits new hire participation, but it chose not to do so once a rehabilitation plan is in place, PBGC should not place any such limitation on plans receiving SFA that are beyond those requirements that otherwise apply to plans that are in critical status.
Withdrawal liability is a contributing employer’s allocable share of unfunded vested benefits (UVB). To determine withdrawal liability, a plan must first determine the amount of UVBs. The term “unfunded vested benefits” means “an amount equal to - (A) the value of nonforfeitable benefits under the plan, less
(B) the value of the assets of the plan.”
Although PBGC has authority to implement rules relating to withdrawal liability, the ARPA did not change the definition UVBs or the definition of plan assets, terms that presumably mean the same under ERISA and ARPA because ARPA did not manifest an intent to redefine the terms. As such, because SFA is a plan asset and will be used to reduce nonforfeitable benefits, SFA should be taken into consideration in determining the amount of UVBs.
ERISA defines plan assets to mean “plan assets as defined by such regulations as the Secretary may
prescribe.” The regulation only defines plan assets with respect to a plan's investment in another entity. However, DOL has stated that “in situations outside the scope of the plan assets-plan investments regulation (29 C.F.R. § 2510.3-101), the assets of a plan generally are to be identified on the basis of ordinary notions of property rights under non-ERISA law.”
Although the SFA is required to be segregated from other plan assets under ERISA Section 4262(m), nothing in the statutory text of the ARPA or under ordinary notions of property rights would classify SFA as anything other than plan assets. For example, SFA would be subject to ERISA’s fiduciary rules and prohibited transaction rules as well as ERISA’s criminal provisions. Given that Congress did not specifically state that SFA assistance is not a plan asset for purposes of determining UVBs, PBGC should not determine otherwise.
By its very nature, SFA also will be used to pay nonforfeitable benefits. In fact, the ARPA states that SFA may be used to “make benefits payments and pay out plan expenses.” Nonforfeitable benefits are
benefit payments, and, therefore, to the extent that SFA reduces nonforfeitable benefits, it should be considered in determining UVBs under a plan.
In the past when Congress created a special program for financially troubled plans, it also provided special rules for determining UVBs. Specifically, under the Multiemployer Pension Reform Act of 2014 (MPRA), Congress specifically provided that
Any benefit reductions under subsection (e)(8) or (f) or benefit reductions or suspensions while in critical and declining status under subsection (e)(9)), unless the withdrawal occurs more than ten years after the effective date of a benefit suspension by a plan in critical and declining status, shall be disregarded in determining a plan’s unfunded vested benefits for purposes of determining an employer’s withdrawal liability under section 1381 of this title.15
In contrast, ARPA did not provide special treatment for SFA with respect to determining UVBs. As such, it should not be within PBGC’s authority to change the definition of UVBs.
ERISA Section 4211 lays out the methods for computing withdrawal liability, and MPRA contained special withdrawal liability rules that apply to plans that take advantage of the partition program.
Specifically, ERISA Section 4233(d)(3) contained a new withdrawal liability rule that applies for 10 years following the date of the partition order. Subsequently, PBGC issued regulations implementing this special withdrawal liability rule that was laid out in the MPRA amendments.
Unlike the MPRA amendments, nothing in the ARPA specifically addresses how SFA should be applied with respect to the methods for determining withdrawal liability. As such, PBGC should proceed cautiously in exercising its discretion under ERISA Section 4262(m).
A narrow interpretation of the Program and overreaching conditions that negatively impact contributing employers will not help the long-term viability of these plans. If the amount of the SFA is interpreted narrowly such that the plans would otherwise become insolvent in 2051, employers will face the option of withdrawing now or waiting until 2051 when the plan inevitably goes insolvent. As many employers are at the point, or will be soon, where withdrawal liability now is the cheaper option, there is no incentive to remain in the plan when remaining in the plan will only extend the duration of future withdrawal liability payments. In addition, unions will have no reason to push for continuation of these plans when the retired or soon to be retired employees are protected until approximately 2051 by the SFA, and the younger active employees know they will receive little or nothing for their pension contributions because the plan is sure to be insolvent before or shortly after they retire.
Chantel L. Sheaks
Vice President, Retirement Policy