• Multiemployer Pension Plans May Retain 2019 Plan Funding Status for 2020 and 2021

    Multiemployer plans, which are subject to the minimum funding rules under  Code Sec. 412 and Code Sec. 431 , are also subject to an additional set of funding rules if they are in endangered, critical, or critical and declining status. ( Code Sec. 432 )

    Under the Code Sec. 432 rules, the plan actuary must annually certify to IRS whether the plan is in endangered status, critical status, or critical and declining status for the plan year. ( Code Sec. 432(b)(3) ) If a plan is in endangered status, the plan sponsor must adopt and follow a funding improvement plan. If a plan is in critical status, the plan sponsor must adopt and follow a rehabilitation plan. If the plan is in critical and declining status, then the rehabilitation plan requirements for a plan in critical status must be applied, and the plan sponsor may suspend benefits. ( Code Sec. 432(a) )

    New law: Under ARPA, a plan may elect to retain its 2019 plan funding status for plan years that begin in 2020 or 2021. A plan in endangered or critical status is not required to update its plan or schedules until the plan year beginning March 1, 2021. (ARPA Sec. 9701(a)) However, any plan that elects to retain its 2019 funding status during the election period, and is certified to be in critical status without regard to the election, will be treated as a plan in critical status regardless of the election. (ARPA Sec. 9701(b))

    Plans that make the election are subject to specified participant notification requirements. (ARPA Sec. 9701(c)(2))

    Effective date. Date of enactment of ARPA, March 11, 2021.

    Multiemployer Pension Plans May Extend Funding Improvement or Rehabilitation Periods for 2020 or 2021

    A multiemployer pension plan that is in endangered or critical status, and that is subject to the  Code Sec. 412 and Code Sec. 431 funding rules, must adopt and comply with (1) a funding improvement plan (for a multiemployer plan in endangered status), or (2) a rehabilitation plan (for a multiemployer plan in critical status). ( Code Sec. 432(a) )

    Specifically, if a plan is certified to be in endangered status (including seriously endangered status), the plan sponsor must adopt a funding improvement plan that is reasonably expected to enable the plan to achieve certain funding improvements by the end of its 10-year funding improvement period. ( Code Sec. 432(c) )

    Similarly, the sponsor of a plan that has been certified to be in critical status must adopt a rehabilitation plan that is reasonably expected to enable the plan to emerge from critical status by the end of its 10-year rehabilitation period. ( Code Sec. 432(e) )

    New law: Under ARPA, a plan in endangered or critical status for a plan year beginning in 2020 or 2021 may elect to extend its funding improvement period or rehabilitation period, whichever is applicable, by five years

    Funding Standard Account Rules Eased for Multiemployer Pension Plans

    Defined benefit pension plans are subject to minimum funding rules under  Code Sec. 431 that require the sponsoring employer to periodically make contributions to fund plan benefits. A multiemployer plan subject to the minimum funding requirements must establish and maintain a funding standard account. ( Code Sec. 431(b) )

    For each plan year, the funding standard account is charged with the sum of the (1) normal cost, and (2) the amortization of supplemental costs, determined based on the use of an acceptable actuarial cost method. A plan’s normal cost for a plan year generally represents the cost of future benefits allocated to the plan year under the funding method used by the plan for current employees. ( Code Sec. 431(b)(2)(A) )

    The supplemental cost for a plan year is the cost of future benefits that would not be met by future normal costs, or plan assets, such as net experience loss. Supplemental costs are amortized (i.e., recognized for funding purposes) over a specified number of years. The amortization period for a multiemployer plan for most credits and charges is 15 years. Experience gains and losses also are amortized over 15 years. ( Code Sec. 431(b)(2)(B) )

    New law: ARPA allows multiemployer plans that satisfy a solvency test to elect to make changes in the funding standard account for either or both of the first two plan years ending after February 29, 2020, by amortizing net investment losses over 30 years, instead of 15 years.

    Financial Assistance for Underfunded Multiemployer Pension Plans

    A multiemployer pension plan is generally a defined benefit plan to which more than one employer is required to contribute, and that is maintained pursuant to a collective bargaining agreement. Numerous multiemployer plans are expected to become insolvent in coming years, and the Pension Benefit Guarantee Corporation (PBGC), which insures benefits to be paid out under those plans, faces bankruptcy due to the number of plans facing insolvency, and the total amount of unfunded vested liabilities owed to participants and beneficiaries.

    New Law: ARPA establishes a special financial assistance program for underfunded multiemployer pension plans.

    Under the program, payments are to be made by the PBGC to certain underfunded multiemployer pension plans.

    Multiemployer Pension Plan PBGC Premium Rates Increased

    Multiemployer pension plans that are covered by ERISA’s termination insurance program must pay the Pension Benefit Guarantee Corporation (PBGC) a flat-rate premium for each participant the plan has during the applicable plan year. For plan years beginning in 2021, the PBGC flat-rate premium for multiemployer plans, as adjusted for inflation, is $31 per participant.

    New law: Starting in calendar year 2031, ARPA increases the PBGC multiemployer plan premium rate to $52 per participant. That rate is to be indexed for inflation in years after 2031

    Extended Period for Single-Employer Pension Plans to Amortize Funding Shortfalls

    Defined benefit pension plans are generally subject to minimum funding rules that require the sponsoring employer to periodically make contributions to fund plan benefits. A complex set of rules applies if there’s a funding shortfall.  Code Sec. 430 specifies the minimum funding requirements that apply to single-employer pension plans under Code Sec. 412 .

    For purposes of calculating the minimum required contribution, Code Sec. 430 generally requires a plan to establish a shortfall amortization base with respect to a plan year for which the value of a plan’s assets is less than the amount of the plan’s funding target. Under pre-ARPA law, a seven-year amortization period generally applied in the case of a single-employer pension plan funding shortfall. ( Code Sec. 430(c)(2) )

    New law: Under ARPA, all shortfall amortization bases in single-employer plans for certain plan years, and all shortfall amortization installments determined with respect to those bases, are reduced to zero. Those shortfalls, as recalculated, and all future funding shortfalls, are to be amortized over a period of 15 years, rather than over seven years.

© Copyright 2013 - Zimmerman and Company CPAs - Website Developed by OodleTech