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CCH® PENSION — 04/22/10

EP Exam Director discusses multiemployer plan funding compliance issues

The proverbial "perfect storm" occurred with the timing of multiemployer plan funding requirements of the Pension Protection Act of 2006 (PPA; P.L. 109-280) and the financial collapse in the past 18 months, said Monika Templeman, Director of Employee Plans (EP) Examinations in the Spring issue of the IRS Employee Plans News. The unfortunate timing makes the new funding rules appear draconian, she said, but added that "of course, that was never the purpose." The new funding rules, she said, were designed to improve the funded status of these plans to protect the plans, the participants and the employers from the consequences associated with funding deficiencies.

The new funding rules require trustees, unions and employers to assess their pension plans' financial status according to certain criteria and to proactively take steps to improve the funded status of plans that are not well-funded. The plan actuary must complete an annual actuarial certification, which is a determination of the plan's current and projected financial status. This certification is due no later than the 90th day of the plan year. The penalty for not having this certification completed equates to a reporting violation and will result in a fine of up to $1,100 per day. Once the status of the plan is certified, plans that are not well-funded have to meet other requirements, such as sending notices regarding status and adopting a funding improvement or rehabilitation plan.

What EPCU is looking for

The Employee Plans Compliance Unit (EPCU) is processing and reviewing the annual certifications, Templeman said. The initial concern is to verify that all multiemployer plans have filed a certification, and confirm that these are complete and timely. Specialists will also follow-up, as necessary, on plans that fall into the status or "zone" of endangered, seriously endangered or critical.

The green zone means that the plan is not in an endangered or critical status. However, Templeman cautioned that employers or unions should not necessarily jump to the conclusion that a green zone means that "everything is ok." The PPA does not require any action if a plan is in the green zone, but plan administrators should always concentrate on all funding indicators and constantly monitor the plan's financial condition, she said.

The yellow zone signifies that a plan is in endangered status. The plan does not meet the criteria to be in critical status but is either: less than 80% funded, or has an accumulated funding deficiency in the current plan year or is projected to have an accumulated funding deficiency in any of the next six plan years. If the actuary determines both criteria apply, the plan is still in the yellow zone, but the plan is now considered to be in seriously endangered status. Within 240 days of the actuarial certification of status required date (the 90th day of the plan year), an endangered multiemployer plan must adopt a funding improvement plan. This plan must include actions, options or a range of options designed to reach funding benchmarks to avoid a funding deficiency. The funding benchmark for an endangered plan is a one-third improvement in funded status over 10 years. Plans in seriously endangered status have a funding benchmark of a one-fifth improvement over 15 years. Sponsors of plans in seriously endangered status must take all reasonable steps to improve the plan's funded percentage and postpone an accumulated funding deficiency, Templeman stressed.

The red zone means that a plan is in critical status. The PPA provides a multi-criteria definition, but generally, the plan is in critical status if the plan is facing a funding deficiency or insolvency within the next five to seven years. Plans in critical status must adopt a rehabilitation plan designed to improve the plan's funding over a 10-year period. This rehabilitation plan must be in place no later than 240 days after the required date of the actuarial certification of status. The rehabilitation plan could include actions such as increasing employer contributions, decreasing benefit accruals or reducing costly adjustable benefits.

Generally, for the period from October 1, 2008, through September 30, 2009, the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA; P.L. 110-458) permitted plan sponsors of multiemployer plans to elect to remain in the status determined for the prior plan year. For plans in the yellow or red zone that elected to freeze their status, the trustees were not required to update any funding improvement or rehabilitation plans for this period. Additionally, the provisions of WRERA allow a plan sponsor of a multiemployer plan in endangered or critical status to elect to extend the funding improvement or rehabilitation period by three years.

Templeman said that, on examination, the multiemployer plan funding issues occurring most often include trustees not pursuing receipt of delinquent contributions from employers, diversion of trust assets, and trustees not assessing withdrawal liability to withdrawing employers or not assessing it in a timely manner.

Source: IRS Employee Plans News, Volume 10/Spring 2010.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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