Section 432(e)(9) of the Internal Revenue Code ("Code"), added by the Pension Protection Act of 2006, directs PBGC to provide guidance on simplified methods for the application of the statutory requirement that multiemployer plans in critical status disregard certain benefit reductions in determining the plan's unfunded vested benefits for purposes of determining an employer's withdrawal liability under section 4201 of ERISA. This Technical Update provides such guidance.
Benefit Reductions by Plans in Critical Status
Under section 432(e)(1) of the Code, a multiemployer plan that is certified to be in critical status for a plan year must adopt a rehabilitation plan that consists of actions formulated to enable the plan to cease to be in critical status by the end of the rehabilitation period or, under certain circumstances, that consists of reasonable measures to emerge from critical status at a later time or to forestall possible insolvency. The plan sponsor must provide the bargaining parties with one or more schedules reflecting reductions in future benefit accruals and adjustable benefits and increases in contributions that the sponsor determines are reasonably necessary to emerge from critical status in accordance with the rehabilitation plan. Section 432(e)(8) of the Code provides that, notwithstanding section 411(d)(6) of the Code, the plan sponsor must make any reductions to adjustable benefits that the plan sponsor deems appropriate, based upon the outcome of collective bargaining over the schedule(s) provided to the bargaining parties.
Under section 432(e)(8) of the Code, "adjustable benefit" means certain benefits, rights, and features under the plan, any early retirement benefit or retirement-type subsidy, any benefit payment option (other than a qualified joint and survivor annuity), and any benefit increase that would not be eligible for guarantee under section 4022A(b)(1) of ERISA on the first day of the initial critical year. Any reductions to adjustable benefits may not be applied against participants or beneficiaries with a benefit commencement date before the date on which the plan provided notice of the plan's critical status for the initial critical year. In addition, a participant's accrued benefit payable at normal retirement age is always protected. This protection does not apply to benefit increases not eligible for the guarantee under section 4022A(b)(1). Before any reduction is made, the plan sponsor must provide notice to participants and beneficiaries, participating employers, and employee organizations. Treasury has announced that it will issue regulations providing guidance on these issues (see Treasury's Spring 2010 Regulatory Agenda, www.reginfo.gov).
Section 432(e)(9)(A) of the Code provides that any benefit reductions under section 432(e) must be disregarded in determining a plan's unfunded vested benefits for purposes of determining an employer's withdrawal liability under section 4201 of ERISA. Section 432(e)(9)(C) of the Code directs PBGC to prescribe simplified methods for the application of paragraph (9) in determining withdrawal liability. Because the determination of withdrawal liability includes only those benefits that are nonforfeitable benefits as described in section 4001(a)(8) of ERISA, a reduction of a benefit under section 432(e) of the Code will be included in the determination of withdrawal liability only if such benefit is also a nonforfeitable benefit.
Under section 4201 of ERISA, if an employer withdraws from a multiemployer plan, in a complete or partial withdrawal, the employer is liable to the plan for withdrawal liability, in an amount determined under section 4211 of ERISA to be the allocable amount of unfunded vested benefits, as adjusted under section 4201(b). Section 4213(c) of ERISA provides that, for purposes of determining withdrawal liability, the term "unfunded vested benefits" means the amount by which the value of nonforfeitable benefits under the plan exceeds the value of plan assets. Section 4211 prescribes four methods for allocating unfunded vested benefits to employers that withdraw from a plan. The amount of unfunded vested benefits determined under each method (except the direct attribution method) is allocated among the employers based on a fraction equal to the withdrawing employer's share of contributions required to be made under the plan, over total plan contributions made by all employers under the plan, for the last five plan years before the plan year(s) for which the unfunded vested benefits are determined.
Under section 4213(a) of ERISA, PBGC may prescribe by regulation actuarial assumptions and methods for purposes of determining an employer's withdrawal liability. To date, PBGC has not issued such a regulation. Absent a regulation, withdrawal liability must be determined by each plan on the basis of actuarial assumptions and methods that, in the aggregate, are reasonable and in combination offer the actuary's best estimate of anticipated experience under the plan. Section 4213(b) provides that, in determining the plan's unfunded vested benefits, the plan actuary may rely on the most recent complete actuarial valuation used for funding purposes, if available, and reasonable estimates for the interim years.
II. Benefit Reductions and Withdrawal Liability Computations
The simplified method is described below:
Determining the Value of Benefit Reductions
In a plan that has reduced benefits as part of a rehabilitation plan, the amount of unfunded vested benefits allocable to an employer that withdraws after the last day of the plan year in which the reduction occurred is equal to the sum of (a) and (b) where -
(a) is the amount determined in accordance with section 4211 of ERISA under the method in use by the plan, and
(b) is the employer's proportional share determined as of the end of the plan year prior to withdrawal of the unamortized balance of the value of the reduced nonforfeitable benefits ("Affected Benefits").
Under this simplified method -
(1) The value of the Affected Benefits-benefit reductions which are to be disregarded under section 432(e)(9)(A) of the Code in determining a plan's unfunded vested benefits for purposes of determining an employer's withdrawal liability-is determined using the same assumptions that the plan uses to determine unfunded vested benefits for purposes of section 4211 of ERISA.
