Legal Update

Jul 13, 2022

PBGC Finally Publishes Final Rule On Special Financial Assistance Program

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Seyfarth Synopsis: On July 8, 2022, the Pension Benefit Guaranty Corporation (“PBGC”) published its final rule (“Final Rule”) on the Special Financial Assistance (“SFA”) Program established under the American Rescue Plan Act of 2021 (“ARPA”). The Final Rule contains a number of significant developments and amendments from the interim final rule (“IFR”), including for example, expanding investment options for SFA assets, providing for separate interest rate assumptions for SFA versus non-SFA assets, loosening restrictions for benefit increases, and adding a new condition for phased recognition of SFA assets in calculating withdrawal liability. The Final Rule becomes effective on August 8, 2022. There is a thirty (30) day public comment period solely on the new phase-in condition for withdrawal liability starting from the Final Rule publication date.

Under the SFA Program, a financially troubled multiemployer pension plan may receive a one-time lump sum payment intended to be sufficient to allow it to pay all benefits due from the date the SFA payment is received through the last day of the plan year ending in 2051. We previously wrote about the IFR and explained the various eligibility conditions for SFA and the calculations involved. (Click here for our earlier Legal Update titled PBGC Issues Much Anticipated Interim Final Rule On Special Financial Assistance Under American Rescue Plan Act).

The following is a high level summary of the key changes and developments from the Final Rule.

Separate Interest Rate Assumptions for SFA and Non-SFA Assets

Under the Final Rule, the SFA amount will now be calculated using two different interest rate assumptions: one for SFA assets and another for non-SFA assets. This is an important development because the interest rates are used to calculate the total SFA amount, and with this new approach, plans should receive more in financial aid in most instances. Previously under the IFR, plans were required to use the same interest rate assumption for both SFA and non-SFA assets. This did not take into account that the IFR also required SFA and non-SFA assets to be segregated, with SFA assets limited to more conservative investments. Thus, using the same interest rate assumption for both pools of assets was not an accurate way for plans to project actual expected investment returns. This also meant that the SFA could fall short of the amount the plan would need to pay all benefits due through the plan year ending 2051.

Recognizing this issue, the Final Rule now bifurcates the required interest rate assumptions as follows:

  1. For Non-SFA assets, the interest rate is the lesser of: (i) the rate used by the plan for zone certification status before January 1, 2021; and (ii) the third segment funding rate plus 200 basis points; and
  2. For SFA assets, the interest rate is the lesser of: (i) the rate used by the plan for zone certification status before January 1, 2021; and (ii) the average of the three funding segment rates plus 67 basis points.

For plans whose applications are approved on or before August 8, 2022 (i.e., the Final Rule date), a supplemental application must be filed with the PBGC to take advantage of the two different interest rate assumptions. If an application is still pending as of August 8, 2022, then the plan will need to withdraw the application, revise and refile.

Investment of SFA Assets

The Final Rule allows plans to invest up to 33% of SFA assets in return seeking investments (e.g., publicly traded common stock, equity funds that invest primarily in public shares, bonds, etc.), with the remaining 67% restricted to investment grade fixed income securities. Previously under the IFR, 100% of SFA assets were required to be invested in investment grade fixed income securities. This development adds an important element in the investment of SFA assets, and it could significantly increase the likelihood that plans will be able to avoid insolvency through 2051.

For plans receiving SFA amounts before August 8, 2022, the investment restrictions under the IFR will continue to apply unless a supplemental application is filed with the PBGC.

MPRA Plans

The Final Rule revises the methodology for determining the SFA amount for plans that suspended benefits under the Multiemployer Pension Reform Act of 2014 (“MPRA”).

Previously under the IFR, a single method was used to calculate SFA amounts for plans that suspended benefits under the MPRA (“MPRA plans”) and those that did not (“non-MPRA plans”). Under the MPRA, benefit suspensions were approved if plans could demonstrate that such suspensions would enable the plan to avoid insolvency indefinitely. To qualify for SFA, MPRA plans must permanently reinstate any suspended benefits. However, under the IFR, an MPRA plan would only receive amounts necessary to avoid insolvency through 2051. Thus, under the IFR, MPRA plans were faced with the dilemma of either keeping any benefit suspensions in place to avoid insolvency indefinitely, or receiving SFA, reinstating benefits, and risking insolvency in the future.

