Many of America’s 1,400 multiemployer pension plans are in varying states of financial distress. The American Rescue Plan Act of 2021 (ARPA) included funding for the Pension Benefit Guaranty Corporation (PBGC) to provide grants that will reduce underfunding in the nation’s most at-risk multiemployer pension plans. Employers who participate should consider the impact of the pension funding relief on their plans and evaluate if the revised costs of withdrawal will be outweighed by the benefits of continued participation.
A brief history of multiemployer pension plans
A multiemployer pension plan is a retirement plan created through an agreement between two or more employers, typically in the same or related industries, and the union that represents their employees. These plans have provided advantages over the years by reducing the per-employee costs of administration through economies of scale. However, with interest rates having fallen over time to historic lows and industries seeing downturns in U.S. activity, many plans are now threatened by increasing liabilities at a time when the pool of workers available to fund them is decreasing. The resulting underfunding of some multiemployer pension plans has become so severe that Congress included billions of dollars in the ARPA COVID-19 relief bill to fund direct grants to the plans most in danger of running out of funds.
Multiemployer pension plan withdrawal liability
With PBGC premiums expected to increase and the long-term financial solvency of these plans in question, many employers who participate in them are considering whether to withdraw and invest in different retirement benefit options for their employees. In order to exit from an underfunded multiemployer pension plan, employers must pay a “withdrawal liability” equal to their share of the underfunding. In general terms, the amount of withdrawal liability an employer owes is the lesser of:
- The employer’s share of the current underfunding liability.
- The net present value of the “20-year cap” amount. (This amount varies based on contribution base units (CBUs) and contribution rates over past 10 years, but it may be smaller than the employer’s share of the current underfunding liability.)
When employers ask their plan administrators about withdrawal, they are typically told only that their withdrawal liability will be the share of underfunding. In today’s market, especially prior to the distribution of the ARPA grants by the PBGC, this cost could make withdrawal prohibitively expensive. Understanding the alternative calculation and working with the plan administrator to utilize it can make an exit much more affordable.
What does ARPA do for multiemployer plans?
ARPA offers “special financial relief” (SFA) to multiemployer pension plans that meet one of the following four criteria:
- The plan is in “critical and declining status” (as defined in section 305(b)(6) of ERISA) in any plan year beginning in 2020, 2021, or 2022.
- The plan had a suspension of benefits under section 305(e)(9) of ERISA approved as of the date ARPA became law (March 11, 2021).
- In any plan year beginning in 2020, 2021, or 2022, the plan is certified to be in “critical status” (under section 305(b)(2) of ERISA), it has a modified funded percentage of less than 40%, and its active participants comprise less than 40% of its total participants.
- The plan became insolvent after Dec. 16, 2014, has remained insolvent, and has not terminated as of March 11, 2021.
Because these grants will reduce the underfunded amounts at the plans that receive them, they will also reduce the withdrawal liability calculated under the first method above. However, the best-case scenario for plans that do qualify for SFA will be an amount sufficient to pay 100% of benefits through the 2051 plan year.
In addition to pension funding relief, ARPA includes an increase in PBGC premiums for multiemployer pension plans. So, at a time when economic circumstances are already making it harder to keep up with funding requirements for these plans, it’s likely that this premium increase will result in higher administrative costs for employers who choose to remain in a multiemployer plan going forward.
Before you act, consider these three scenarios
When it comes to decisions about withdrawing from a multiemployer pension plan, employers need to understand how their plans fit into one of the following three classifications:
- Is the plan fully funded? If so, since the withdrawal liability is zero, the decision to go forward should be focused on whether another option (e.g., 401(k) plan or conservative single employer pension plan) provides better workforce management and outcomes for the business. There will be an uptick in multiemployer PBGC premiums under the new law, so that should factor into any calculations related to future costs to maintain the plan.
- Is the plan underfunded at a level that doesn’t qualify for ARPA support? Businesses that participate in multiemployer pension plans that don’t qualify for SFA could still be affected by the actions of other employers who participate in the plan. If other employers withdraw using the 20-year cap method described above, the underfunding could increase in the future. Additionally, more analysis is needed to quantify the actual withdrawal liability to best determine if staying with a multiemployer pension plan is worth the risk of increasing withdrawal liability, contribution levels, and poor workforce management.
- Is the plan underfunded at a level that qualifies for ARPA support? Distressed multiemployer pension plans that qualify for SFA under ARPA should factor the amount of assistance into the calculation of withdrawal liability. Under the current rules, the only plans that can apply for SFA now are those that were insolvent before March 11, 2021. The application process will expand to include other plans as shown in the following chart:
As noted above, the maximum SFA amount is intended to keep the plan solvent until the 2051 plan year. The calculation is based on the present value of the plan’s 2051 balance, minus the plan assets, expected investment returns, and the present value of expected contributions and withdrawal liability payments. Present values are calculated using current IRS long-term corporate bond rate figures. Any SFA amounts paid to the plan must be invested in high-quality corporate bonds.
Under the eligibility rules, a plan that doesn’t qualify for relief today may still qualify based on conditions that occur later in plan year 2021 or in plan year 2022. Many plans that do qualify will not be able to apply for SFA until February of 2023. With so many variables to consider in the process of qualifying for and receiving SFA, it may still be difficult for some employers to calculate the impact that SFA relief may have on withdrawal liability. Many in the industry have been disappointed by this assistance and regard it as too inequitable, only kicking the can down the road without fixing the underlying multiemployer pension system.
As with any type of tax or employee benefit plan advice, affected employers should discuss their individual facts and circumstances with a knowledgeable advisor who is familiar with their situation. To learn more about calculating multiemployer pension plan withdrawal liability and the pension funding relief provisions of ARPA, feel free to contact a Plante Moran expert.
