proskauer benefits brief podcastThis episode is the final installment of our three-part series on a new special financial assistance program created by the American Rescue Plan Act of 2021 for troubled multiemployer plans and the interim guidance issued by the Pension Benefit Guaranty Corporation regarding the program. Be sure to listen as Rob Projansky and Justin Alex cover the special rules that apply to plans that receive the assistance and other details including how the program impacts withdrawal liability for employers.

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ROB PROJANSKY: Hello and welcome to the Proskauer Benefits Brief: Legal Insights on Employee Benefits and Executive Compensation. I’m Rob Projansky and on today’s episode, I’m joined by Justin Alex. This is our final installment of the three-part series on a new special financial assistance program created by the American Rescue Plan Act of 2021 for troubled multi-employer plans and the interim guidance issued by the Pension Benefit Guaranty Corporation in July, 2021 regarding the program. We previously covered the basic contours of the program, the application process and how the amount of special financial assistance is calculated. In today’s podcast we’ll cover the special rules that apply to plans that receive the assistance and other details including how the program impacts withdrawal liability for employers. So Justin, let’s start with withdrawal liability. I know a lot of plans and employers are asking us how does ARPA Relief affect withdrawal liability? Can you talk a little bit about that?

JUSTIN ALEX: Sure. Let’s start with the basic principle, as we know withdrawal liability is an employer’s share of a plan unfunded vested benefits, which is the amount by which the present value of the plan’s vested liabilities exceeds its assets. In some ways right off the bat you can see how getting special financial assistance would affect that. For example, if you have a plan with five billion in liabilities and three billion in assets and the plan gets a billion in special financial assistance the total under funding goes from two billion to one billion. So there’s less liability to spread around.  However, various stakeholders also wanted to ensure that the special financial assistance program doesn’t incentivize employers to head for the exits from these plans as soon as possible. So an earlier draft of the legislation said that for 15 years after a plan receives assistance withdraw liability calculations would ignore the amount of the assistance. So it wouldn’t change the unfunded vested benefits allocated to any employer that withdraws in that fifteen year period but that was cut from the final statute for procedural reasons in the Senate. Instead the statute gave PBGC the authority to impose certain types of conditions on plans that received special financial assistance, specifically including with respect to withdrawal liability and PBGC took Congress up on their offer and addressed this in a bit of a unique way in its guidance.

The PBGC said that withdrawal liability calculations can take the special financial assistance into account from day one but there’s a catch. Plans that receive the assistance have to calculate an employer’s withdrawal liability using the much more conservative actuarial assumptions that would normally only apply in the case of a mass withdrawal. What that means practically is that when the plan calculates its unfunded vested benefits it will need to calculate the present value of its liabilities using a very low interest rate that’s set by the PBGC. And a very low interest rate translates into much higher liabilities and therefore much more unfunded vested benefits to allocate to withdrawing employers. So while a plan will count the special financial assistance in its assets and make its total assets higher, the plan will also use a very low interest rate and make the liabilities higher as well. At least for plans that don’t already use the mass withdrawal interest rate. This won’t necessarily work out as a dollar per dollar offset but it does block the benefit of including the special financial assistance in a withdrawal liability calculation. All that said, even if this change would ultimately result in a reduction to the unfunded vested benefits that’s allocated to an employer, what’s interesting is that practically this still may not even matter for the employer.

The reason is that the liability we’ve been talking about so far isn’t necessarily what an employer’s actually required to pay when it withdraws. That’s because withdrawal liability is actually paid in installments. And the amount of each installment is based and the employer’s past contribution history and doesn’t change based on the amount of the liability that we’ve been talking about. If there’s a higher liability, an employer just pays that amount over a longer period. And if there’s a lower liability the employer pays it over a shorter period. But here’s the wrinkle. In a standard withdrawal the payments are capped at twenty years even if the employer hasn’t fully paid off its liability. So in a poorly funded plan it’s possible that an employer will be a twenty year payor with or without special financial assistance and regardless of the interest rate used to calculate the plan’s liabilities. That’s a long-winded way of saying all of these changes might actually have little or no impact for an employer or it might. It really depends on the plan and the employer’s specific circumstances.

That’s the main condition that the PBGC imposed with respect to withdrawal liability but there’s also another one that’s getting a little less press but is also important. For a plan that receives special financial assistance PBGC approval is now required if the present value of any liability settled is greater than $50,000,000. PBGC says that it imposed this rule to ensure that large negotiated settlements are in the best interest of participants and won’t put the PBGC at an unreasonable risk of loss. We could talk for a whole podcast about what this really means and whether plans and employers might now have to arbitrate cases simply because PBGC has a different assessment of the relative merits of their legal arguments in a dispute over liability assessment but I think the key takeaway here is there’s now going to be a certain level of unpredictable change in the dynamic of settlement negotiations between plans and withdrawing employers over legitimately disputed withdrawal liability claims. So while we’re talking about conditions on plans that receives special financial assistance, Rob, maybe you can discuss a few of the other key conditions that the PBGC has imposed.

