IRS offers guidance on troubled pension plans

The Internal Revenue Service posted new rules Friday for multiemployer qualified retirement plans that have run into funding problems and need extra financial help from the Pension Benefit Guaranty Corporation.

The guidance in Notice 2021-38 also aims to help the participants and beneficiaries in such plans in accordance with provisions of the American Rescue Plan Act of 2021 pertaining to special financial assistance paid by the PBGC to eligible multiemployer defined benefit pension plans that find themselves financially at risk.

Multiemployer pension plans, such as those offered by labor unions, have found themselves chronically underfunded, so many retirees who have paid into the plans for years may find themselves without benefits, or with drastically reduced benefits, when they retire. The American Rescue Plan Act that the Biden administration passed in March includes provisions to help bail out the plans, as the increasingly strained Pension Benefit Guaranty Corporation runs the risk of not having enough funds to meet the shortfall. The American Rescue Plan provided $86 billion in funds for failing pension plans. The PGBC has said that 124 multiemployer plans are in critical and declining status, according to CNBC, and approximately 1 million workers are in such plans, according to the American Academy of Actuaries. The PGBC itself projects that it could become insolvent by 2026 or 2027 if the additional pension plan failures continue.

The notice offers guidance for multiemployer plans, and addresses three major areas pertaining to the reinstatement of previously suspended pension benefits, along with make-up payments, as a condition that eligible multiemployer plans must meet if they receive special financial assistance. It also offers information on the individual income tax treatment of these make-up payments, as well as rules for how a plan that receives special financial assistance must treat the plan’s special financial assistance account for purposes of the minimum funding requirements for multiemployer defined benefit plans. The notice provides guidance on whether make-up payments related to previously suspended benefits are eligible to be rolled over to another eligible retirement plan and the extent to which any special financial assistance received by the plan is not taken into account in determining the required contributions.

According to the PGBC, a multiemployer plan is considered to be eligible for special financial assistance if it satisfies one of the following criteria:

• The plan is in critical and declining status in any plan year beginning in 2020 through 2022;
• A suspension of benefits has been approved for the plan under the Multiemployer Pension Reform Act of 2014 as of March 11, 2021;
• In any plan year starting in 2020 through 2022, the plan is in critical status, has a “modified funding percentage” (as defined by the law) of less than 40%, and has a ratio of active to inactive participants of less than two to three; or,
• The plan became insolvent after Dec. 16, 2014, and has remained insolvent and has not been terminated as of March 11, 2021.

Under the legislation, the Treasury will fully fund any vested benefits, including any that have been previously suspended by the plan, for up to 30 years, according to JD Supra.

The PBGC’s own guidance on the application process for special financial assistance can be found at www.PBGC.gov/arp-sfa.