Multiemployer pension plans (MEPPs) that have applied or are considering applying for special financial assistance (SFA) under the American Rescue Plan Act (ARPA) (Pub. L. No. 117-2) have a new final rule from the Pension Benefit Guaranty Corp. (PBGC). The rule makes a few notable changes to last year’s interim final rule (IFR), but otherwise leaves the SFA program mostly intact. The final rule takes effect Aug. 8, but won’t apply to any plan that has already received SFA unless the plan files a supplemented application under the final rule. This article reviews the final rule’s provisions of most interest to employers.

Changes to extend solvency

ARPA created a temporary special fund within PBGC to provide SFA to help eligible, poorly funded MEPPs remain solvent until 2051. The implementation time frame was quite short: ARPA was enacted in March 2021, and the SFA application process opened in July 2021 under the IFR. PBGC approved its first application in December 2021 and made the first payment in January 2022.
 

PBGC received more than 100 comments on the IFR, many of which noted that certain aspects of the IFR would nearly guarantee that plans receiving SFA would go insolvent before 2051. The final rule addresses these concerns with a few targeted fixes:
 

• Investment of SFA assets. The IFR required plans to invest all SFA assets in investment-grade bonds. The final rule permits plans to invest up to 33% of SFA assets in stocks and other return-seeking assets.
  
  
• Expected return for determining SFA. ARPA sets the amount of SFA as the excess of a MEPP’s projected obligations for benefit payments and expenses over its projected resources. The IFR required plans to make these projections using a single statutorily specified return assumption, which would likely be unattainable because of the restrictions on investing SFA assets. This mismatch would cause most funds to become insolvent before 2051 — contrary to the statute’s purpose — since assets would not earn as much as projected when the SFA awards were determined. The final rule lets plans use a more realistic (lower) expected return assumption for SFA assets. This will increase the amount of SFA and, when combined with the ability to invest some of the SFA in stocks, should give plans a much higher probability of remaining solvent through 2051.
  
  
• MPRA benefit suspensions. To receive SFA, MEPPs that reduced benefits pursuant to the Multiemployer Pension Reform Act of 2014 (MPRA) must reverse those reductions and make retroactive payments to participants. But under the IFR, plans might have received less SFA than necessary to fully pay for the restored benefits, impairing long-term solvency. Trustees of such plans would need to weigh the interests of current participants (who would benefit from the restored benefits) against the interests of future participants (who might incur a significant benefit reduction after 2051). Under the final rule, plans will not receive less SFA than necessary to restore previously reduced benefits.

Other changes

The final rule makes some other changes not directed toward solvency concerns:

• Withdrawal liability. Under the IFR, SFA assets were fully included in plan assets when calculating a withdrawing employer’s allocated share of unvested vested benefits (UVBs). This lowered UVBs, but plans had to use unfavorable (to employers) “mass withdrawal” interest rates to calculate the present value of benefits, which could have led to significantly higher UVBs. The final rule phases in the recognition of SFA assets over a period generally expected not to exceed 10 years. As a practical matter, this change may have little impact, since most withdrawing employers’ withdrawal liability will be based on the present value of the required periodic withdrawal liability payments, which will be unaffected by the final rule.
  
  
• Diversion of assets. MEPPs receiving SFA are generally prohibited through 2051 from making retroactive benefit improvements (except to restore reduced benefits) or from diverting income to another employee benefit plan. However, the final rule lets plans request an exemption to grant retroactive benefit improvements or, if legislative changes significantly increase healthcare costs, to allocate contributions to a health plan. However, a MEPP requesting an exemption will need to demonstrate to PBGC that the action does not increase the risk of insolvency, which could be a very high hurdle to overcome.
  
  
• Plan mergers. Plans that receive SFA may not engage in asset and liability transfers (including mergers and spinoffs) during the SFA coverage period without PBGC’s approval. In response to comments, PBGC added a new section to the final rule explaining the restrictions and conditions that will apply to a plan receiving SFA and involved in a merger. To provide additional guidance, IRS released Rev. Rul. 2022-13, describing the determination of deemed critical status when a plan that has received SFA merges with a plan that hasn’t received SFA.

Transition from IFR

The final rule takes effect on Aug. 8. Because the changes may increase the amount of SFA that a plan is awarded, PBGC provides the following transition provisions:
 

• Plans that have already received SFA may choose to supplement the application to reflect the provisions of the final rule.
• Plans with a pending application may let it be reviewed under the terms of the IFR or may withdraw it and file a revised application under the final rule.
• Plans may refile a previously withdrawn or denied application.

Plans that received SFA under the IFR will remain subject to the IFR’s restrictions on investing SFA assets and must fully recognize SFA assets when calculating withdrawal liability. However, those plans may choose to file a supplemented application — even if they won’t receive any additional SFA. Plans doing do may rely on the new rule’s provisions on investments and withdrawal liability from the date the supplemented application is filed, regardless of whether it is ultimately approved.

Limited request for comments

Although the rule is final, PBGC is accepting comments for 30 days on the phased-in recognition of SFA assets in withdrawal liability calculations. The agency is interested to hear whether the calculation balances the interests of various stakeholders or a different approach might work better. Depending on the comments received, PBGC may revise this section of the rule.
 

Related resources

Non-Mercer resources

• Final PBGC rule on special financial assistance (Federal Register, July 8, 2022)
• Rev. Rul. 2022-13 (IRS, July 7, 2022)
• Press release (PBGC, July 6, 2022)
• Fact sheet (PBGC, July 6, 2022)
• Resource page on special financial assistance program (PBGC)