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CCH® PENSION AND BENEFITS — 04/06/09

Guidance issued on notice and election procedures for significantly underfunded multiemployer plans

The IRS has issued guidance on the notice and election procedures for sponsors of multiemployer defined benefit plans that are significantly underfunded, which are required by the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA; P.L. 110-458).

Code Sec. 432 , added by the Pension Protection Act of 2008 (PPA; P.L. 109-280), provides rules for underfunded multiemployer defined benefit plans. Actuaries for such plans are required by the 90th day of each plan year to certify as to the plan’s “section 432 status”— whether the plan is in endangered status, critical status, or neither status for the plan year.

If a plan is certified to be in endangered status, the sponsor must adopt a funding improvement plan that is reasonably expected to enable the multiemployer plan to achieve certain funding improvements by the end of its 10-year funding improvement period (with a possible substitution of a 15-year funding improvement period for a plan in seriously endangered status). Similarly, the sponsor of a plan that has been certified to be in critical status must adopt a rehabilitation plan that generally is reasonably expected to enable the multiemployer plan to emerge from critical status by the end of its 10-year rehabilitation period. A funding improvement plan or rehabilitation plan must be updated each year after the initial endangered year or initial critical year.

WRERA sections 204 and 205

Section 204 of WRERA provides that a multiemployer plan sponsor may elect to temporarily freeze the plan’s section 432 status so that it is the same as the plan’s section 432 status for the plan year immediately prior to the election year. The sponsor of a multiemployer plan that was in endangered or critical status for the prior year, and for which an election is made under section 204, is not required to update its funding improvement plan, rehabilitation plan, or schedules as otherwise required under the PPA rules until the plan year following the election year.

Plans making the election to freeze section 432 status are required to comply with special notice requirements under WRERA. The IRS guidance makes clear that “if the election is made before the date the annual certification of the plan’s section 432 status is submitted to the Secretary of the Treasury, then notice must be provided not later than 30 days after the date of the certification” and “if the election is made after the date the annual certification is submitted to the Secretary, then notice must be provided not later than 30 days after the date of the election.”

Section 205 of WRERA provides for an elective extension of the funding improvement period or rehabilitation period for multiemployer plans in endangered or critical status. If the plan sponsor of a plan that is in endangered or critical status for a plan year beginning in 2008 or 2009 makes an election under section 205, the plan’s 10-year funding improvement period or rehabilitation period is extended to 13 years. Similarly, if the sponsor of a multiemployer plan that is in seriously endangered status for a plan year beginning in 2008 or 2009 and that is eligible for a 15-year funding improvement period makes a section 205 election, the plan’s funding improvement period is extended to 18 years.

Interaction of WRERA elections

In the guidance, the IRS cautions plan sponsors to “take into account the interaction between sections 204 and 205 of WRERA in choosing whether to elect the relief provided under either section.” For example, the IRS notes, a plan sponsor may elect under section 204 for the plan year beginning in 2009 to freeze the plan’s section 432 status as neither endangered nor critical. If, however, the plan is subsequently certified as being in endangered or critical status for the plan year beginning in 2010, then the section 205 election to extend the funding improvement period or rehabilitation period to 13 or 18 years would no longer be available because the initial endangered year or initial critical year for the plan (the year when the plan first enters endangered or critical status) would not be until 2010 (a year as of which no election under section 205 is available). On the other hand, if the plan sponsor does not make a 204 election so that it operates in accordance with the plan’s endangered or critical status as certified for the year, and elects for that year to extend the funding improvement period or rehabilitation period under section 205, then the funding improvement period or rehabilitation period for the plan as determined in accordance with the 2009 election would continue to be 13 or 18 years for as long as the funding improvement plan or rehabilitation plan remains in effect.

Election procedures

The IRS specifies that an election under section 204 must be made by the later of April 30, 2009 and the date that is 30 days after the due date of the annual certification of section 432 status for the election year. An election under section 205 must be made by the last day of the plan year as of which the election is being made, or, if earlier, by the date a funding improvement plan, rehabilitation plan, or update is adopted that takes into account the election. However, the election will not be required to be made earlier than April 30, 2009. The election must be signed by an authorized trustee and contain certain items of information specified in the notice.

Other guidance provided

The guidance also contains information on special notice requirements for plans in neither endangered nor critical status as a result of a freeze election. In addition, the IRS describes the effect of a WRERA election on Form 5500, Schedule MB, and Schedule R filings.

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