(2) The unamortized balance of the Affected Benefits as of a plan year is the value of that amount as of the end of the year in which the reductions took effect (base year), reduced as if that amount were being fully amortized in level annual installments over 15 years, at the plan's valuation interest rate, beginning with the first plan year after the base year. An employer's proportional share of the unamortized balance of the Affected Benefits is the product of -
(i) the unamortized balance as of the end of the plan year preceding the withdrawal, and
(ii) a fraction -
the numerator of which is the sum of all contributions required to be made by the employer under the plan for the last 5 plan years ending before withdrawal, and
the denominator of which is the total amount contributed under the plan by all employers for the last 5 plan years ending before the withdrawal, increased by any employer contributions owed with respect to earlier periods which were collected in those plan years, and decreased by any amount contributed to the plan during those plan years by employers who ceased to be obligated to contribute or ceased covered operations.
Adjustment to Outstanding Claims for Withdrawal Liability
A plan that uses an allocation method that requires that unfunded vested benefits be reduced to reflect outstanding claims for withdrawal liability would disregard the amount of the claim attributable to reduced benefits.
Assume that Plan X is certified to be in critical status for the plan year beginning January 1, 2008. On April 1, 2008, Plan X provides notice of the plan's certified status to the parties described in section 432(b)(3)(D) of the Code, including notice that certain benefits under the plan will be reduced for participants and beneficiaries whose benefit commencement date is on or after April 1, 2008. Plan X adopts a rehabilitation plan on October 1, 2008, followed by schedules to the bargaining parties reflecting reductions in benefits and increases in contributions.
Employer A withdraws from Plan X during the 2013 plan year. The plan uses the rolling-5 method for allocating unfunded vested benefits to withdrawn employers under section 4211 of ERISA. The Plan's actuary first determines the amount of Employer A's withdrawal liability using the rolling-5 method (i.e., based on the plan's unfunded vested benefits as of the end of 2012, excluding the value of any benefits that were reduced under the rehabilitation plan, and disregarding any surcharges under section 432(e)(7) of the Code). In accordance with the requirement in section 432(e)(9)(A) of the Code, the actuary then adds to this amount the employer's proportional share of the Affected Benefits.
The actuary determines the value as of December 31, 2008 (base year) of the Affected Benefits (which are to be disregarded under section 432(e)(9)(A) of the Code in determining a plan's unfunded vested benefits for purposes of determining an employer's withdrawal liability), using the same assumptions used by Plan X to determine unfunded vested benefits under section 4211 of ERISA. This value is then reduced in accordance with a 15-year amortization schedule beginning in 2009. Assuming the value of the Affected Benefits as of December 31, 2008, was $20 million, and the valuation interest rate for the base year was 7.5%, the unamortized balance as of December 31, 2012 - the end of the plan year before Employer A's withdrawal - is $16.575 million (the principal balance on $20 million at 7.5% after four annual payments). Employer A's proportional share of $16.575 million is determined by applying a fraction equal to Employer A's required contributions for the last 5 plan years ending before the withdrawal over all employer contributions for the same period (adjusted as appropriate).
III. Further guidance
PBGC may supersede the guidance in this Technical Update with regulations.
This guidance represents PBGC's current thinking on this topic. It does not create or confer any rights for or on any person or operate to bind the public. If an alternative approach satisfies the requirements of the applicable statutes and regulations, you can use that approach. If you want to discuss an alternative approach (you are not required to do so), you may contact the PBGC.
V. PBGC Contact Point
For questions about this Technical Update 10-3, contact Constance Markakis of the Legislative and Regulatory Department at (202) 229-4223, ext. 6779, or firstname.lastname@example.org.
References to Code provisions used herein should be read to include parallel provisions under section 305(e) of ERISA.
A multiemployer plan is in critical status if its funded percentage is less than 65 percent, and/or if certain other funding or liquidity triggers are met.
Section 432(e)(9)(B) of the Code provides that employer surcharges imposed under section 432(e)(7) generally must be disregarded in determining an employer's withdrawal liability under section 4211 of ERISA. The preamble to PBGC's final rule on Methods for Computing Withdrawal Liability; Reallocation Liability Upon Mass Withdrawal; Pension Protection Act of 2006 includes an example of a simplified method of implementing the exclusion of employer surcharge amounts from the allocation fraction otherwise based on employers' contribution obligations. 73 FR 79628 (Dec. 30, 2008); see 29 CFR § 4211.4.
In addition, plans in critical status are generally restricted from paying lump sums and similar benefits. See Code section 432(f)(2). Section 432(f)(3) of the Code provides that any such reductions must be disregarded in determining a plan's unfunded vested benefits for purposes of determining an employer's withdrawal liability.
The adjustments are in accordance with provisions in sections 4201 through 4225 of ERISA. The employer's schedule for liability payments is determined under section 4219.
PBGC's December 2008 final rule (see footnote 3) amended the definition of "nonforfeitable benefit" in 29 CFR §§ 4211.2 and 4219.2 to include any adjustable benefit that has been reduced by the plan sponsor pursuant to section 432(e)(8) of the Code that would otherwise have been includable as a nonforfeitable benefit for purposes of determining an employer's allocable share of unfunded vested benefits.
Among the statutory methods, the presumptive method generally allocates the unamortized amount of the change in the plan's unfunded vested benefits for each plan year ending after September 25, 1980, for which the employer has an obligation to contribute under the plan; and the rolling-5 method generally allocates a share of the plan's unfunded vested benefits as of the end of the plan year preceding the employer's withdrawal.
A separate pool is created for each year in which the plan adopts a reduction.
Employer surcharges under section 432(e)(7) of the Code are excluded from contributions in the allocation fraction. See 29 CFR § 4211.4.
The value of the Affected Benefits would be $20 million for an employer that withdrew in 2009; $19.234 million for an employer that withdrew in 2010; $18.411 for an employer that withdrew in 2011; $17.526 million for an employer that withdrew in 2012; $16.575 million for an employer that withdrew in 2013; and so on.