New Multiemployer Pension Plan Funding Rules Begin Impacting Employers in April 2008

Employers that contribute to a multiemployer pension plan should watch the mail for an important new notice that the plan's trustees will send if the plan's funded status is low enough to be considered "endangered" or "critical." The notice is required by the Pension Protection Act of 2006 (PPA), 26 U.S.C. §432 and 29 U.S.C. §305, as supplemented by regulations the United States Department of Labor (DOL) proposed in late March, 2008, 73 Fed. Reg. 14417 and 15688. This e-alert briefly explains why the notice is being sent and the new obligations that the PPA imposes on employers, unions, and trustees who are involved with multiemployer pension plans in "endangered" or "critical" status.

Funding Notice

Within 90 days after the beginning of the plan year (March 30, 2008 in many cases), the plan's actuary must certify the plan's "funded percentage" to the plan sponsor. If the plan's "funded percentage" is 80 percent or greater, then the plan is relieved of the more serious funding obligations under the new rules and, generally, does not have to issue a specific notice (although not legally required to do so, some plans in this situation may issue notices to let contributing employers know that they are adequately funded).

However, if the plan's funded percentage is between 65 and 80 percent, or the plan is expected to have an accumulated funding deficiency for any of the next six plan years, then the plan's status will be considered "endangered," and if the plan's funded percentage is less than 65 percent or the plan has other serious financial problems, then the plan's status will be considered "critical." Having an "endangered" or "critical" status will impose a variety of new obligations on contributing employers, unions and trustees.

Endangered Status

If the plan actuary certifies that the plan is in "endangered" status, then several things must happen. First, within 30 days after receiving the certification from the plan's actuary, the trustees must notify the participants, the union, the employers, the PBGC and the DOL of the designation.

Second, within 240 days after the plan actuary certifies the plan's status as being "endangered," the trustees must adopt a "funding improvement plan." The "funding improvement plan" must include actions, including a range of options to be proposed to the union and the employers, that are reasonably likely to achieve a one-third reduction in the underfunded liability over of a period of approximately 12 years. For example, if a plan's funded percentage is 70 percent, the "funding improvement plan" must be designed to achieve an 80 percent "funded percentage" within approximately 12 years.

Third, within 30 days after adopting the "funding improvement plan," the trustees must provide the union and the employers (the "bargaining parties") with two or more schedules, either of which, if adopted, would reasonably be expected to permit the plan to meet its obligations under the "funding improvement plan." One of the schedules must provide for increased contributions and the other, the "default schedule," must provide for a reduction in future benefit accruals, with no contribution increases or only those still needed to achieve the goals of the "funding improvement plan" after future benefit accruals have been reduced to the maximum extent permitted by law. The bargaining parties must negotiate over which schedule to adopt when their current collective bargaining agreement expires.

Fourth, if the bargaining parties cannot agree on changes that satisfy the "funding improvement plan" by the earlier of (a) the date on which the DOL certifies that the bargaining parties are at an impasse, or (b) 180 days after the current collective bargaining agreement expires, then the trustees MUST implement the "default schedule," reducing future benefit accruals to the lowest level possible and increasing contributions as needed to meet the goals of the "funding improvement plan."

Fifth, during the period when a "funding improvement plan" is being considered and after it has been adopted, the trustees cannot accept a collective bargaining agreement that provides for (a) a reduction in contribution rates, (b) a suspension of contributions, (c) the exclusion of new hires, or (d) benefit improvements (unless the plan actuary certifies that the improvements are consistent with the "funding improvement plan"). Additionally, once a "funding improvement plan" has been adopted, the plan may not be amended to so as to increase benefits, unless the plan actuary certifies that the benefit increases are consistent with the "funding improvement plan" and can be paid for out of contributions not required by the "funding improvement plan." Thus, the bargaining parties should attempt to secure the actuary's certification for any proposed improvements before they formally agree to the improvements.

