On July 8, 2022, the Pension Benefit Guaranty Corporation (“PBGC”) published a long-awaited final rule setting forth requirements for multiemployer pension plans applying for financial assistance under the PBGC’s Special Financial Assistance (“SFA”) program, which was established as part of the American Rescue Plan Act of 2021 (“ARPA”). This final rule, which goes into effect on August 8, 2022, modifies and supersedes an interim final rule that was issued by the PBGC in July 2021 (the “IFR”).
The revised guidance has been fashioned, in large part, as a response to a number of public comments received with respect to the IFR over the course of the past year. Public comments reflected various concerns, falling mostly under the umbrella of whether the SFA, as implemented pursuant to the IFR, would offer sufficient and meaningful solvency relief to a universe of severely underfunded multiemployer pension plans. With the incorporation of changes to certain investment return assumptions used in determining the amount of financial assistance, increased SFA availability for plans affected by restrictions under the Multiemployer Pension Reform Act of 2014 (“MPRA”), and the expansion of permissible investments for SFA funds to include return-seeking assets, the PBGC has established a regulatory framework that is intended to ensure the solvency of eligible multiemployer plans through 2051.
Eligibility for SFA Program Relief.
Title IV of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), contains a pension insurance program that provides the PBGC with various tools to assist multiemployer pension plans that are insolvent or approaching insolvency so that they are able to pay federally mandated guaranteed benefits. In 2021, the ARPA created the SFA program, which is intended to provide financial relief to eligible multiemployer pension plans to both stave off insolvency and reinstate previously suspended benefits for numerous participants. By providing direct funding assistance to troubled multiemployer plans and allowing such plans a path to greater solvency, the SFA is also intended to provide relief to the PBGC, whose Multiemployer Pension Insurance Program was projected to become insolvent in 2026.
Among the SFA’s requirements, a plan must meet certain eligibility criteria in order to submit an application for financial relief under the program. Generally, a multiemployer plan is eligible to submit an SFA application if it satisfies one of the following: (i) the plan has been in critical and declining status in any plan year beginning in 2020, 2021, or 2022; (ii) the plan has had benefits suspended under the MPRA; (iii) the plan is in critical status, has a modified funding ratio below forty percent (40%), and has a ratio of active-to-inactive participants of less than 2-to-3; or (iv) the plan became insolvent after December 16, 2014, but has not, as of March 11, 2021, been terminated.
Overview of the PBGC’s Final Rule.
The final rule reflects a number of important changes to the program provisions that had been included in the IFR, including a modified methodology to calculate the amount of financial assistance for eligible multiemployer plans, revised investment guidelines for SFA funds, and special withdrawal liability rules for plans that receive financial assistance.
1. Changes to the SFA Calculation Methodology:
The final rule revises the SFA calculation methodology provided for in the IFR by utilizing separate investment return assumptions for SFA and non-SFA assets when calculating the amount of financial assistance a multiemployer plan may receive under the program. The IFR had required that a single investment return assumption be used when calculating expected investment returns for both SFA and non-SFA assets. This methodology did not take into account certain investment restrictions that the IFR placed on SFA funds, which could restrict the growth of such funds. Commenters argued that by calculating financial assistance using investment returns that could not be achieved due to these investment restrictions, the amount of financial assistance would be insufficient to enable plans to realize even the moderate growth necessary to maintain solvency through the 2051 target solvency date. Under the final rule, the investment return assumption for SFA assets is lower than that used for non-SFA assets, thereby reflecting the investment restrictions applicable to such funds.
In addition, the final rule provides that plans that had previously implemented benefit suspensions under the MPRA are to be treated differently when calculating the amount of SFA. MPRA plans are eligible for increased SFA funds, and may apply for the greater of: (1) the amount of SFA calculated for a plan that is not an MPRA plan; (2) the lowest amount of SFA that is sufficient to ensure that the plan will remain solvent through the end of the 2051 plan year; or (3) the amount of SFA equal to the present value of reinstated benefits, including both make-up payments for previously suspended benefits, as well as payments of the reinstated portion of benefits through 2051.
2. Permissible Investments of SFA Funds:
Under the IFR, multiemployer plans were required to invest all of the SFA funds in investment grade bonds. The final rule permits plans to invest up to thirty-three percent (33%) of their SFA funds in return-seeking assets (“RSA”) (e.g., publicly traded, US dollar denominated common stock; funds that primarily invest in publicly traded equity securities; and certain debt instruments of domestic issuers that are not investment grade bonds). Of note, real estate investment trusts that issue publicly traded equity are included within the universe of RSA that the final rule allows as permissible investments, and exposure to infrastructure is also available through permissible equity investments. The remaining SFA funds must be invested in investment grade fixed income securities.
