The Internal Revenue Service (IRS) and the Pension Benefit Guaranty Corporation (PBGC) issued proposed, interim, and temporary regulations and Revenue Procedure 2015-34 pertaining to benefit suspensions and partitions under the Multiemployer Pension Reform Act of 2014 (MPRA). Below we discuss some of the highlights of the regulations.
Comment Deadline: Comments on the IRS proposed and PBGC interim regulations are due to the respective agencies by August 18, 2015.
Hearing Scheduled: The IRS has scheduled a hearing for September 10, 2015.
MPRA made a number of changes to the funding rules for multiemployer plans and removed the sunset date for the sections of ERISA and the Internal Revenue Code pertaining to the zone status of plans.1 In addition, MPRA added sections that would permit a plan that was certified as being "critical and declining" to apply to the Secretary of the Treasury for approval to "suspend benefits" (which is a temporary or permanent reduction in benefits) to avoid the plan becoming insolvent. MPRA also modified ERISA to change the law with respect to the ability for a plan sponsor to apply to the PBGC to partition a plan.
MPRA required that the appropriate guidance with respect to the suspension of benefits be issued within 180 days of enactment. The IRS and the PBGC issued a request for information under their respective provisions in February.2 The IRS has now issued a temporary regulation, a proposed regulation, and Revenue Procedure 2015-34. The IRS temporary regulations and Rev. Proc. 2015-34 are effective immediately.
The PBGC has issued an interim final rule that sets forth the requirements to apply for a partition of a multiemployer plan under MPRA. The PBGC regulation is effective immediately.
Highlights of IRS Regulations and Revenue Procedure
The IRS regulations set out the requirements for a suspension of benefits under MPRA, including rules on how to determine the maximum amount of any reduction. Revenue Procedure 2015-34 sets out the procedure on how to apply for a suspension and provides a model notice to participants. Below are some of the key issues addressed in the new IRS regulations. More detailed information will follow in subsequent alerts.
- Requests for approval of benefit suspensions can be made immediately. The requests will be sent to and processed by the Department of the Treasury. However, it is expected that applications will not be approved prior to issuance of final regulations, which may not occur before 2016. Any applications submitted before issuance of the final regulations may have to be supplemented to comply with the final rules.
- The effective date of any proposed suspension of benefits may not precede the date on which the final authorization is issued. If an application for approval of a suspension of benefits is made today (June 19, 2015), the Department of the Treasury takes a full 225 days to approve the application (i.e., until January 29, 2016), a vote then takes place, and then a final authorization is issued, the earliest date for a suspension of benefits would be sometime in 2016.
- Notice of the application for a suspension of benefits is required to be provided to participants, beneficiaries of deceased participants, and alternate payees, and is not met simply by mailing to the last known address of an individual. A plan sponsor will have to make reasonable efforts to communicate with participants beyond the mailing to the last known address. The regulations set out the content of the notice. The notice may have to be revised once the final regulation is issued. After reasonable efforts, any participants or beneficiaries of deceased participants ("eligible voters") who could not be located will be treated as voting "no" in the same percentage as those who could be located.
- The regulations do not address how a vote will be administered, however ballots must be pre-approved and a proposed ballot included with the application.
- If a request for a suspension of benefits is approved, the plan sponsor must make an annual re-determination that all reasonable measures have been taken to avoid insolvency and that the plan is not projected to avoid insolvency unless the suspension of benefits continues (or another suspension of benefits is implemented). Failure to do so means that the suspension of benefits expires at the end of the plan year.
A "systemically important" plan may have to provide the Department of the Treasury with individual participant data. This data may be used to determine whether, in the case of a negative vote, the Secretary of the Treasury will permit the suspension to go into effect but with a modification of the proposed suspension.
- If the plan sponsor also applies for a partition of the plan, any suspension may not take effect prior to effective date of the partition.
- The regulations and Revenue Procedure 2015-34 clarify that a significant amount of information is to be provided along with a request for a suspension of benefits. Also, the regulations provide specific details on how the maximum amount that can be suspended is determined, as well as some guidance on how the statutory factors are taken into account.
- Revenue Procedure 2015-34 provides a model notice, which includes a section entitled "Individual Estimate of Effect of Proposed Reduction in Benefits," as well as a sample power of attorney and submission checklist.
- The Secretary of the Treasury has appointed Kenneth Feinberg as a Special Master to oversee the process for reviewing requests for a suspension of benefits.
Highlights of the PBGC Partition Regulation
Under section 4233 of ERISA, the PBGC will order a partition only if doing so will result in less cost to the agency and partition will allow the plan to remain solvent. In addition, there are four other statutory conditions that must be satisfied in order for there to be a partition.
Below are some of the key issues addressed in the PBGC regulation.
- The statutory requirement that benefits be suspended to the maximum extent possible is interpreted as the maximum benefit suspensions permissible under the IRS rules for suspension of benefits.
- The term "remain solvent" is interpreted in the same manner as "avoid insolvency" under the suspension of benefit rules, and is determined in the same manner and using the same methodology.
- For a plan sponsor that is coordinating applications for partition and suspension of benefits, an initial determination that a partition application is complete will be conditioned on filing an application for benefit suspensions with the Department of the Treasury within 30 days after receipt of the written notice from the PBGC that the partition application is complete.
- The effect of the requirement that benefits be suspended to the maximum extent allowed is that plans seeking partition must also apply at the same time to the IRS to suspend benefits. The only exception to the requirement that a plan seeking partition must also suspend benefits is if there are no benefits subject to suspension because they are already either below the guaranteed level or payable to participants whose benefits may not be reduced.
- Residual benefits after a partition are not subject to a separate guarantee under section 4022A of ERISA.
- A plan applying for a partition must submit complete information regarding the plan, its participants, its finances, actuarial valuations and projections of financial condition showing that the partition is necessary to allow the plan to avoid insolvency. The application must identify the participants proposed to be removed from the plan, the rational for choosing those participants, and the projected cost to PBGC of providing their guaranteed benefits. The PBGC will require plan sponsors to submit a draft amendment to the original plan or a draft successor plan document along with the application for partition.
Cheiron Observation: PBGC expects that over the next three years, fewer than 20 plans will qualify for partition, and that the total financial assistance PBGC will provide to those plans will be less than $60 million per year.
Cheiron is an actuarial consulting firm that provides actuarial and consulting advice. However, we are neither attorneys nor accountants. Accordingly, we do not provide legal services or tax advice.
1See the Cheiron Pension Alerts of December 11, 2014, and December 22, 2014, and the Cheiron Pension Advisory of May 15, 2015, for more details about MPRA.
2See the Cheiron Pension Alert of February 20, 2015.