PBGC, IRS Issue Guidance on Multiemployer Plan Assistance

July 9, 2021

The Pension Benefit Guaranty Corporation (PBGC) on July 9 announced that it has issued an interim final rule implementing a new Special Financial Assistance (SFA) Program for financially troubled multiemployer pension plans. The IRS on the same day issued guidance for multiemployer plans that receive the assistance, and also for participants in those plans and their beneficiaries. 

PBGC Guidance

The PBGC intends the SFA Program to enhance retirement security for millions of Americans by providing eligible multiemployer pension plans with SFA in the amounts required for the plans to pay all benefits due during the period beginning on the date of payment of SFA through the plan year ending in 2051. The PBGC had said in its priority guidance plan that it was planning to issue this rule this year. 

The interim final rule implements provisions of the American Rescue Plan Act, a measure enacted on March 11, 2021 that provides an estimated $94 billion in assistance to eligible plans that are severely underfunded, assists plans by providing funds to reinstate previously suspended benefits and addresses the solvency of PBGC’s Multiemployer Insurance Program. To do this, the interim final rule adds to the PBGC regulations a new part 4262 to implement the requirements under Section 9704 of the American Rescue Plan Act of 2021, “Special Financial Assistance Program for Financially Troubled Multiemployer Plans.” 

More specifically, the interim final rule: 

  • sets forth requirements for special assistance applications;
  • establishes what information a plan is required to file to demonstrate eligibility for SFA;
  • sets the formula for determining the amount of SFA that PBGC will pay to an eligible plan;
  • identifies the priority order in which  plans are permitted to apply for SFA;
  • outlines a processing system which will accommodate the filing and review of many applications in a limited amount of time;
  • specifies permissible investments for SFA funds; and 
  • establishes certain restrictions and conditions on plans that receive SFA. 

The PBGC will accept public comments for 30 days after the interim rule is published in the Federal Register, which is set to take place on July 12, 2021. Comments may be submitted by:

  • sending an email to reg.comments@pbgc.gov
  • registering comments at https://www.regulations.gov; or
  • be sending or delivering comments to: Regulatory Affairs Division, Office of the General Counsel, Pension Benefit Guaranty Corporation, 1200 K Street NW, Washington, DC 20005–4026.

All submissions must include the agency’s name (Pension Benefit Guaranty Corporation, or PBGC) and title for this rulemaking (Special Financial Assistance by PBGC) and the Regulation Identifier Number for this rulemaking (RIN 1212-AB53). 

PBGC Director Gordon Hartogensis noted in a press release that rule implements a law important to benefits he called “critical to the economic security of so many retirees and their families.” Said Hartogensis, “The American Rescue Plan provides funding to severely underfunded pension plans that will ensure that over three million of America’s workers, retirees, and their families receive the pension benefits they earned through many years of hard work.” 

The interim rule implements the American Rescue Plan “just as Congress designed it,” said Secretary of Labor Marty Walsh in a July 9 press release. He said that as Chair of the PBGC Board of Directors, he is “proud that today’s rulemaking by the Pension Benefit Guaranty Corporation will help secure the pensions of an estimated 3 million American workers, retirees and their families by providing financial assistance to over 200 severely underfunded multiemployer plans.” Walsh went on to call it an “historic achievement to secure the pension benefits of hardworking union members and the most substantial policy ever passed to further the solvency of our nation's multiemployer pension plans. Unions, their members and beneficiaries of these plans have been fighting for years for what these workers have earned.” 

IRS Guidance

The IRS on July 9 issued Notice 2021-38, in which it provides guidance: 

  • to sponsors of multiemployer pension plans that are required to reinstate certain previously suspended benefits as a condition of receiving special financial assistance under Section 4262 of ERISA;
  • on whether make-up payments regarding previously suspended benefits under Code Section 432(k)(2)(A)(ii) are eligible to be rolled over to another eligible retirement plan under Code Section 402(c); and 
  • on how to apply the rule in Code Section 432(k)(2)(D)(i) under which any special financial assistance received by the plan is not taken into account in determining contributions required under Code Section 431.

