Pension Relief Provisions in the American Rescue Plan Act of 2021: Plans Receive Funding Relief but Many Questions Remain

President Biden's signing of the American Rescue Plan Act of 2021 (ARP) culminates a decade-long effort by stakeholders in the multiemployer pension system to obtain funding relief for nearly 200 multiemployer pension plans that face insolvency or near-insolvency over the next several years. The pension subtitle of the legislation (Title 9, Subtitle H) also provides critical funding relief for single-employer pension plans whose pension obligations have dramatically increased since the Federal Reserve began lowering interest rates in the second half of 2019 and in 2020.

The single-employer relief provisions will be familiar to plan sponsors, as the relief (1) extends and enhances current law interest rate relief and (2) provides an extended amortization period similar to what Congress enacted in the aftermath of the 2008-09 financial crisis. In contrast, the multiemployer relief involves a new program – direct payments by the Pension Benefit Guaranty Corporation (PBGC) to qualifying multiemployer plans. Moreover, as the legislation had to comply with the Senate's "budget reconciliation" requirements, certain rules and guidelines that typically would accompany this type of funding relief had to be jettisoned. The absence of detail leaves plan sponsors, plan professionals, and contributing employers with many unanswered questions.

The following is a high-level summary of the multiemployer and single-employer pension relief provisions in the legislation.

Multiemployer Pension Relief Provisions

COVID-19 Relief for Multiemployer Plans

The legislation provides optional relief to all multiemployer plans that enables them to respond to the COVID-19 pandemic. These provisions resemble what was enacted following the 2008-09 financial crisis.

• Temporary Delay in Designation of MEPP as in Endangered, Critical, or Critical and Declining Status (Sec. 9701): A multiemployer pension plan (MEPP) is classified by its funded percentage. In general, a MEPP whose funded percentage is less than 80% is an "endangered plan," a MEPP whose funded percentage is less than 65% is a "critical plan," and a plan that is projected to become insolvent in the next 14 years (or in certain circumstances 19 years) is a "critical and declining" plan.

  The legislation provides that a plan may retain its 2019 zone status for plan years that begin in 2020 or 2021.

• Temporary Extension of the Funding Improvement and Rehabilitation Periods for Multiemployer Pension Plans in Endangered and Critical Status for 2020 and 2021 (Sec. 9702): A plan in endangered status must adopt and comply with a "funding improvement plan" that is reasonably expected to enable the plan to achieve certain funding improvements over a 10-year period. A plan in critical status must adopt a "rehabilitation plan" that is reasonably expected to enable the plan to emerge from critical status over 10 years (or use all reasonable measures).

  The legislation provides that for a plan year beginning in 2020 or 2021, a plan may extend its funding improvement plan or rehabilitation period (whichever is applicable) by five additional years.

• Adjustments to Funding Standard Account Rules (Sec. 9703): The legislation permits plans that have not received special assistance to take advantage of temporary funding relief rules to address COVID-19-related investment and contribution losses (but would be subject to certain benefit restrictions and a solvency test). For the first two plan years following February 29, 2020, a plan may use a 30-year amortization base to spread out COVID-19-related losses.

Special Assistance Program for Troubled Multiemployer Plans

The legislation provides the necessary funding to the PBGC so it can provide direct "special financial assistance" to multiemployer plans. The Congressional Budget Office estimates that between 185 and 336 multiemployer plans will receive special assistance under the legislation, at an estimated cost of $86 billion over the next decade (although the total cost of relief is not limited to this amount). The special assistance is not subject to repayment and does not allow any benefit cuts. Beginning in 2031, the legislation increases PBGC premiums.

The special financial assistance program is described in Section 9704 of the legislation.

