2006 Pension Funding Reform

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	2006 Pension Funding Reform
	Single-Employer Plan Rules
	New Benefit Restrictions
	Hybrid Pension Plans
	Defined Contribution Plans
	Disclosure Rules
	Multiemployer Plan Rules

New Rules for Multiemployer Plan

New Amortization Periods
All multiemployer plans will be affected by new amortization rules. The amortization period for past service liabilities and for gains and losses resulting from changes to actuarial assumptions has been reduced from 30 years to 15 years. The amortization period for experience gains and losses remains 15 years. Amounts amortized before the effective date will continue to be amortized under the old rules. Automatic extensions of amortization periods are available for applications filed before December 31, 2014, if the plan meets specified requirements.

Endangered Status
A plan will be considered endangered (assuming it’s not in critical status) if either:

• The plan is less than 80 percent funded.
• The plan has an accumulated funding deficiency in the current plan year or is expected to have one during any of the next six plan years, taking into account extensions of amortization periods. 

If both of these conditions are met, the plan enters “seriously endangered status.” The plan’s funded percentage is plan assets over accrued liability.

The plan actuary must certify whether the plan is in endangered status within 90 days after the beginning of the plan year. If the plan was already in endangered status, the actuary must certify whether it is meeting its funding improvement plan targets.

Funding Improvement Plans for Plans in Endangered Status
Plans in endangered status must notify participants, beneficiaries, bargaining parties, the PBGC and the Secretary of Labor within 30 days of the certification. They must adopt a funding improvement plan within 240 days of actuarial certification of the endangered status. The funding improvement plan, which must be proposed to bargaining parties, must include actions, options or a range of options designed to reach funding benchmarks and avoid a funding deficiency. The funding benchmark for plans in endangered status is a one-third improvement in funded status over 10 years. Plans in seriously endangered status that are less than 70 percent funded have 15 years to achieve a one-fifth improvement in funded status.

Pending adoption of the funding improvement plan, the plan sponsor cannot accept any collective bargaining agreement that would reduce or suspend contributions for any participants, or exclude, either directly or indirectly, younger or newly hired employees. Nor may a sponsor amend a plan in a way that increases liabilities. If the plan is in seriously endangered status, the sponsor must take all reasonable steps to improve the plan’s funded percentage and postpone an accumulated funding deficiency.

Within 30 days of adopting the funding improvement plan, the sponsor must provide bargaining parties with alternative proposals for revised benefit structures and/or contribution structures, which may be reasonably expected to meet the funding benchmarks. Such proposals must include:

• At least one proposal to reduce future benefit accruals.
• At least one proposal that increases contributions as necessary to achieve the benchmarks.

Once the funding improvement plan is adopted, the sponsor may not adopt any plan amendments that would conflict with the plan. Nor may plans increase future benefit accruals, unless the plan actuary certifies that the increase is consistent with the funding improvement plan and will be paid for by contributions not already earmarked for the funding improvement plan.

A summary of the funding improvement plan (or modifications to an existing plan) and annual updates on funded status must appear in the plan’s annual report.

Failure to file a funding improvement plan and/or failure to contribute as necessary to achieve funding benchmarks could incur penalties and excise taxes. 

Critical Status
A plan will enter critical status if, at the beginning of the plan year, any of the following conditions are met:

• The plan is less than 65 percent funded, and the sum of the market value of assets plus the present value of reasonably anticipated employer contributions for the current plan year and next six plan years is less than the present value of nonforfeitable benefits payable over that time period (including administrative expenses).
• An accumulated funding deficiency exists for the current plan year or is projected for any of the next three years (four years if the plan is less than 65 percent funded), not taking into account extensions of amortization periods.
• Normal cost for the current plan year plus interest on unfunded benefit liabilities exceed the present value of reasonably anticipated employer and employee contributions for the same period; and the present value of nonforfeitable benefits for inactive participants exceeds the corresponding present value of nonforfeitable benefits for active participants; and an accumulated funding deficiency exists for the current plan year or is projected for any of the next four years, not taking into account extensions of amortization periods.
• The sum of the market value of assets plus the present value of reasonably anticipated employer contributions for the current plan year and the next four years is less than the present value of benefits payable during the same period (including administrative expenses).