ROB PROJANSKY: Sure, Justin. Let’s start with limitations on benefit increases and contribution decreases. Key concern of PBGC and other stake holders was ensuring that plans that receive the special financial assistance use it to extend their solvency as long as possible and not for other purposes. So to that end PBGC guidance provides the plans receiving this assistance cannot generally reduce their contribution rates for employers below the rates that were in effect on March 11, 2021. And the idea is that they don’t want the SFA used to allow for a reduction in contributions. There’s one exception, which is triggered when the plan determines that the reduction in contribution rates will actually lessen the plan’s overall risk of loss. How could reducing contribution rates help the plan and reduce its risk of loss? Well, one example of where that can happen is if the reduced rate would keep the employer out of bankruptcy, for example so we’d rather get something than nothing. However, the PBGC really has to approve reductions that could impact a significant portion of the contributions to the plan. So even with that exception there are some limitations. So that covers the contribution decrease side of the equation. They’re also restrictions on the other side of the ledger limits on benefit increases. The PBGC guidance provides the plans receiving special financial assistance cannot adopt any retroactive benefit increases except for restoration of suspended benefits, which I’ll talk about in a second. What it says is you can’t otherwise adopt any retroactive benefit increases.

Also, it says that you can only adopt perspective benefit increases if those increases are fully funded with increased employer contributions. The restriction on perspective increases is similar to the rule that already exists for plans and endangers and critical status. The part about retroactive benefits I think though is the one that’s a little surprising given that it’s an outright ban with no apparent exceptions such as for de minimis changes or changes in the condition of the plan or it may have substantially improved. You know, de minimis situations could be important for example if there’s some kind of error in the plan that needs to be corrected but that’s where the PBGC landed. So let’s turn to the reinstatement of MPRA suspensions. As we discussed way back in episode 1, plans that suspended benefits under MPRA as of March 11 2021 are still eligible for special financial assistance. However, if they receive that assistance they’re going to have to reinstate the previously suspended benefits and provide retroactive adjustments to all of the impacted individuals. The assistance they receive is going to include amounts intended to fund those changes. But here’s the tricky part that people are talking about right now. Some stakeholders have noted that there’s a little conundrum created by this situation for some plans and in particular the fiduciaries of those plans. So let’s take a plan that’s projected to stay solvent indefinitely if it keeps its prior MPRA suspension that plan may decide let’s go with the ARPA relief because it avoids having to maintain a reduction in people’s benefits and they’re going to undo the suspensions. The issue there is they’re going to be going from a projected solvent indefinitely situation to a projected insolvency in 2052 or possibly even earlier. So the question really is, “Is a fiduciary safe in doing that?” It appears that’s what Congress intended that they would do.

In practical reality, I think that even plans in this situation are going to end up applying for special financial assistance and the good news is that the DOL has informally indicated that it believes that ARPA included a clear legislative objective to allow plan fiduciaries to restore benefits that were previously suspended they wanted to encourage plans to apply for that assistance and that they’re really shouldn’t be potential fiduciary liability concerns there. So the DOL has at least informally suggested that fiduciaries can go forward with ARPA relief even though the plan may be projected to be in a worse position in 30 years then it would have been had a MPRA suspension been in place. We’re definitely hoping to see more from the DOL on that but what they’ve said so far is encouraging. So let’s turn to another restriction on plans that receive special financial assistance. These plans are now not allowed to transfer assets and liabilities or enter into mergers without the PBGC’s express approval. There are also specific rules in place intended to assure that plans don’t enter into mergers before they receive the special financial assistance in order to increase the financial assistance that they get.  There’s a limitation that basically says you’re only going to get the lesser of the amount you would have had beforehand or what you would get post-merger. Another restriction we should talk about is the liquidity requirement. As we discussed in Episode two a plan has to segregate the special financial assistance from its other assets and the special financial assistance is subject to restrictions so it can only be invested in investment grade bonds or other investments that PBGC approves.

One of the real concerns before PBGC came out with these interim final rules was whether it was going to also put restrictions on the investment allocation for the rest of the plan’s assets and not just the special financial assistance. This would have been a huge problem because the mismatch of interest rates that we discussed in episode two already has the plan playing catch up with its investments. If its other investments that were restricted significantly, there really be no way for these plans to catch up. Fortunately PBGC did not impose significant asset allocation restrictions on these other assets except by adding this liquidity requirement that I mentioned. So what is that requirement? The liquidity requirement basically says that a plan receiving special financial assistance has to keep at least one year’s worth of benefit payments and administrative expenses in investments that meet the same restrictions that apply to the special financial assistance. So investment grade bonds or other investments PBGC approves. That’s a non-event at the beginning of all of this because the special financial assistance proceeds that are already subject to these restrictions anyway count towards satisfying the liquidity requirements. So in the beginning you clearly have a year’s worth of liquidity. Once the plan fully spends down its special financial assistance, then the requirement could theoretically drag down returns because those other assets will need to be restricted to some extent. Again, it’s only a year’s worth of benefit payments and expenses. So a lot of plans that won’t be a big deal because even absent the restrictions, they’ll likely have some allocation to investment grade bonds anyway.

