PBGC's Interim Final Rule Implements the Special Financial Assistance Program (SFAP) and IRS Notice 2021-38 Provides Related Guidance | Practical Law

PBGC's Interim Final Rule Implements the Special Financial Assistance Program (SFAP) and IRS Notice 2021-38 Provides Related Guidance | Practical Law

The Pension Benefit Guaranty Corporation (PBGC) issued an interim final rule (IFR) that implements the new Special Financial Assistance Program for severely underfunded multiemployer pension plans. The Program was created by the American Rescue Plan Act of 2021 (ARPA-21). Additionally, the Internal Revenue Service (IRS) issued Notice 2021-38, which provides guidance for multiemployer pension plans that receive financial assistance under the Program.

PBGC's Interim Final Rule Implements the Special Financial Assistance Program (SFAP) and IRS Notice 2021-38 Provides Related Guidance

by Practical Law Employee Benefits & Executive Compensation
Published on 13 Jul 2021 • USA (National/Federal)
The Pension Benefit Guaranty Corporation (PBGC) issued an interim final rule (IFR) that implements the new Special Financial Assistance Program for severely underfunded multiemployer pension plans. The Program was created by the American Rescue Plan Act of 2021 (ARPA-21). Additionally, the Internal Revenue Service (IRS) issued Notice 2021-38, which provides guidance for multiemployer pension plans that receive financial assistance under the Program.
On July 9, 2021:

ARPA-21

ARPA-21, which was enacted on March 11, 2021, was the fifth major piece of legislation enacted in response to the US outbreak of COVID-19 (Pub. L. No. 117-2, H.R. 1319 (Mar. 11, 2021)), and it includes numerous employee benefit and executive compensation provisions (see Legal Update, $1.9 Trillion COVID-19 Stimulus Legislation Includes COBRA Premium Assistance, Retirement Plan Funding Relief, and an Expansion of Covered Employees Under Section 162(m)).
ERISA Section 4262 and Code Section 432(k) were enacted by Section 9704 of ARPA-21. ERISA Section 4262 established the SFAP, which allows the sponsor of a severely underfunded multiemployer plan as defined in Section 4262(b) to apply to the PBGC to receive special financial assistance, provided certain conditions are satisfied. Code Section 432(k) provides rules relating to an eligible multiemployer plan that applies to PBGC for special financial assistance under ERISA Section 4262.
Four types of multiemployer plans may receive financial assistance under the SFAP. Plans receiving assistance under the SFAP are not obligated to repay any monies received. However, they must reinstate certain previously suspended benefits as a condition of receiving special financial assistance.
Applications for financial assistance under the SFAP must be filed by December 31, 2025. Timely applications are deemed approved unless the PBGC notifies the plan otherwise within 120 days. For more information on the SFAP, see Legal Update, $1.9 Trillion COVID-19 Stimulus Legislation Includes COBRA Premium Assistance, Retirement Plan Funding Relief, and an Expansion of Covered Employees Under Section 162(m): Financial Assistance for Severely Underfunded Multiemployer Plans.
ARPA-21 directed the PBGC to issue regulations outlining the application requirements for financial assistance within 120 days of its enactment.

PBGC's IFR

The PBGC issued the IFR on July 9, 2021. It was published in the Federal Register and took effect on July 12, 2021.
The IFR adds Part 4262—Special Financial Assistance By PBGC to the PBGC regulations. Part 4262 includes Sections 4262.1 through 4262.17.
The IFR details what information a multiemployer plan is required to file to demonstrate its eligibility for special financial assistance.
The IFR also provides the formula to determine the amount of special financial assistance that the PBGC will pay to an eligible multiemployer plan.
ARPA-21 requires the PBGC to process special financial assistance applications within 120 days, and it authorizes the PBGC to accept applications in a manner that allows for sufficient review and processing within that time frame. The PBGC also may prioritize the special financial assistance applications of multiemployer plans in specified groups. The IFR identifies the priority order in which plans in those groups are permitted to apply. The preamble to the IFR includes a table showing the seven priority groups and the dates when plans in those groups may apply for special financial assistance. During those priority periods, applications will be accepted only for a plan in the affected group. Applications must also be submitted to the Treasury Department (26 U.S.C. § 432(k)(1)(D); see IRS Notice 2021-38: Submissions to the Treasury Department). There will be a notification system on the PBGC's website that states which plans may file at that particular time.
Under the IFR, special financial assistance funds received by a plan, and any earnings thereon, must be segregated from other plan assets and may only be used to make benefit payments and pay plan expenses, and special financial assistance funds may be used before other plan assets are used for these purposes. PBGC Regulation Section 4262.14 provides that special financial assistance funds and earnings must be invested by plans in investment-grade bonds or the other investments permitted by that section (29 C.F.R. § 4262.14).
The IFR imposes conditions on a plan that receives special financial assistance with respect to:
  • Benefit increases.
  • Allocation of plan assets.
  • Contribution reductions, allocating contributions, and other practices.
  • Transfers or mergers.
  • Reporting and audit.
The IFR also discusses the two conditions that apply when a multiemployer plan reinstates benefits previously suspended. Specifically, these plans must:
(29 C.F.R. § 4262.15.)
PBGC Regulation Section 4262.17 provides that a multiemployer plan receiving special financial assistance:
  • Must continue to pay plan premiums due under ERISA Section 4007 for participants and beneficiaries in the plan.
  • Is deemed to be in critical status under ERISA Section 305(b)(2) until the last plan year ending in 2051.
  • That subsequently becomes insolvent under ERISA Section 4245 will be subject to the rules and guarantee for insolvent plans in effect when the plan becomes insolvent.
  • Is not eligible to apply for a suspension of benefits under ERISA Section 305(e)(9).
(29 C.F.R. § 4262.17.)
The PBGC is requesting public comments on the IFR.
The PBGC issued nonbinding guidance, Special Financial Assistance Assumptions, that provide guidelines for changes to certain assumptions that plans may use for purposes of determining eligibility for special financial assistance and the amount of that assistance.

