The Pension Benefit Guaranty Corporation (PBGC) has just issued several FAQs answering some important questions about the impact of the Coronavirus Aid, Relief and Economic Security (CARES) Act on single employer defined benefit (DB) plans.
The FAQs discuss how the CARES Act extension of the payment deadline for required minimum contributions due in 2020 affects reportable events and premiums. While multiemployer DB plans were in financial difficulty before COVID-19, and the pandemic is expected to exacerbate their problems, funding relief for multiemployer plans did not make it into the final version of the CARES Act. Contributing employers to multiemployer plans may be confronted with increased contribution obligations and significant withdrawal liability assessments if further relief is not enacted.
Single Employer Plans
The CARES Act extended the deadline for required minimum contributions, including quarterly contributions, due during 2020 to January 1, 2021. This extension was limited to single employer plans. Plans using this extension are allowed to use the prior year’s funded percentage to determine if distributions of lump sums and annuity contracts must be restricted—these restrictions apply to plans that are less than 80% funded. However, the CARES Act does not address how the extension affects actions required to be taken under Title IV of the Employee Retirement Income Security Act (ERISA).
Failure to make required minimum contributions is a reportable event requiring notice to the PBGC. The PBGC clarified in its FAQs that if a plan sponsor takes advantage of the extended funding deadline, no reporting is required if the contributions are made by January 1. If the contributions due in 2020 are not made by January 1, unless a waiver applies, a reportable event filing for a missed contribution must be made by January 11 if the missed contribution exceeds $1 million or by February 1 if the missed contribution does not exceed $1 million.
Contributions also affect the calculation of the variable rate premium paid by underfunded plans, as they are included in plan assets. For purposes of computing the variable rate premium, plans will have only an additional month to make contributions that can count in their variable rate premium calculations. The PBGC gives an example of a calendar year plan with a normal funding deadline of September 15. In this case, contributions made up to October 15 may be counted in the variable rate premium calculation.
The PBGC also indicated that it continues to handle requests for distress terminations, to evaluate the appropriateness of initiating involuntary terminations and to monitor corporate transactions under its early warning program.
Multiemployer Pension Plans
COVID-19 is expected to push more plans into endangered (yellow) and critical (red) funding status and to accelerate withdrawals. These changes will be the result of investment losses, a shrinking contribution base and the downsizing and insolvency of contributing employers. Employers face increasing contributions under funding improvement and rehabilitation plans. For these reasons, contributing employers should be monitoring their plans, as well as the status of introduced legislation to help multiemployer plans.
What Happens if Contributions Are Skipped or Late?
The CARES Act provision allowing employers to delay contributions due in 2020 until January 1, 2021, does not apply to multiemployer plans. Employers that fail to make contributions to multiemployer plans may be in for an unpleasant surprise. ERISA has special provisions authorizing multiemployer plans to sue to collect delinquent contributions. In addition to the late contributions, the plans can claim interest, liquidated damages and reasonable attorney’s fees.
What if the Contributing Employer Withdraws?
A multiemployer pension plan will assess a proportionate share of its unfunded vested liabilities on a withdrawing employer. Under the general rules, there is a complete withdrawal if there is a complete cessation of the obligation to contribute, whether voluntary or as a result of closing of a business. There is a partial withdrawal when an employer has a 70% reduction in its contributions measured over a three-year period or stops contributing under fewer than all collective bargaining agreements or with respect to fewer than all of its multiple locations or entities and continues the same type of work. COVID-19-related layoffs may trigger partial withdrawals for some employers. An asset sale may also trigger a withdrawal if the buyer does not assume the seller’s contribution obligations.
Plans are aggressive in pursuing claims for unpaid withdrawal liability. All members of the contributing employer’s controlled group or commonly controlled trades or businesses are jointly and severally liable for withdrawal liability. This means that all the liability may be assessed against any other member of the group if the contributing employer cannot pay.
A contributing employer’s withdrawal liability is based on the prior year (2019 for a calendar year plan) and is likely to increase if assets lose value in a recession and as remaining employers assume additional liabilities for withdrawn and defaulting employers. All contributing employers are entitled to one withdrawal liability estimate a year, although the plan has 180 days to provide it. Contributing employers should be regularly requesting these, and, if they are considering a withdrawal, they may wish to accelerate the timing to 2020.
What if There Is a Mass Withdrawal?
A mass withdrawal occurs when all contributions to a multiemployer pension plan cease, which could be the result of a trustee decision, or if substantially all employers withdraw pursuant to a plan or arrangement. There is a presumed mass withdrawal if substantially all employers withdraw within a three-year period. Employers that withdrew from a plan within the preceding three years and already had withdrawal liability assessed can face an additional assessment after a mass withdrawal due to defaulted employers and without regard to a 20-year cap that usually applies to withdrawal liability payments.
Additional Relief May Be Coming
The CARES Act funding extension may not solve the problems of sponsors of single employer plans that are still unable to make their contributions on January 1, and the IRS has not clarified how the funding extension affects waiver applications, which must usually be made by the 15th day of the third month following the end of the plan year.
A future stimulus bill might contain the House’s version of financial support or other relief for multiemployer plans. Plan sponsors should also be aware of the PBGC’s Disaster Relief Policy, which can be accessed on the PBGC’s website. This policy extends certain reporting and premium deadlines automatically if the IRS should further extend Form 5500 filing deadlines. However, the policy will not automatically extend the deadline for reportable events that indicate the sponsor’s financial difficulty, such as insolvency, liquidation, missed contributions and failure to pay benefits when due.
Carol Buckmann is a co-founding partner of Cohen & Buckmann P.C. As a highly regarded employee benefits and ERISA [Employee Retirement Income Security Act] attorney, Buckmann deals with the foremost issues in ERISA, including pension plan compliance, fiduciary responsibilities and investment fund formation.
She has 40 years of practice in this area of the law and a depth of experience on complex pension law and fiduciary problems. She regularly shares her thoughts on new developments in the benefits industry on Insights, Cohen & Buckmann’s blog, and writes and speaks on ERISA topics. Buckmann has been recognized by Martindale-Hubbell as an AV Pre-eminent Rated Lawyer, was selected for inclusion in the Best Lawyers in America and was named one of the Super Lawyers in Employee Benefits.This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services or its affiliates.
« Plan Sponsors Should Focus on Life Events Rather Than Generations in Communications