Seyfarth Synopsis: The billions of taxpayer dollars now flowing out to financially troubled multiemployer plans is good news for those plans, their contributing employers, and plan participants. That said, it is not a “get out of jail free” card for employers considering withdrawing from such plans. Employer beware.
Christmas came early this past year for some financially troubled multiemployer pension plans, thanks to newly available Special Financial Assistance (SFA) under the American Rescue Plan Act. President Biden recently announced, for example, that the Central States, Southeast and Southwest Areas Pension Fund would receive $35 billion in SFA. Similarly, the New York State Teamsters Pension Fund in November learned it would receive $963.4 million in SFA.
As of December 30, 2022, PBGC has approved over $45.6 billion in SFA to plans that cover over 550,000 workers, retirees, and beneficiaries. By the time the application process for SFA is over, the PBGC estimates that more than 200 plans covering more than 3 million participants and beneficiaries will receive some $94 billion in SFA.
This windfall may cause contributing employers participating in these plans to wonder how this effects them. There is a lot for contributing employers to be grateful for:
- Multiemployer plans receiving SFA, if all goes as planned, should receive sufficient funds to cover all participant benefits due through 2051. Even if the SFA amounts received are insufficient to cover benefits payable through the next 28 years, one would hope the financial relief received would cover benefits at least through the vast majority of that time;
- Multiemployer plans receiving SFA are limited both in how they invest SFA money and in increasing benefits, so as to reduce the chances these multiemployer plans run out of money too soon;
- Participating employees and retirees should actually receive their full pension benefits for the foreseeable future. Employers need not fear that the benefits they are paying for are illusory;
- These multiemployer plans will not become insolvent like they would have without SFA, and that reduces the risks of mass withdrawal; and
- The SFA program was paid for entirely by taxpayer dollars.
What SFA does not do, however, is make it any less expensive to exit these funds — at least initially. While the Central States Pension Fund, for example, may have just gone from being 17% funded to roughly 78% funded, that is not going to equate to a similar immediate reduction in employer withdrawal liability. This is due to two new PBGC withdrawal liability rules for funds receiving SFA:
- The discount rate to determine unfunded vested benefits for withdrawal liability must be the PBGC’s very conservative mass withdrawal interest assumptions that approximate the market price that insurance companies charge to assume a similar pension-benefit-like liability for withdrawals. For many multiemployer pension plans, this is a lower discount rate than they would otherwise use for funding purposes, and will result in a higher calculated amount of unfunded vested benefit liability. This rule remains in effect until the later of ten years or when the plan projects it will exhaust any SFA assets (assuming plan benefits and expenses are paid exclusively from SFA assets until exhausted).
- Multiemployer plans, at least those receiving SFA under the PBGC final rule as opposed to the old interim rule, will not initially credit all of the SFA assets for withdrawal liability purposes. Instead, the SFA will be phased in, with the phase-in period beginning the first plan year in which the plan receives SFA, and extending through the end of the plan year in which the plan expects SFA funds to be exhausted (assuming plan benefits and expenses are paid exclusively from SFA assets until exhausted). Depending upon the multiemployer plan, it could be several years or even well over a decade before most or all of the SFA assets are counted for withdrawal liability purposes. This will mean employers withdrawing shortly after plans receive SFA will see little benefit to the SFA reflected in their assessments.
Every multiemployer plan’s situation is different, but most contributing employers should not assume a withdrawal — especially if their share of unfunded vested benefit liability is so high their payment schedule is capped at 20 years — will immediately be less expensive post SFA. At a minimum, they should consult with counsel and actuaries to determine what the SFA means, and does not mean, for them.
While contributing employers may not benefit from multiemployer plans receiving SFA in the form of immediately reduced withdrawal liability, both contributing employers and employees will certainly still benefit from participating in plans that will now how have sufficient assets to pay full benefits for decades to come. That is something everyone can be thankful for.