PBGC Issues Final Regulations on Mergers and Transfers Between Multiemployer Plans

Practical Law Legal Update w-016-6062 (Approx. 6 pages)

PBGC Issues Final Regulations on Mergers and Transfers Between Multiemployer Plans

by Practical Law Employee Benefits & Executive Compensation

Background

ERISA provides that a plan sponsor may merge a multiemployer plan with one or more multiemployer plans, or engage in a transfer of assets and liabilities to or from another multiemployer plan, if certain requirements are met (ERISA § 4231 (29 U.S.C. § 1411)). Under ERISA Section 4231, the PBGC provides financial assistance to multiemployer plans that are or will be insolvent, meaning that the plan is unable to pay benefits when due during the year. Before the enactment of the Multiemployer Pension Reform Act of 2014 (MPRA), the PBGC was rarely able to provide financial assistance to facilitate the merger of a soon-to-be insolvent multiemployer plan with a more financially secure multiemployer plan.

Effective December 2014, the MPRA provides various modifications to multiemployer pension plan rules and other remediation measures, including statutory reforms to assist financially troubled multiemployer plans (see Legal Update, President Signs Bill Reforming Multiemployer Pension Plan Rules). Among other things, the MPRA amended ERISA Section 4231 to add a new section clarifying the PBGC's authority to facilitate the merger of two or more multiemployer plans (29 U.S.C. § 1411(e)).

Specifically, under the MPRA, the PBGC may:

Facilitate a merger of two or more multiemployer plans upon request by the plan sponsors if it determines that the merger is:
- in the interests of the participants and beneficiaries of at least one of the plans; and
- not reasonably expected to be adverse to the overall interests of the participants and beneficiaries of any of the plans.
Facilitation may include training, technical assistance, mediation, communication with stakeholders, and support with related requests to other government agencies.
Provide financial assistance to facilitate a merger that it determines is necessary to enable one or more of the plans involved to avoid or postpone insolvency if certain conditions are met, including that one or more of the plans involved in the merger is in critical and declining status. Critical and declining status generally means a plan that is in critical status as defined in ERISA Section 305(b)(6) and that is projected to become insolvent within 15 to 20 years.

In June 2016, the PBGC issued proposed regulations that would amend the current regulations to implement the MPRA's changes to ERISA Section 4231 (29 U.S.C. § 1411) (see Legal Update, PBGC Issues Proposed Regulations on Mergers and Transfers Between Multiemployer Plans).

Overview of the Final Regulations

The final regulations adopt many of the proposed regulations' provisions, reject a few, and modify others.

Definition of Significantly Affected Plan

The proposed regulations would have expanded the definition of significantly affected plan to include plans in endangered or critical status that engage in non-de minimis transfers. In proposing this change, the PBGC cited its concern that such plans pose a higher risk of insolvency. The PBGC received comments arguing that:

The proposed change was "unduly restrictive."
The PBGC could address the risk by requiring that the transfer postpone the date when the plan is projected to become insolvent.
The proposed change would prohibit beneficial transfers that are currently allowed.

To allow more time to consider the issues raised in the public comments, the PBGC declined to adopt the proposed change to the definition of significantly affected plan in the final regulations.

Plan Solvency Tests

ERISA Section 4231(b)(3) prohibits a merger or transfer unless the plan sponsor can demonstrate the plan's solvency after the merger or transfer (29 U.S.C. § 1411(b)(3)). Under the proposed regulations, a plan that is not a significantly affected plan could satisfy the plan solvency requirement under one of the following tests:

In each of the first ten plan years beginning on or after the proposed effective date of the merger or transfer, the plan's expected fair market value of assets as of the beginning of the plan year plus expected contributions and investment earnings equal or exceed expected expenses and benefit payments for the plan year (up from five plan years under the current regulations).
The expected fair market value of assets immediately after the merger or transfer equals or exceeds ten times the benefit payments for the last plan year ending before the proposed effective date of the merger or transfer (up from five times under the current regulations).

The proposed regulations provided a more rigorous solvency test for significantly affected plans.

In response, commenters argued that the proposed changes to the plan solvency tests would:

Make plan mergers and transfers more difficult or impossible.
Increase the burden on plan sponsors.
Limit plans' options.

Some commenters also urged the PBGC to modify the existing solvency test for significantly affected plans. These commenters argued that many significantly affected plans cannot meet the existing solvency test.

To allow more time to consider the issues raised in the public comments, the PBGC declined to adopt these proposed changes to the plan solvency tests in the final regulations.

Waiver of the Requirement Concerning Preservation of Accrued Benefits

Under ERISA, a participant's or beneficiary's accrued benefit may not be lower immediately after a plan merger or transfer than immediately before the merger or transfer (ERISA Section 4231(b)(2) (29 U.S.C. § 1411(b)(2)). The PBGC's existing regulations provide guidance on this requirement.

In the proposed regulations, the PBGC did not propose any changes to this section of the regulations. In the final regulations, however, the PBGC recognized that ERISA Section 4231(b)(2) would bar a plan merger or transfer that happens at the same time as a benefit suspension under ERISA Section 305(e)(9) (see Practice Note, Suspensions of Benefits). To permit a merger or transfer in these circumstances, the PBGC added a new subsection which provides that it may waive the requirement concerning the preservation of accrued benefits if the benefit suspension and transfer or merger happen simultaneously.

Information Requirements for Financial Assistance Mergers

The final regulations adopt the proposed information requirements for financial assistance mergers, but modify the requirements concerning:

The types of benefit disbursement projections plans in critical and declining status must provide.
How the enrolled actuary may demonstrate that financial assistance is necessary for the merged plan to become or remain solvent.
The information that must be included in the participant census data.

For a discussion of the information requirements, see Legal Update, PBGC Issues Proposed Regulations on Mergers and Transfers Between Multiemployer Plans: Information Requirements for Financial Assistance Mergers.

Remaining Provisions Adopted Without Change

The final regulations adopt without change the remaining proposed changes concerning:

New definitions.
General requirements for mergers and transfers.
Rules for facilitated mergers.
The manner in which the PBGC will notify a plan sponsor of its decision on a request for a facilitated merger.
The PBGC's jurisdiction over the merged plan resulting from a financial assistance merger.

For a discussion of these changes, see Legal Update, PBGC Issues Proposed Regulations on Mergers and Transfers Between Multiemployer Plans.

Effective Date

The final regulations are effective on October 15, 2018.

Practical Implications

Plan sponsors considering a plan merger or transfer between multiemployer plans should pay close attention to these final regulations which provide somewhat more flexibility in structuring such transactions but which also leave some important topics unaddressed, including the plan solvency tests.

PBGC Issues Final Regulations on Mergers and Transfers Between Multiemployer Plans | Practical Law