Sixth, if a contributing employer fails to timely pay contributions to the plan in accordance with the "funding improvement plan," then the employer will be liable for the contributions, along with interest and liquidated damages under ERISA; in addition, the employer and its control group may be liable for an excise tax equal to the amount of the delinquent contributions. This new remedy substantially ups the ante for employers who might not pay contributions on time.

Critical Status

If the plan actuary certifies that the plan is in "critical" status, then several things must happen, most of which parallel those that apply if the plan is in "endangered" status. The key differences are as follows.

First, the trustees must adopt a "rehabilitation plan," rather than a "funding improvement plan." The "rehabilitation plan" must include actions, including a range of options to be proposed to the bargaining parties that are reasonably likely to permit the plan to emerge from "critical" status over of a period of approximately 12 years. For example, if a plan's funded percentage is 50 percent, the "rehabilitation plan" must be designed to achieve at least a 65 percent "funded percentage" within approximately 12 years.

Second, the trustees must explain in the notice they send to participants, the union, and the employers that any "adjustable benefits" may be reduced. "Adjustable benefits" include early retirement benefits, post-retirement death benefits, sixty-month guarantees, disability benefits (if not yet in pay status), benefit payment options other than a qualified joint and survivor annuity, recent benefit increases (occurring within the last five years) and other similar benefits.

Third, as with a "funding improvement plan," the trustees must provide the bargaining parties with two or more schedules, either of which, if adopted, would reasonably be expected to permit the plan to meet its obligations under the "rehabilitation plan." One of the schedules must provide for increased contributions and the other, the "default schedule," must provide for a reduction in future benefit accruals, with no contribution increases or only those still needed to achieve the goals of the "funding improvement plan" after benefits have been reduced.

Fourth, during the period beginning with 30 days after the trustees notify the contributing employers that the plan is in "critical" status, and ending on the effective date of a collective bargaining agreement that includes terms consistent with the "rehabilitation plan," the employers must pay a surcharge of 5 percent of the contributions the employers are otherwise obligated to make. This surcharge increases to 10 percent during the next plan year if the parties have not yet signed a collective bargaining agreement that complies with the "rehabilitation plan."

Fifth, notwithstanding the general rule against cutting back benefits, the trustees may reduce "adjustable benefits," based on the outcome of the negotiations between the bargaining parties. In other words, the trustees must implement the reductions if the bargaining parties agree to them, or if they are contemplated by the "default schedule" and the bargaining parties cannot reach agreement.

Conclusion

During April 2008, the trustees of many multiemployer pension plans will be notifying the bargaining parties if their plan is in "endangered" or "critical" status. The trustees will simultaneously, or at some point later this year, also provide the bargaining parties with a plan for remedying the underfunding that will include at least two alternatives, one with increased contributions and one with a reduction in benefits and, if still necessary, a smaller increase in contributions.

Although the bargaining parties are not required to adopt one of the alternatives until the current collective bargaining agreement expires, the new rules encourage employers whose plan is in "critical" status to quickly adopt the required changes. Otherwise, the employer's contributions will be subject to an automatic 5 percent surcharge, which will increase to 10 percent next year and remain in effect until a new, compliant collective bargaining agreement is reached or the "default schedule" is implemented. Finally, for employers whose plans are in "endangered" or "critical" status, the new rules attempt to coerce timely compliance with the contribution obligations under a "funding improvement plan" or a "rehabilitation plan" by imposing a 100 percent excise tax on delinquent payments.

Employers that contribute to multiemployer pension plans in "endangered" or "critical" status need to consider a variety of issues raised by the new rules, including, but not limited to, (a) whether to attempt to negotiate changes before their collective bargaining agreements expire to avoid or minimize surcharges, (b) when in negotiations with the union, whether to agree to the schedule that raises contributions, or push for the "default schedule," and (c) whether to withdraw from a plan rather than pay increased contribution rates.