Okay, so let’s move to the final condition on plans receiving special financial assistance. These plans also have to submit an annual statement confirming their compliance with the terms and conditions that apply to them. Also, they have to be subject to audit by the PBGC. What’s notable about this is neither the statute nor the guidance from the PBGC includes some of the more onerous restrictions regarding governments, information reporting and other things that were in some of the prior proposals. These would have been far more difficult to comply with. So while nobody wants an additional reporting burden on a relative basis, it doesn’t look so onerous. With that it’s time to call a wrap on our three-part series on the new financial assistance program. Thanks for listening and if you have any questions feel free to reach out to us. Be sure to follow us on Apple podcast, Google podcast or Spotify. There, you can find the first two installments of this series. You can also find podcasts on a host of other employee benefits and executive compensation issues.

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Photo of Robert Projansky Robert Projansky

Robert M. Projansky is a partner in the Employee Benefits & Executive Compensation Group and is currently a member of the Firm’s Executive Committee.

Rob has a broad practice advising both multiemployer and single employer clients on all issues related to the legal…

Robert M. Projansky is a partner in the Employee Benefits & Executive Compensation Group and is currently a member of the Firm’s Executive Committee.

Rob has a broad practice advising both multiemployer and single employer clients on all issues related to the legal compliance and tax-qualification of ERISA-covered pension and welfare plans. Rob’s clients include the largest and highest-profile U.S. media and entertainment industry clients, as well as a broad range of Fortune 500 companies.

In the multiemployer context, he serves as counsel to the boards of trustees of a number of large and small funds and frequently assists clients in addressing issues related to the funding of defined benefit pension plans, including zone status, benefit suspensions, special financial assistance and withdrawal liability. He also advises these clients on healthcare compliance, cybersecurity and government investigations. In addition, his practice includes advising corporate clients on their responsibilities related to multiemployer plans, with particular expertise on the impact of multiemployer and collectively bargained plans in corporate transactions.

Rob has extensive experience advising corporate clients regarding general compliance issues and fiduciary compliance matters, including plan asset and prohibited transaction issues. He also has addressed a myriad of issues related to complex plan investments, including negotiation of separately managed and collective investment vehicles for both traditional and alternative investments such as hedge funds, private equity funds and fund-of-funds vehicles.

Rob is described in Chambers USA as “incredibly smart and creative, and a really effective, zealous advocate” who “adroitly communicates complicated ERISA matters to clients in understandable language and well-timed levity.”  He is a widely sought after speaker on topics related to employee benefits, fiduciary, cybersecurity and government investigations and speaks each year at the annual conference and various other conferences sponsored by the International Foundation of Employee Benefit Plans, the largest educational organization in the employee benefits industry. Rob currently serves as one of the nine Advisory Directors on the Board of Directors of the International Foundation.

Photo of Justin Alex Justin Alex

Justin S. Alex is a partner and a member of the Employee Benefits & Executive Compensation Group.

Justin advises private and public companies on all aspects of their employee benefits and executive compensation arrangements and plans.

He has particular experience in the sports…

Justin S. Alex is a partner and a member of the Employee Benefits & Executive Compensation Group.

Justin advises private and public companies on all aspects of their employee benefits and executive compensation arrangements and plans.

He has particular experience in the sports industry, including employment agreements for executives at the highest levels in professional sports and the benefits and compensation aspects of numerous transactions, such as the purchase or sale of the Buffalo Bills, Carolina Panthers, Denver Broncos, Miami Marlins, Real Salt Lake, OL Reign, Professional Hockey Federation, the Licensed Sports Group Unit of VF Corporation, Full Swing Golf, and ADPRO Sports and the merger of the USFL and XFL.

In addition to Justin’s general benefits and compensation practice, he spends a significant portion of his time advising employers and financial sponsors with respect to pension liabilities. He also advises the trustees of collectively bargained single-employer and multiemployer plans with respect to their administration, governance, and legal compliance.

Prior to joining Proskauer, Justin was an attorney in the Office of Chief Counsel at the Pension Benefit Guaranty Corporation (PBGC), where he gained significant experience with pension termination and underfunding issues. He also represented the PBGC in corporate bankruptcies and federal court litigation.

Justin is the co-editor of Proskauer’s Employee Benefits & Executive Compensation Blog and the Hiring Partner for Proskauer’s Washington office. He also serves on the Board of the Washington Lawyers’ Committee for Civil Rights and Urban Affairs.