• Plan Eligibility for Financial Assistance: The eligibility period for plans to qualify for special assistance will last until plan year 2022. Eligible plans include:
  • Plans certified in critical and declining status,
  • Critical zone plans if they have a modified funded percentage less than 40% and an active-to-inactive ratio that is less than 2 to 3,
  • Plans that have benefit suspensions approved prior to the date of enactment, or
  • Plans that became insolvent after December 16, 2014.
• Financial Assistance Timing: The PBGC has 120 days from March 11 to issue guidance that details the materials required to be submitted in an application and specifies the date of the special assistance transfers once an application is approved. The legislation gives the PBGC discretion to limit applications in the first two years of the program. Plans that (1) are projected to become insolvent within five years or (2) have implemented benefit suspensions and (3) other large, financially distressed plans may be given priority consideration for financial assistance. The PBGC must approve the application unless it notifies a plan of an incomplete or unreasonable application within 120 days of filing. All applications for special financial assistance must be submitted before December 31, 2025.
• Amount of Financial Assistance: The PBGC must provide enough assistance to allow plans to pay all benefits due from the date the special assistance commences through 2051. The amount of financial assistance paid to a plan will not be capped at the PBGC guarantee amount and will not require benefit cuts. The interest rate used to determine the amount of a plan's special assistance is the rate used by the plan in its most recent certification, subject to a limit. The interest rate limit is determined using the third segment rate plus 2% (approximately 5.5%). The PBGC must accept the other actuarial assumptions used by the plan in its most recent certification unless the assumptions are deemed unreasonable. The special financial assistance will be paid to plans in a single, lump sum payment. Financial assistance received by a plan will be segregated from other plan assets and will be required to be invested in low-risk bonds or other PBGC-approved investments.

  Note: The legislation's omission of current plan assets in describing the amount of financial assistance creates considerable ambiguity. PBGC regulations are needed to clarify whether a plan's current assets are considered in determining the amount of special assistance given to a plan. These regulations will have a profound impact on the long-term sustainability of troubled plans (beyond the 30-year relief period). If the statute is interpreted to include a plan's existing assets, the amount of financial assistance will be smaller, but it is likely that the plan will be insolvent beyond 2051. This scenario will likely put added pressure on employer contributions and active plan participants. It may also create complications and difficult decisions for plan sponsors that have implemented benefit suspensions pursuant to the Multiemployer Pension Reform Act of 2015 (MPRA).

• Reinstatement of MPRA Benefit Suspensions: The legislation requires that plans receiving special assistance restore previously suspended MPRA benefits. The restored benefits will be paid either as a lump sum within three months of a plan receiving financial assistance or in equal monthly installments over five years.
• Financial Assistance Conditions: The legislation gives the PBGC the power to regulate asset allocations, increase future accrual rates, change (reduce) employer contribution rates and withdrawal liability, and adjust other plan provisions. However, the PBGC cannot require plan benefit reductions (including adjustable benefits) or regulate plan governance or funding rules related to the financial assistance. Plans that receive special financial assistance will not be eligible to apply for MPRA benefit reductions in the future and are deemed to be in critical status until 2051. It is unclear whether these plans will also be ineligible for future PBGC partitions. Financial assistance is not taken into account for purposes of determining employer contributions.
• PBGC Premium Increases After 10 Years: ARP increases the PBGC fixed-rate premium to $52 per participant in plan years beginning after December 31, 2030 and remains indexed to inflation. Because the current PBGC premium is indexed to inflation, it is expected the premium will increase by roughly $8 from $44 to $52 in 2031.

Note: Two withdrawal liability provisions in the House-passed legislation were removed in the Senate because of the budget reconciliation rules. The first related to the effect of the special assistance on an employer’s withdrawal liability. The House-passed version provided that the financial assistance was not considered in calculating an employer’s withdrawal liability for 15 years immediately following the receipt of federal aid. The second change related to withdrawal liability disclosure requirements for plans that received financial assistance. The House bill required that a plan receiving financial assistance annually disclose an employer’s withdrawal liability taking into account the special financial assistance and provide  a statement that the plan would have sufficient resources to pay all benefits through 2051.

The absence of withdrawal liability directives in the final legislation raises many questions for plan sponsors and employers moving forward. The legislation permits the PBGC to issue withdrawal liability conditions for plans that receive special assistance, but the scope of this authority has been interpreted differently by plan professionals.