More specifically, Notice 2021-38 says that if an eligible multiemployer plan receiving SFA had suspended benefits operationally under Code Section 418E(a) without adopting a plan amendment, the plan must be amended to reinstate suspended benefits, effective as of the month in which the SFA is paid to the plan, for individuals who are participants or beneficiaries as of that month. The reinstatement will apply through the end of the plan year in which the effective date of the SFA occurs. For subsequent plan years, the plan must apply Code Section 418E by taking into account all plan assets, including the SFA.

The make-up payments to a participant or a beneficiary must be paid, as determined by the plan sponsor, either as a lump sum within three months of the date the SFA is paid to the plan or in equal monthly installments over a period of five years, commencing within three months of the date the SFA is paid. 

The plan amendment providing for the make-up payments must also specify which distribution form (that is, as a lump-sum payment or as monthly installments) will apply for the make-up payments to a participant or beneficiary. If the make-up payments are paid over five years, then the installments do not include any adjustment for interest and must be paid without regard to whether the participant or beneficiary survives to the end of the 5-year period.

Because a multiemployer plan that receives SFA must be amended to provide make-up payments to retirees and beneficiaries in addition to the annuity payments those individuals already receive, the notice says that these make-up payments are independent payments under Treas. Reg. §1.402(c)-2, Q&A-6(a) for purposes of Code Sections 401(a)(31), 402(c) and (f), and 3405(c)(1) unless the payments satisfy the requirements of Treas. Reg. §1.402(c)-2, Q&A-6(b)(2) to be treated as supplemental payments that are part of a series of substantially equal periodic payments.

The IRS says that the plan administrator must provide the participant or beneficiary who receives a make-up payment in a lump sum that exceeds the limit under Treas. Reg. §1.402(c)-2, Q&A-6(b)(2)(iv) with the Code Section 401(a)(31) election to make a direct rollover to an eligible retirement plan and the notice described in Code Section 402(f). Unless that participant or beneficiary elects to roll over that payment to an eligible retirement plan under Code Section 402(c)(4), the make-up payment will be subject to 20% withholding under Code Section 3405(c)(1). 

The IRS notes that Code Section 432(k)(1)(D) requires, in the case of a plan applying for SFA under PBGC’s rules providing for temporary priority consideration, that the plan’s application be submitted to the Treasury Department. However, says Notice 2021-38, in the case of an application to which that provision applies, the requirement will be satisfied by submission to PBGC. 

The IRS also notes that Code Section 432(k)(2)(D)(i) provides that any SFA a multiemployer plan receives is not taken into account in determining contributions required under Code Section 431. Accordingly, the amounts in the SFA account established under Section 4262 of ERISA are not included in the plan’s assets for purposes of determining the contributions required under Code Section 431. This exclusion of the SFA account applies for all purposes under Code Section 431, including the determination of the fair market value of assets used under Code Section 431(c)(6) and the determination of the actuarial value of assets. 

The amount in the SFA account is equal to the initial SFA paid by the PBGC as adjusted by the investment return on the assets held in that account and reduced by benefit payments and expenses that are paid from that account, the IRS says in the notice. To the extent that a liability for benefits or expenses is satisfied by payments from the special financial assistance account, there will be no corresponding reduction in the portion of the plan’s assets that are taken into account for purposes of Code Section 431. As a result, says the IRS, any benefit or plan expenses paid from the special financial assistance account during a plan year will generate an actuarial gain for that plan year. If the funding method used by the plan includes a determination of an actuarial gain or loss for each plan year, then the actuarial gain generated from any benefit or plan expense paid from the special financial assistance account in a plan year will be included in the actuarial gain or loss for that plan year and amortized over 15 years in accordance with Code Section 431(b)(3)(B)(ii).