CROmnibus: The ‘Fix’ is in for Multiemployer Pensions

By Judy Miller • December 15, 2014 • 0 Comments
Lawmakers have crafted and approved a sweeping bipartisan solution to address the mammoth funding shortfalls of the multiemployer plan system — a solution that is likely to have a long-term impact on defined benefit pension plans for both single and multiemployer arrangements.

The changes mean that for the first time, a plan sponsor will be able to suspend payment of a portion of the accrued normal retirement benefit in an ongoing plan under multiemployer pension provisions. The provisions were included in the so-called “CROmnibus” bill (a hybrid nomenclature for this combination of a “continuing resolution” and “omnibus” bill), which late Dec. 13 passed the Senate by a bipartisan 56-40 vote (21 Democrats, 18 Republicans and Independent Bernie Sanders voted against the measure).

While the provisions are intended to leave most participants affected by the changes with greater benefits in the long term than if the plan continued paying current benefits and subsequently became insolvent, the shortfall risk has clearly been shifted from employers to participants in multiemployer defined benefit plans.

‘Critical and Declining’

Under the new rules, multiemployer plans in “critical and declining” status would be allowed to suspend a portion of the accrued benefits. These are plans that have taken all reasonable measures to avoid insolvency, but are still projected to become insolvent in the current or next 14 years (19 years if there are more than twice as many inactive as active members in the plan). To do so, the plan sponsor will have to show that, with the benefit suspension, it is possible to avoid insolvency and preserve benefits above 110% of the PBGC maximum guarantee level that applies to insolvent multiemployer plans (currently $12,870 per year). Participants and beneficiaries who are age 80 or over on the suspension date will not see any reduction in benefits. Any suspension is to be ratably phased out for those who are between age 75 and age 80.

Applications to suspend benefits must be approved by the Secretary of the Treasury in consultation with the Department of Labor (DOL) and Pension Benefit Guaranty Corporation (PBGC). In recognition that these plans are collectively bargained, participants must be given an opportunity to vote on the suspension before it is effective. However, a vote to not suspend will be ignored if the plan is a “systemically important” plan. The law defines systemically important as a plan with the present value of projected required PBGC assistance in excess of $1 billion. This means participants will effectively have no say for large, severely underfunded plans.

Acknowledging that even with these modifications PBGC faces a severe deficit in its multiemployer program, the legislation will also increase multiemployer premiums to $26 per participant in 2015 (from $12/participant in 2014), with indexing in future years.

In addition to its signature benefit-reduction provision, the legislation:

  • eliminates sunset of PPA multiemployer funding rules with technical corrections to those rules;
  • allows early election of red zone status if a plan is projected to be in critical status within the next five years;
  • repeals the reorganization rules; and
  • expands required disclosures. 

Impact on Single Employer Pensions

The bill also restricts PBGC enforcement of a downsizing liability provision contained in Section 4062(e) of ERISA. Section 4062(e) requires companies with an ERISA-covered plan to post security with the PBGC in the event the company shuts down a major facility and, as a result, lays off a substantial portion of its workforce.

However, in recent years, the PBCG has interpreted section 4062(e) broadly to apply to routine business transactions and assessed a substantial liability penalty that, in effect, forced companies to contribute more to their pension plans. The language in the new agreement would more clearly define the instances where the PBGC could use its authority under section 4062(e) and would require that a more rational liability calculation assessment be applied.

Other Pension Provisions

A second provision in the agreement addresses an issue certain pension plans had with IRS regulations defining “normal retirement age.” In 2007, the IRS issued guidance that generally required pension plans to have a “normal retirement age” of at least age 62. Plans that provided for a normal retirement date of the earlier of a stated age (even if the age was 62 or older) and completion of 30 years of service failed to meet the age 62 safe harbor because a participant could meet the 30-years-of-service requirement before attaining age 62.

The new agreement would allow plans that already define normal retirement age as the earlier of a specified age and 30 years of service to apply that definition to participants employed before Jan. 1, 2017, provided the age would otherwise meet the current requirements.

The Implications

The fact that such a significant piece of legislation, first filed by U.S. House of Representatives Committee on Education and the Workforce Chairman John Kline (R-MN) and Senior Democratic Member George Miller (D-CA), passed during the lame duck session is quite an accomplishment for those who believed disaster would strike the multiemployer system without it.

But to those who opposed the policy or simply opposed the process, it is one more big bill that got rammed through without proper consideration. However you view the process, it is hard to deny the lasting impact this piece of the CROmnibus will have on the promise of a defined benefit pension.

Judy Miller is ASPPA’s Director of Retirement Policy. Andrew Remo also contributed to this article.