Multiemployer Pension Bailout – Great for Participants in Certain Plans – Not so Good for Taxpayers and Employers
Anyone who has worked in the pension business during the last 20 years has known that a legislative solution was necessary to solve the multiemployer pension funding crisis. Almost no one, however, thought that Congress would essentially eliminate the crisis for participants in the most underfunded plans with the stroke of a pen. But that is exactly what it appears Congress has done in enacting the American Rescue Plan Act of 2021.
There have been several bills introduced in Congress over the last 10 years that were designed to prevent long service union employees from losing, or receiving a significant cut to, their pensions. The Democrats generally proposed preserving most or all accrued pension benefits to be funded by loans from the Federal Government, whereas the Republicans generally proposed a mix of benefit cuts and funding reforms so that the cuts would not be too severe and the cost to taxpayers would not be too significant.
The final law, however, provides for direct payments to be made by the U.S. Treasury to restore all benefits, including previously implemented benefit cuts, for the plans in the worst financial shape. As a result, retirees who participate in funds like the Central States Pension Fund have gone from wondering how they were going to survive on pensions that were scheduled to be reduced to as little as $12,000 per year to knowing that they will now receive their full pensions, which in some cases are $50,000 per year or more.
One of the most interesting and unfair things about the new law is that the plans that will receive the most benefit are the ones that have been managed the most irresponsibly. For example, it appears that the participants in the Central States Pension Fund will now receive their full pension based on the increased contributions that employers have been required to make under the Pension Protection Act of 2006 to attempt to improve the Plan’s funded status; whereas the participants in plans that required employers to make larger contributions that were used exclusively to fund previously accrued benefits, will not receive any increased benefits as a result of the bailout.
The big unknown is what this bailout means for employers who are currently contributing to one of these plans and employers who previously withdrew from such plans. First, the legislation only applies to plans that are in “critical and declining” status or meet certain other criteria that make it likely that the plan will become insolvent in the future. So, employers who contribute to plans that are in bad shape, but are unlikely to become insolvent in the relatively near future, are unlikely to be affected by this legislation.
Second, the initial version of the Bill that was passed in the House of Representatives included a provision that required plans that receive a bailout to continue to assess withdrawal liability on employers that withdraw in the next 15 years as if the bailout had not occurred. This provision was stripped, however, from the Bill passed by the Senate. Therefore, the Pension Benefit Guaranty Corporation (PBGC) will now be given the authority to decide how plans that receive a bailout should determine each employer’s withdrawal liability. It remains to be seen if the PBGC will impose requirements similar to what was in the House Bill or will come up with a new rule. But, the legislation should be beneficial to an employer who continues to contribute to a bailed out plan for the long term, since the employer’s withdrawal liability should eventually be greatly reduced or eliminated and the contributions the employer is required to make each year should not increase nearly as much as they have in the past.
There also does not appear to be any relief provided to employers who previously withdrew from a plan and are paying their withdrawal liability in installments. But there may be two small ancillary benefits to these employers. The first is that the possibility of a mass or complete withdrawal is much less likely as a result of legislation, so the risk of payments continuing beyond 20 years has essentially been eliminated. Second, it is possible that plans like the Central States Pension Fund will be less likely to take the aggressive positions it has been taking in litigation and arbitration, since the plan will be fully funded by the Federal Government now. Only time will tell whether employers receive any significant benefit from the new legislation.
Finally, depending on guidance issued by the PBGC in the next few months, it is conceivable that it could become advantageous for some employers who previously withdrew from a multiemployer pension plan to rejoin the plan—subject, of course, to any contractual and collective bargaining obligations. If permitted by new regulations, rejoining a plan could eliminate the employer’s withdrawal liability payments and allow its employees to continue to earn generous pensions. ERISA permits the PBGC to issue regulations regarding how an employer who completely withdraws from a multiemployer pension fund may rejoin the pension fund. To date, however, no such regulations have been issued. So, until the PBGC issues a number of regulations with respect to the new law, it is unclear whether this option would be available.
If you have any questions about what this means for your organization’s pension plan, please contact the author or a member of the Miller Johnson Employee Benefits and Executive Compensation practice.