Special Assistance Guidance and Timeline

The PBGC will be primarily responsible for administering the special assistance program, though the Treasury Department will coordinate and consult with the corporation in the following areas.

• Administration of Special Assistance Funds: The PBGC, in conjunction with Treasury, will determine the appropriate amount of funds dedicated to the special assistance program.
• Priority Consideration Applications: The PBGC may provide priority consideration for certain eligible plans in the first two years of the special assistance program. If the PBGC contemplates priority consideration for certain plans, it must consult with Treasury on granting priority consideration to those plans. Any plan that wishes to apply for priority consideration must submit its special assistance application to both the PBGC and Treasury.
• Applications of Plans That Previously Suspended Benefits: Treasury and the PBGC may issue guidance for plans applying for special assistance that previously suspended benefits under MPRA. The PBGC will consult with Treasury in reviewing these applications and the methods in which plans reinstate previously suspended benefits. Plans with suspended benefits must submit a special assistance application to both the PBGC and Treasury.
• Plans That Change Assumptions in Special Assistance Application: If a plan proposes to change the assumptions used in its application, the PBGC shall consult with Treasury on the proposed changes.
• Conditions on Plans That Receive Special Assistance: The PBGC will consult with Treasury on regulations and guidance for conditions on future accrual rates, asset allocation, contribution rates, and withdrawal liability for plans that receive special assistance.

The legislation provides a specific timeline for the PBGC to submit guidance, review applications, and provide special assistance to plans.

• July 2021: Deadline for the PBGC to issue guidance or regulations for special assistance applications. (120 days following the March 11 enactment)
• November 2021: First special assistance applications automatically approved unless the PBGC notifies a plan that an application is incomplete or its assumptions are unreasonable. (120 days following submission of application)
• March 2022: Revised applications deemed approved, unless the PBGC affirms that an application is incomplete or unreasonable. (120 days following submission of revised application)
• November 2022: Deadline for PBGC to provide special assistance to plans that had an application approved in November 2021. Special assistance is provided to plans in a lump sum payment no later than one year after an application is approved.
• March 2023: End of two-year priority consideration period for certain plans.
• December 31, 2025: Deadline for plans to submit a special assistance application.
• December 31, 2026: Deadline for plans to submit a revised special assistance application.

Single-Employer Pension Funding Relief Provisions

The legislation provides funding relief for single-employer pension plans. The relief consists of two key elements similar to the HEROES Act legislation that was passed by the House of Representatives on two separate occasions in 2020.

• Longer Period to Amortize Funding Shortfalls (Sec. 9705): Plans will be able to amortize funding shortfalls over a 15-year period instead of seven years. All shortfall amortization bases for plan years beginning after December 31, 2021 would be reduced to zero. Plans could elect to use December 31, 2018, December 31, 2019, or December 31, 2020 if preferred.
• Extension of Interest Rate Corridor (Sec. 9706): In 2012, 2014, and again in 2015, to address concerns that historically low interest rates were inflating pension obligations, Congress provided temporary interest rate relief (that results in a slightly higher or "smoothed" interest rate). The current smoothed interest rate under the 2015 legislation began phasing out in 2021.

  The legislation extends and enhances the interest rate smoothing relief to account for a continued decline in interest rates since 2015. Specifically, the legislation (i) reduces the 10% interest rate corridor to 5% effective in 2020, (ii) delays the phase-out of the 5% corridor until 2026, and (iii) imposes a 5% floor on the 25-year interest rate averages.

Next Steps

The focus shifts to the PBGC, which faces a July 10 deadline for issuing guidance that provides a roadmap for the MEPP financial assistance application process (which will require answers to many questions arising from the legislation). Plans, plan professionals, and contributing employers should closely monitor developments at the PBGC and Treasury.

Questions?

If you have questions or concerns regarding this client alert, please contact the authors, any member of Venable's Employee Benefits Practice Group, or your regular Venable lawyer.

*A special thank-you to Peter Nielsen for his contribution to this article.