Plans in critical status must pay a surcharge equal to 5 percent of the contribution required under the collective bargaining agreement in the first critical-status year and 10 percent for subsequent years in critical status. These additional contributions are due at the same time as regular contributions. Failing to pay a surcharge will be treated as a delinquent contribution.

Rehabilitation Plans for Plans in Critical Status
Plans in critical status must notify participants, beneficiaries, bargaining parties, the PBGC and the Secretary of Labor within 30 days of the certification. They must adopt a rehabilitation plan within 240 days of the actuarial certification of critical status. The rehabilitation plan must outline actions, options or a range of options to propose to the bargaining parties that, based on reasonable assumptions and anticipated experience, will steer the plan out of critical status. It must also provide annual standards for meeting its requirements. If the plan sponsor cannot reasonably expect to emerge from critical status within 10 years, the plan must propose reasonable measures to emerge from critical status at a later time or to forestall insolvency.

A plan remains in critical status until the plan actuary certifies that there is no accumulated funding deficiency in the current or next nine plan years.

Pending adoption of the rehabilitation plan, the plan sponsor cannot accept any collective bargaining agreement that would reduce or suspend contributions for any participants, or exclude, directly or indirectly, younger or newly hired employees. Pending adoption of the rehabilitation plan, sponsors may not amend their plans so as to increase liabilities (excluding changes prescribed by law).

Within 30 days of adopting the initial rehabilitation plan, the plan sponsor must provide bargaining parties with schedules showing revised benefit and/or contribution structures that would bring the plan out of critical status in accordance with the rehabilitation plan.

While in critical status, sponsors may reduce certain previously earned benefits. Plan participants must be notified of the reduction at least 30 days before its effective date.

During the rehabilitation period, sponsors may not amend the plan in a way that conflicts with the rehabilitation plan. Nor may they amend the plan to increase future benefit accruals, unless the plan actuary certifies that the benefit increase will be funded by contributions not already earmarked by the rehabilitation plan, and the benefit increase will not derail the plan’s emergence from critical status.

Once notice of critical status certification is sent, the plan cannot pay lump sums of $5,000 or more (except for retroactive payments linked to a retroactive annuity start date).

A summary of a rehabilitation plan (or any modifications to an existing rehabilitation plan) and annual updates regarding the plan’s funded status must appear in the annual report.

Failure to file a required rehabilitation plan and/or make contributions outlined in the rehabilitation plan could result in penalties and excise taxes. 

Other Changes for Multiemployer Plans
The act imposes joint and several liability on all members of the employer’s controlled group for purposes of minimum required contributions.

Unless the value of plan assets exceeds three times the total amount of benefit payments, the sponsor must determine whether the plan will be insolvent for any of the next five plan years.

Partial withdrawal liability could apply if the employer contracts out a portion of its services to an entity it owns or controls.

The “free look” rule that allows plans to exempt certain employers from withdrawal liability now applies to plans that primarily cover employees in the building and construction industries.

The excise tax currently levied on multiemployer plans with an accumulated funding deficiency no longer applies to plans with fewer than 100 participants, or to those whose normal cost is less than $100,000 and that are experiencing a funding deficiency on the date of enactment.

The PPA increases the maximum deductible contribution for multiemployer plans to 140 percent of the plan’s current liability over the value of plan assets.

Effective Date and Sunset
The new rules are generally effective after December 31, 2007. The funding rules for plans in endangered or critical status will sunset after December 31, 2014, but existing funding improvement and rehabilitation plans will remain in effect. A study will be conducted by December 31, 2011, to analyze the effect of the new rules on multiemployer plans. The study will also make legislative recommendations to Congress.

Issues to Consider
These changes will affect multiemployer plans, contributing employers and plan participants.
Action Items:

• Determine whether your plan would fall into the critical or endangered category.
• Perform the projections required by the new rules. Even though they will not take effect until 2008, most funds will want preliminary information.
• If your fund will require a funding improvement plan, begin investigating the options.