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CCH® PENSION AND BENEFITS — 3/21/08

IRS issues proposed regs under PPA for endangered multiemployer DB plans

The IRS has issued proposed regulations under the Pension Protection Act of 2006 (PPA; 109-280) to implement Code Sec. 432 for multiemployer defined benefit (DB) plans that are in endangered or critical status.

Code Sec. 431 sets forth the funding rules that apply specifically to multiemployer defined benefit plans. Code Sec. 432 sets forth additional rules that apply to multiemployer plans in effect on July 16, 2006, that are in endangered or critical status.

ERISA §305 is parallel to Code Sec. 432 . The Secretary of the Treasury has interpretive jurisdiction over the subject matter addressed in these proposed regulations for purposes of ERISA, as well as the Code. Therefore, these Treasury Department regulations issued under Code Sec. 432 apply as well for purposes of ERISA §305.

Actuary must determine endangered or critical status

Code Sec. 432 generally provides for a determination by the enrolled actuary for a multiemployer plan as to whether the plan is in endangered status or in critical status for a plan year. In the first year that the actuary certifies that the plan is in endangered status, Code Sec. 432(a)(1) requires that the plan sponsor adopt a funding improvement plan. If a multiemployer plan is in critical status, the plan sponsor must adopt a rehabilitation plan.

In addition, Code Sec. 432(b)(3)(A) requires an actuarial certification of whether or not a multiemployer plan is in endangered status, and whether or not a multiemployer plan is or will be in critical status, for each plan year. This certification must be completed by the 90th day of the plan year and must be provided to the Secretary of the Treasury and to the plan sponsor. The deadline for adoption of the funding improvement plan or rehabilitation plan is 240 days after the deadline for the certification.

If the certification is with respect to a plan year that is within the plan’s funding improvement period or rehabilitation period arising from a prior certification of endangered or critical status, the actuary must also certify whether or not the plan is making scheduled progress in meeting the requirements of its funding improvement or rehabilitation plan.

Failure of the plan’s actuary to certify the status of the plan is treated as a failure to file the annual report under ERISA §502(c)(2) ). Thus, a penalty of up to $1,100 per day applies.

Endangered status

A multiemployer plan is in endangered status for a plan year if it is not in critical status and as of the beginning of the plan year:

• the funded percentage of the plan is less than 80 percent, or
• the plan has an accumulated funding deficiency for the plan year or is projected to have an accumulated funding deficiency in any of the six succeeding plan years (taking into account amortization extensions under Code Sec. 431(d) ).

Under Code Sec. 432(i) , a plan’s funded percentage is the percentage determined by dividing the value of the plan’s assets by the accrued liability of the plan.

Funding improvement plan

Code Sec. 432(c)(3) defines a funding improvement plan as a plan which consists of the actions, including options or a range of options, to be proposed to the bargaining parties, formulated to provide, based on reasonably anticipated experience and reasonable actuarial assumptions, for the attainment by the plan of certain requirements. Those requirements are based on a statutorily specified improvement in the plan’s funding percentage from the percentage that applied on the first day of the funding improvement period.

Critical status

A plan is in critical status if it meets any of four tests specified in Code Sec. 432(b)(2)(A) through Code Sec. 432(b)(2)(D) . For example, a multiemployer plan is in critical status under Code Sec. 432(b)(2) (A) if, as of the beginning of the plan year:

• the funded percentage of the plan is less than 65 percent and
• the sum of (A) the market value of plan assets, plus (B) the present value of reasonably anticipated employer contributions for the current plan year and each of the six succeeding plan years is less than the present value of all nonforfeitable benefits projected to be payable under the plan during the current plan year and each of the six succeeding plan years (plus administrative expenses).

For this purpose, employer contributions are determined assuming that the terms of all collective bargaining agreements pursuant to which the plan is maintained for the current plan year continue in effect for succeeding plan years.

Rehabilitation plan

A rehabilitation plan is a plan which consists of the actions, including options or a range of options, to be proposed to the bargaining parties, formulated to provide, based on reasonably anticipated experience and reasonable actuarial assumptions, for the attainment by the plan of certain requirements. Generally, the rehabilitation plan should enable the plan to emerge from critical status by the end of a 10-year period that begins after the earlier of (1) the second anniversary of the date of the adoption of the rehabilitation plan or (2) the expiration of the collective bargaining agreements in effect on the due date for the actuarial certification of critical status for the initial critical year and covering, as of such due date, at least 75 percent of the active participants in such multiemployer plan.

A second set of regulations is expected to be issued this year.