The Multi-Employer Pension Reform Act of 2014
The massive spending bill enacted by Congress on December 13, and signed into law shortly thereafter, is known as the Multi-Employer Pension Reform Act of 2014 (MPAA). Here’s what it does.
A significant part of the law features changes to the Pension Protection Act of 2006 (PPA) — including repealing the scheduled “sunset” of that law’s funding rules in 2015. Additional PPA-related changes cover/address the following areas:
- Critical status election;
- Emergence from critical status;
- Endangered status not applicable if no additional action is required;
- Correcting the endangered status funding improvement plan target funded percentage;
- Conforming endangered status and critical status rules during funding, improvement and rehabilitation plan adoption periods;
- Corrective plan schedules when parties fail to adopt in bargaining;
- Repeal of reorganization rules for multi-employer plans;
- Disregard of certain contribution increases for withdrawal liability purposes;
- Guarantee for pre-retirement survivor annuities under multi-employer pension plans; and
- Required disclosure of multi-employer plan information.
The law also addresses multi-employer plan mergers and partitions, and raises Pension Benefit Guaranty Corporation (PBGC) premiums for multi-employer plans to $26 per participant — double the originally planned $1 rate hike to $13 next year.
Options for Troubled Plans
The second and most controversial part of the law (Title II) outlines conditions, limitations, distribution and notice requirements, and the approval process for benefit suspensions (called “remediation measures”) for multi-employer plans deemed to be “in critical and declining status.”
Those are plans that are projected to become insolvent any time over the next 14 plan years, including the current one. Plans with less than an 80 percent funded ratio or a retiree-to-active-participant ratio exceeding 2:1 can be projected to be solvent as far as 19 plan years out into the future, and still be deemed “in critical and declining status.”
Plans with that status have the authority — subject to a set of restrictions — to temporarily or permanently suspend both current and future benefits, including accrued and vested benefits, both for active employees and retirees already receiving payments.
Here are the hoops the plan must jump through to curtail benefits:
Any reduced benefit cannot fall below 110 percent of PBGC’s benefit amount (what PBGC will pay out to retirees in the event of a complete plan collapse).
PBGC’s benefit amount is determined according to this formula: 100 percent of the first $11 of the plan’s monthly benefit rate, plus 75 percent of the next $33 (which equals $24.75) of the monthly benefit rate, times the participant’s years of credited service. That translates to a maximum monthly benefit of $35.75 times the number of years of service.
Applying this formula, the maximum monthly benefit of an employee with 20 years of service would be $715 (20 years times $35.75 per year).
Remember, the reduced benefit cannot fall below 110 percent of PBGC’s benefit amount, in this case, 110 percent of $715, which equals $786.50. Thus the minimum benefit that such a participant would have to promised by the multi-employer seeking relief would be $786.50.
Older participants and beneficiaries (75 and above) and disabled individuals get a better deal, however. No other distinctions are made, and the impact of benefit suspensions must be spread evenly among other participants and beneficiaries.
“Critical and declining” plans cannot simply opt to suspend benefits on their own; they must get a green light from the Department of the Treasury. And when they seek approval, they are required to notify everybody — retirees, active participants and beneficiaries, not to mention all contributing employers, of course.
The Department of Treasury will consult with the Department of Labor and the PBGC in deciding whether to grant the request. Their approval, however, is not the end of the story. If approved, the proposed suspension must next be subject to a vote by participants and beneficiaries.
Why would they approve? They might approve if they believed it’s better to put the pension on life support (and get at least 110 percent of the PBGC guaranteed benefit), than to pull the plug on it entirely.
If they don’t approve, they can be overridden by the government and be forced to accept the suspension, or a “modified suspension.” For either to happen, the Treasury, again in consultation with the Labor Department and PBGC, must determine that the plan in question is “systemically important.” Essentially that means if the plan were to collapse entirely, it would cost the PBGC at least $1 billion to make good on its obligations.
In that scenario, if participants and beneficiaries want to keep fighting the suspension or reduction of benefits they can take their case to federal court, and hope for the best.