IRS Notice 2021-38

IRS Notice 2021-38 provides guidance for multiemployer pension plans that receive financial assistance under the PBGC's SFAP.

Reinstatement of Benefits and Make-Up Payments

The Notice first provides guidance under Code Section 432(k) to multiemployer plan sponsors that are required to reinstate certain previously suspended benefits as a condition of receiving special financial assistance. Under Code Section 432(k)(2)(A)(i), if an eligible multiemployer plan receiving special financial assistance was previously amended to suspend benefits under Code Section 432(e)(9) or ERISA Section 4245(a) (which corresponds to Code Section 418E(a)), the plan must be amended again to reinstate those suspended benefits, effective as of the month in which the special financial assistance is paid to the plan. As Notice 2021-38 explains, that month's benefit payment and any future payment of benefits to a participant or beneficiary must be made as if the amendment suspending benefits had never been adopted. The Notice provides further technical guidance on the reinstatements that must be made for plans that had suspended benefits under Code Sections 432(k)(2)(A)(i) and 418E(a).
Under Code Section 432(k)(2)(A)(ii), an eligible multiemployer plan that receives special financial assistance must also be amended to provide make-up payments to individuals who are participants or beneficiaries on, and who have commenced benefits by, the date the special financial assistance is paid to the plan. The make-up payments must be paid either:
  • As a lump sum within three months of the date the special financial assistance is paid to the plan.
  • In equal monthly installments over a period of five years, beginning within three months of the date the special financial assistance is paid to the plan, with no adjustment for interest.
The make-up payments are in addition to the annuity payments those individuals already receive, and they must equal the total amount of benefits that were not paid to the participants and beneficiaries on account of the suspension, with no actuarial adjustments. The plan amendment providing for the make-up payments must also specify which distribution form (a lump-sum payment or monthly installments) will apply for the make-up payments. Make-up payments that are paid over five years must be paid without regard to whether the participant or beneficiary survives to the end of the five-year period.

Whether Make-Up Payments Are Eligible to Be Rolled Over

Regarding make-up payments under Code Section 432(k)(2)(A)(ii) that are paid in the form of monthly installments over five years, Notice 2021-38 provides that:
  • To the extent that the aggregate supplement exceeds the limit set forth in Treasury Regulation Section 1.402(c)-2, Q&A-6(b)(2)(iv), that limit is increased to the amount of the make-up payment.
  • Make-up payments that are paid in the form of monthly installments over five years are treated as part of a series of substantially equal periodic payments and are not eligible rollover distributions subject to the requirements of Code Sections 401(a)(31), 402(f), or 3405(c)(1).
Regarding make-up payments under Code Section 432(k)(2)(A)(ii) that are paid in the form of a lump sum, Notice 2021-38 provides that:
  • A lump sum make-up payment that is less than or equal to the greater of 10 percent of the annual rate of payment for the annuity or $750 is treated as part of a series of substantially equal periodic payments, and is not an eligible rollover distribution.
  • A lump sum make-up payment that exceeds the limit under Treasury Regulation Section 1.402(c)-2, Q&A-6(b)(2)(iv) is not a supplemental payment that is part of a series of periodic payments and is an independent payment that is an eligible rollover distribution. In this situation, the plan administrator must provide the participant or beneficiary who is receiving the lump sum make-up payment with a Section 401(a)(31) election to make a direct rollover to an eligible retirement plan and a Code Section 402(f) notice (see Standard Document, Special Tax Notice (Section 402(f) Notice)). Unless that participant or beneficiary elects to roll over that payment to an eligible retirement plan, the make-up payment will be subject to withholding under Code Section 3405(c)(1) at the rate of 20 percent.

Submissions to the Treasury Department

Code Section 432(k)(1)(D) requires that a multiemployer plan's application for special financial assistance via temporary priority consideration must be submitted to the Treasury Department. However, Notice 2021-38 provides that this requirement will be satisfied by submitting the application to the PBGC, which will transmit the application to the Treasury Department on behalf of the plan (29 C.F.R. § 4262.10(c)(2)).

Disregarding Special Financial Assistance

Notice 2021-38 explains that the amounts in the special financial assistance account established under ERISA Section 4262 are not included in the plan's assets for purposes of determining the contributions required under Code Section 431. If 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 under Code Section 431. Therefore, 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.

Practical Impact

Underfunded multiemployer pension plans that want to apply to the PBGC for special financial assistance should review the PBGC's interim final rule and Special Financial Assistance Assumptions guidance document, as well as IRS Notice 2021-38, to manage the process and comply with all of the requirements for the program.
For information on multiemployer plans, see Practice Note, Multiemployer Pension Plans.