IRS Offers Up Rules for MPRA-Related Benefit Reductions

The IRS published temporary regulations and proposed final regulations governing the process of reducing benefit payments by distressed multiemployer retirement plans under MPRA.

When passed in 2014, the Multiemployer Pension Reform Act of 2014 (MPRA) reinforced and expanded a new path forward for multiemployer plans that are projected to have insufficient funds, at some point in the future, to pay the full benefits to which individuals will be entitled.

Under MPRA, such plans are referred to as plans in “critical and declining status.” The terms of MPRA extended earlier guidance created under the Pension Protection Act (PPA), to allow plans with these status ratings to avoid insolvency by reasonably cutting benefits, including those already in pay status.

PPA initially established the “zone system” for rating the financial health of multiemployer pension plans. Under the zone system, plans are given a green, yellow or red financial health status, depending on their current status and future prospects for remaining solvent. Changes to the zone system included in MPRA provide that plans in critical status (i.e., plans in the red zone) that also are in “declining status” may reduce some benefits, including benefits in pay status, subject to various requirements and limitations. This is referred to as “suspension” of benefits under MPRA, because as the funded status of a plan improves, suspended benefits could be reinstated.

A critical part of the benefits reduction process involves an approval vote, by simple majority, from the plan population. After first requiring approval from the Department of Labor, the Pension Benefit Guaranty Corporation (PBGC) and the Department of the Treasury, benefit suspensions will only go into effect if a majority of all participants vote to approve them. MPRA provides that the government can step in to override a no-vote on benefit cuts, but only when the plan in question is projected to cost the PBGC more than $1 billion in financial assistance, should it go insolvent.

Now the Internal Revenue Service (IRS) has introduced temporary regulations to guide plan sponsors’ administration of a benefits reduction vote under MPRA. A set of final proposed regulations with the same form has also been published in the Federal Register, alongside a call for public/industry comment within 60 days. The terms of the temporary regulations apply for plan-related calculations on and after June 17, 2015, and expire on June 15, 2018.

NEXT: Approval votes are complicated  

The text of the proposed regulation points out key details from Section 432(e)(9)(H) of MPRA, under which it is stipulated that no suspension of benefits may take effect prior to a vote of the participants of the plan with respect to the suspension.

“Section 432(e)(9)(H) requires that the vote be administered by the Secretary of the Treasury, in consultation with the Pension Benefit Guaranty Corporation and the Secretary of Labor within 30 days after approval of a suspension application,” the regulation explains. “The plan sponsor is required to provide a ballot for a vote (subject to approval by the Treasury Department, in consultation with the PBGC and the Labor Department). The statute specifies information that the ballot must contain, including a statement in opposition to the proposed suspension that is compiled from comments received on the application.”

Under the IRS guidance, a participant vote requires the completion of three steps. First, a package of ballot materials is distributed to eligible voters. Second, the eligible voters cast their votes and the votes are collected and tabulated. Third, the Treasury Department itself determines whether a majority of the eligible voters has voted to reject the proposed suspension, but it is also permitted to render the services of a third-party to facilitate the administration of the vote.

The temporary regulations provide that if a service provider is designated to collect and tabulate votes, then the service provider will provide the Treasury Department with a report of the results of the vote, which includes a breakdown of the number of eligible voters who voted, the number of eligible voters who voted in support of and to reject the suspension, and certain other information.

The temporary regulations define “eligible voters” as all plan participants and all beneficiaries of deceased participants. The regulations further provide that the ballot package sent to eligible voters includes the approved ballot and a unique identifier for each eligible voter. The unique identifier, which is assigned by the Treasury Department or a designated service provider, is intended to ensure the validity of the vote while maintaining the eligible voters’ privacy in the voting process.

NEXT: Other important implications 

Because the ballot for each eligible voter is accompanied by a unique identifier, the plan sponsor cannot itself distribute the ballot. Instead, the plan sponsor is responsible for furnishing a list of eligible voters so that the ballot can be distributed on the plan sponsor’s behalf.

According to the text of the new regulations, the list must include the last known mailing address for each eligible voter (except for those eligible voters for whom the last known mailing address is known to be incorrect). The plan sponsor must also provide a list of eligible voters whom the plan sponsor has been unable to locate using reasonable efforts. In addition, the plan sponsor must furnish current electronic mailing addresses for certain eligible voters.

The plan sponsor must also furnish individualized benefit reduction estimates provided to eligible voters as part of the earlier notices described in section 432(e)(9)(F), so that an individualized estimate can be included with the ballot for each eligible voter. These materials must be provided no later than 7 days after the date the Treasury Department has approved an application for a suspension of benefits.

Under these temporary regulations, the plan sponsor is responsible for paying all costs associated with the ballot process, including postage.