To help alleviate this issue, the Final Rule provides that the SFA amount for MPRA plans is the greater of the following:

  1. The SFA amount calculated without regard to any benefit suspensions (i.e., a non-MPRA plan);
  2. The lowest SFA amount that is sufficient to ensure the plan’s projections demonstrate increasing assets in 2051; and
  3. The SFA amount equal to the present value of reinstating suspended benefits through 2051 (including make-up payments).

Retroactive Benefit Increases

The Final Rule allows retroactive benefit increases beginning ten years after receiving SFA, provided the plan can demonstrate to the PBGC that it will continue to avoid insolvency. The IFR did not permit retroactive benefit increases at all during the SFA period (i.e., through 2051), and only permitted prospective benefit increases when certain conditions were satisfied.

Merger Involving SFA Plans

The IFR contained a number of restrictions and conditions, including PBGC approval, that are applicable in the event of merger of a plan receiving SFA. The Final Rule, however, removes restrictions on prospective benefit increases, allocation of assets, and allocation of expenses. The PBGC explained that such conditions would “unduly impede beneficial mergers.” In addition, a merged plan may apply for a waiver of certain other restrictions.

Transfer From SFA Plan To Health Plan

While the PBGC was initially hesitant to permit reallocation of contributions between SFA plans and other employee benefit plans, the Department of Labor suggested that there may be circumstances that would justify good faith reallocations of income or expenses between plans (e.g., health benefit cost increases due to legislative changes).

Addressing this narrow circumstance, the Final Rule now permits an SFA plan to apply to the PBGC for permission to temporarily reallocate to a health plan up to 10% of the contribution rate negotiated on or before March 11, 2021. The SFA plan must demonstrate that the reallocation of contributions is necessary to address an increase in healthcare costs required by a change in Federal law, and that the reallocation does not increase the risk of insolvency for the SFA plan. Plans can begin applying five years after receiving SFA, and reallocation of contributions relating to any single change in Federal law can last for no more than five years, with a limit of ten years cumulatively for all reallocation requests.

Withdrawal Liability

The Final Rule adds a “phase-in” feature intended to ensure that SFA funds are not used to subsidize employer withdrawals.

Under the IFR, all SFA funds must be included as plan assets in determining unfunded vested benefits. As a result, it is likely that withdrawal liability would be significantly reduced when calculated immediately after plans receive SFA funding. After the changes in the Final Rule, however, the reduction in withdrawal liability will be more gradual, as plans are required to “phase-in” the recognition of SFA assets.

The phase-in period begins the first plan year in which the plan receives SFA and extends through the end of the plan year in which the plan expects SFA to be exhausted. To determine the amount of SFA assets excluded each year, the plan multiplies the total amount of SFA by a fraction, the numerator of which is the number of years remaining in the phase-in period, and the denominator is the total number or years in the phase-in period. The phased recognition of SFA assets does not apply to plans that received SFA funds under the terms of the IFR unless a supplemental application is filed. If the plan files a supplemental application, the phased recognition applies to withdrawals occurring on or after the date the plan files the supplemental application.

Solely for this new condition for determining withdrawal liability, there is a thirty (30) day public comment period starting on July 8, 2022, the date of publication of the Final Rule in the Federal Register.

SFA Measurement Date and Lock-In Applications

To provide filers with more flexibility, the Final Rule redefines the “SFA measurement date” as the last day of the third calendar month preceding the plan’s initial application date. Previously under the IFR, the SFA measurement date was defined as the last day of the calendar quarter preceding the plan’s initial application date.

In addition, the Final Rule creates a mechanism to permit plans in priority groups 5, 6, and any additional priority groups established by the PBGC, to file a “lock-in application.” A lock-in application allows the plan to freeze its base data (i.e., SFA measurement date, census data, non-SFA interest rate assumption, and SFA interest rate assumption) when it is unable to file an application because the PBGC has temporarily closed the filing window. Eligible plans may file lock-in applications after March 11, 2023, and on or before December 31, 2025.

Conclusion

As practitioners continue to digest the new Final Rule, there may be other issues that come up that are not addressed. As noted above, there will also be a thirty (30) day public comment period solely on the phase-in approach to calculating withdrawal liability, which may lead to additional changes. We will continue to monitor for further developments in that regard, and for any additional clarifying guidance from the PBGC. Stay tuned…