Employee Benefits Lawyer & Attorney : Fox Rothschild Law Firm : Health Care, Retirement, ERISA : Philadelphia, New York, Northeast

The Pension Protection Act left open certain areas of pension plan administration to further amendment. We are beginning to see proposed regulations that would fill in the gaps created by the PPA. The first of these regulations are proposed by the Pension Benefit Guaranty Corporation (PBGC). These proposed regulations modify parts of the multiemployer pension plan withdrawal liability rules under ERISA. These new rules may alter the amount of withdrawal liability that would otherwise be assessed to an employer withdrawing from a multiemployer pension plan, depending on the adoptive options taken by the plan Trustees.

The proposed regulations, which are based on the statutory changes made by the Pension Protection Act of 2006 (PPA), present 4 key items:
* there is a mandated adjustment to the withdrawal liability calculation for multiemployer plans that are in “critical status”
* there is a “Fresh Start” rule that applies to calculations
* there is a limited exception that allows an employer to delay making withdrawal liability payments until a final decision is rendered by a court or arbitrator
* there is a change to the allocation of a plan’s total unfunded vested benefits (UVBs) among employers in a mass withdrawal.
Comments on the proposed regulations are due by May 19, 2008, and the regulations would be effective as of the approved date unless otherwise stated.

Withdrawal Liability Calculations for Critical Status Plans
As most employers participating in multiemployer funds have now become aware, the PPA introduced new rules for multiemployer plans whose funding is in “critical status.” Part of the relief provided under the PPA allows “critical” plans to reduce “adjustable benefits” and also requires contributing employers to pay a surcharge equal to 5% of contributions (10% after the first year the plan is in critical status). The PPA requires that such adjustments must be disregarded in determining a plan’s UVBs, and the employer surcharge is not taken into account in calculating an employer’s allocable portion of UVBs for purposes of determining withdrawal liability. The proposed rule expands the definition of “nonforfeitable benefits” and “unfunded vested benefits” to include adjustable benefits that have been reduced while the plan is in critical status. The proposed rule also provides that the employer surcharge would be subtracted from both the numerator and denominator of the allocation fraction used to determine an employer’s withdrawal liability. This change will impact how withdrawal liability is calculated, but it may not necessarily decrease overall withdrawal liability for plans. These changes are effective for withdrawals occurring during plan years beginning on or after January 1, 2008.

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I happen to be working a distress termination of a single employer defined benefit plan for a company that is not in bankruptcy or insolvent and it struck me that in the current economy, there might be more employers that will have to deal with this issue.

There are four statutory tests for determining "distress" for the purposes of distress terminations: (1) liquidation in bankruptcy or insolvency proceedings, (2) reorganization in bankruptcy or insolvency proceedings, (3) inability to pay debts when due to continue in business unless a distress termination occurs, and (4) unreasonably burdensome pension costs due solely to a decline in employment.  While options 1 and 2 are considered the most common, options 3 and 4 may become more commonplace.

There are a couple of interesting hurdles to options 3 and 4 in a distress termination.  First, the determination is made by the PBGC, in its discretion, based on information provided by the plan sponsor.  The second hurdle is that the distress tests must be applied to the members of the control group of the sponsor, not just the sponsor itself.  That means that a troubled subsidiary may not be able to terminate its own plan if the parent is not equally distressed. 

When an underfunded plan terminates in a distress termination, the plan effectively goes into receivership. The PBGC becomes the trustee of the plan, takes control of any plan assets, and assumes responsibility for liabilities under the plan. The PBGC makes payments for benefit liabilities promised under the plan with assets received from two sources: assets in the plan before termination, and assets recovered from employers. The balance, if any, of guaranteed benefits owed to beneficiaries is paid from the PBGC's revolving funds.  Following a distress termination, the plan's contributing sponsor and every member of that sponsor's controlled group is liable to the PBGC for the excess of the value of the plan's liabilities as of the date of plan termination over the fair market value of the plan's assets on the date of termination. The liability is joint and several, meaning that each member of the controlled group can be held responsible for the entire liability.

Not surprisingly, the PBGC is not particularly receptive to distress terminations and will carefully scrutinize applications for termination where the sponsor is not in bankruptcy.  But if the choice is between bankruptcy and terminating the pension plan, sponsors should consider whether distress termination is a viable option to keep the company itself in operation.

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Notwithstanding the provisions of the federal Defense of Marriage Act, I believe that the availability of non-spouse beneficiary rollovers in Section 829 of the Pension Protection Act of 2006 serves as a sort of "unofficial official" recognition of the desire of plan participants to provide beneficiary status to same-sex partners and the need for plans to deal with this issue.  What follows are some general observations about how they work.

The rules provide that a non-spouse beneficiary of a participant in a qualified plan may make a direct rollover of the deceased participant's account balance to an inherited IRA (effective for distributions after December 31, 2006).  An inherited IRA is an individual retirement account established specifically with reference to the decedent and the decedent's name must be included in the title.  So it would be something like "Jane Doe as beneficiary of John Doe."  Once the inherited IRA is established, the direct rollover is the ONLY means of moving money from the qualified plan to the IRA.  There cannot be a cash distribution and then and rollover contribution within the 60 day window.

The rollovers are exempt from the stranded direct rollover requirements, such as the mandatory 20% withholding on amounts not directly rolled over, and there is no need to issue a 402(f) rollover  notice.  Generally, the inherited IRA will be required to follow the same distribution rules of the plan from the which the rollover was made.  Non-spouse rollover provisions are required for 2008 plan operations however the PPA does not require that a plan amendment be made until the 2009 plan year.  It is interesting to note, though, that the plan does not have to be specifically amended to provide for the non-spouse rollover, but it has to be documented (possibly through board resolution) that the option is available.

I think administration of this provision will prove interesting to plan administrators, particularly where there are multiple potential beneficiaries, such as children raised by same-sex partners.  The more options participants are given to change and designate beneficiaries, the more likely they are to make mistakes.  I think administrators would do well to put in place some extra measure of confirmation from the participant of a non-spouse beneficiary if participants choose that option. 

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Taking advantage of the extra day, the Department of Labor proposed a new "safe harbor" rule for small plan contributions on February 29, 2008.  The proposed regulation addresses small plan (under 100 participants) contributions and the timing of these contributions.

Under the current regulations, participant contributions to a plan that are paid to the employer or deducted from payroll are due as of the earliest date such amounts can reasonably be segregated from the employers general assets, but in any event not later than (1) for retirement plans, the 15th business day of the month following the month in which the employer received the payment from the participant or would have otherwise paid the amount in cash to the participant; (2) for welfare plans, 90 days after the employer receives the amount withheld.

The difficulty has always been that following these regulations provided no assurance that the timing of the contribution from the employer was "reasonable."  The "no later than" language has left open the discussion that "sooner" was required to be a sound fiduciary.  This new proposed safe harbor provides that, at least for small plans, amounts deposited within the 7th business day after receipt of the withholding by the employer will be treated as reasonable.

Participants may generally assume that contributions made to a plan are deposited in their account almost immediately.  In this time of market volatility, plan sponsors have to be wary of making sure contributions are made in a timely manner.  While this new proposed regulation only applies to small plans, this new 7-day rule could be considered as an acceptable rule of thumb for larger plans.

The proposed regulations are open for comment until April 29, 2008, and will be final upon publication.  The DOL has clarified that it will not assert an ERISA violation against any small plan sponsor that adheres to this rule prior to its final effective date.  For a copy of the Federal Register provision, please click here.

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