As we noted in a post last year at this time, pension plans that are not fully funded for PBGC purposes have two parts to their PBGC premium. One part is a flat rate premium of $83 per participant in 2020 ($86 for 2021, as just announced by the PBGC). The other is a variable rate premium that looks to the value of the plan’s “unfunded vested benefits,” which is the excess, if any, of the plan’s Premium Funding Target over the fair market value of plan assets.
Our employee benefits and executive compensation practice is available to help employers evaluate and troubleshoot potential issues arising from the changing work environment and economic situation caused by the COVID-19 pandemic. This guidance reviews the employee benefits and executive compensation issues that we have been assisting clients with in the last few days.
Please contact the authors or your Morgan Lewis contacts if you have questions related to employee benefits and executive compensation in the midst of coronavirus COVID-19. For updated, comprehensive information about COVID-19, please see our resource page.
As concerns continue regarding the possibility of an economic downturn, plan sponsors should be aware of the effects that two potential downturn events could have on their qualified plans.
Substantial Cessation of Operations (Section 4062(e) Event)
Where there is a substantial cessation of operations at a facility, an employer maintaining a qualified defined benefit plan may be subject to certain notice requirements and termination liability rules. A substantial cessation of operations occurs when a permanent cessation of operations at a facility results in the loss of employment by employees at the facility who constitute more than 15% of all employees who are eligible under the plan.
As we look forward to 2020, we bring you a few key takeaways on the hot topics and trends that individuals operating in the employee benefits space are watching in health and welfare, plan sponsor considerations, executive compensation, fiduciary, and fringe benefits.
Pension plans that are not fully funded for PBGC purposes have two parts to their PBGC premium. One part is a flat rate premium of $83 per participant in 2020 ($80 for 2019). The other is a variable rate premium that looks to the value of the plan’s “unfunded vested benefits,” which is the excess, if any, of the plan’s Premium Funding Target over the fair market value of plan assets. The Premium Funding Target is generally determined the same way as the plan’s funding target for ERISA Section 303 minimum funding requirements, with one important exception. The interest rate used to measure the Premium Funding Target is a “spot” rate, rather than an interest rate averaged over 24 months. In lieu of using the special premium discount rates, a plan sponsor may make an election (irrevocable for five years) to use smoothed discount rates, similar to, and in some cases identical to, the rates used to determine the minimum required contribution (the Alternative Premium Funding Target). The PBGC variable rate premium for 2020 is 4.5% of the plan’s unfunded vested benefits, subject to a headcount cap of $561 per participant.
With the recent decline in interest rates (and the possibility of further decline before yearend), plans may face an unexpected increase in their variable rate PBGC premium for 2020 because the value of the “unfunded vested benefits” may be quite a bit higher in 2020 compared to 2019. In this regard, each of the spot segment rates in December 2018, used for determining variable rate premiums for 2019 for calendar year plans, is at least 100 basis points higher than the comparable spot segment rates in October 2019. The spot segment rates in December 2019 will be used to determine variable rate premiums in 2020 for calendar year plans unless the Alternative Premium Funding Target has been elected. We recommend that plan sponsors check with their actuaries to determine estimated total PBGC premiums for 2020, and to evaluate whether it is advisable to undertake action to reduce the estimated premiums (e.g., by making additional contributions to the plan or electing the Alternative Premium Funding Target).
Under the Multiemployer Pension Reform Act of 2014 (MPRA), financially troubled multiemployer pension plans in “critical and declining” status are permitted to reduce the pension benefits payable to retirees and beneficiaries. Under the applicable rules, the reduction first requires approval by the US Department of Treasury (Treasury), in consultation with the US Department of Labor (DOL) and the Pension Benefit Guaranty Corporation (PBGC). Within 30 days of such regulatory approval, the suspension then must be presented to eligible participants and beneficiaries for a vote to ratify or reject the benefit reductions under a process supervised by Treasury. Under applicable regulations, the benefit reduction approved by Treasury will go forward unless a majority of eligible voters reject the reduction. In counting votes, eligible voters to whom ballots were not provided (because they could not be located) are counted as votes to reject the benefit reduction, but eligible voters to whom ballots were provided, but who failed to vote, are counted as votes to ratify the benefit reduction. These default voting rules have resulted in the implementation of benefit reductions where the number of non-voting eligible voters exceeded the number of eligible voters who affirmatively voted for the benefit reductions.
In the wake of the JSC’s demise, Rep. Richard Neal (D-Massachusetts) and Rep. Bobby Scott (D-Virginia) have reintroduced the so-called “Butch Lewis” Act. Titled “The Rehabilitation for Multiemployer Pensions Act,” the legislation would establish a federal loan program for critical and declining (“red zone”) multiemployer pension plans administered through a newly-created federal agency, the Pension Rehabilitation Administration (PRA).
Many in the multiemployer pension plan community expected significant developments in 2018 in the ongoing effort to address the multiemployer pension plan solvency crisis. There were higher than usual expectations when the Joint Select Committee on Solvency of Multiemployer Pension Plans (JSC) was formed in early 2018 and tasked with developing legislative solutions to improve the solvency of multiemployer pension plans and the Pension Benefit Guaranty Corporation (PBGC). Unfortunately, after a year-long effort during which several ideas were discussed, the JSC failed to agree on any formal proposal. In the wake of the JSC’s demise, the so-called “Butch Lewis” Act has been reintroduced, which is addressed in Part 2 of this series.
On September 14, 2018, the Pension Benefit Guaranty Corporation (PBGC) published final regulations intended to facilitate plan mergers and transfers between multiemployer pension plans under ERISA Section 4231. These regulations become effective October 15, 2018.
ERISA Section 4231, as amended by the Multiemployer Pension Reform Act of 2014 (MPRA), permits the PBGC to facilitate mergers of multiemployer pension plans and to provide financial assistance for such mergers where at least one of the participating plans is in critical and declining status. Generally, a critical and declining plan is projected to become insolvent within 15 to 20 years.
Employers that do not have large employee populations have for many years struggled to provide competitive health coverage to their employees. In an effort to offer the economies of scale and risk spreading that exist when large numbers of employees are covered in a single group health plan, there have been many attempts to structure health insurance arrangements (typically referred to as multiple employer welfare arrangements, or MEWAs) in which unrelated employers can participate. Unfortunately, many MEWAs have been undercapitalized, unable to provide the cost savings they promoted, and/or noncompliant with state and federal law. Although there has been a recent effort by the US Department of Labor (DOL) (through a final regulation issued in June of 2018) to expand the ability of employer associations to offer group health plan coverage to their members, this effort will primarily benefit small employers who currently obtain health coverage through the individual or small group insurance markets.