3. Special Withdrawal Liability Rules:
Use of Mass Withdrawal Interest Rate Assumptions. The final rule requires the use of certain mass withdrawal interest rate assumptions prescribed by the PBGC for calculating withdrawal liability until the later of (1) ten years after the end of the plan year in which the plan first receives payment of SFA, and (2 ) the last day of the plan year by which the plan projects that it will exhaust any SFA assets, extended by the number of years in which the plan ceases to hold SFA funds or earnings on such funds. Notably, a footnote in the preamble to the final rule provides that the PBGC intends to propose a separate rule under Title IV of ERISA to prescribe actuarial assumptions that may be used by a plan actuary in determining an employer’s withdrawal liability. This future rule is intended as a response to the use of the “Segal blend” and certain other interest rate assumptions to calculate withdrawal liability, which has been heavily litigated over the past several years.
Phased-In Recognition of SFA. The final rule also imposes an additional condition requiring plans to recognize over time the amount of SFA received by the plan for the purpose of determining the plan’s unfunded vested benefits (“UVB”) for calculating withdrawal liability. Under the IFR, all SFA funds were included immediately when calculating UVB, thereby lessening a withdrawal liability determination as soon as the relief funds were received. In order to avoid having SFA funds subsidize employer withdrawals, the PBGC’s final rule gradually phases in the recognition of SFA assets when calculating withdrawal liability. Contributing employers with respect to multiemployer plans receiving SFA funds can monitor the impact of the financial assistance on their potential withdrawal liability by exercising their rights to receive estimates from plans in which they participate (ie, once during any 12-month period).
Settlement of Withdrawal Liability. An additional condition related to withdrawal liability requires that any settlement of withdrawal liability during the SFA coverage period must have PBGC approval if the present value of the liability settled is greater than $50 million. The PBGC did not make any changes to this provision in the final rule, but it is unclear how active a role the PBGC will play in evaluating and approving such settlements.
The final regulations note that, for the new provisions relating to the phase-in of withdrawal liability, there is a thirty (30) day public comment period beginning on July 8, 2022, the date of the final rule’s publication in the Federal Register.
4. Conditions for SFA:
The final rule also addresses the following:
- Benefit Increases. In consideration of comments submitted with respect to the IFR, the PBGC added a section to provide a process by which a plan may request a determination from the PBGC for an exception, allowing benefit improvements based on participants’ past years of service–if future plan circumstances allow the plan to provide benefit increases without endangering the plan’s ability to pay all benefits. Under the new provision, beginning ten (10) years after the end of the plan year in which a plan receives payment of SFA, the plan may apply for an exception by demonstrating to the satisfaction of PBGC that, taking into account the value of any proposed benefit increase, the plan will avoid insolvency.
- Allocation of Plan Assets. The final rule provides that during the SFA coverage period, plan assets, including SFA assets, must be invested in permissible fixed income investments in an amount which is sufficient to pay for at least one year (or until the date the plan is projected to become insolvent, if earlier) of projected benefit payments and administrative expenses, as discussed above.
- Transfers or Mergers. The final rule describes those conditions that apply (and how they apply) following the merger of an SFA plan with a non-SFA plan. Changes to the previous conditions reflected in the IFR are intended to encourage beneficial SFA/non-SFA plan mergers. The final rule addresses the manner in which certain restrictions apply to a non-SFA plan that either receives a transfer of assets and liabilities from, or merges with, an SFA plan. The final rule also provides that, as part of a request for approval of a merger between an SFA and non-SFA plan, the PBGC may provide a waiver of certain conditions relating to, for example, retrospective benefit increases, contribution decreases and reallocations of contributions if certain requirements prescribed in the final rules are met.
5. Other Important Changes:
- Lock-in Application. The IFR created a prioritization system for SFA applications based on plan distress levels. The PBGC may, however, temporarily stop accepting SFA applications due to volume. The final rules permit distressed plans that meet certain requirements to file an initial “lock-in” application which contains basic information about the plan and a statement of intent to lock-in based data, pending the PBGC’s acceptance of a formal SFA application.
- SFA Measurement Date. To address timing concerns related to preparing a plan’s application, the final rule changes the definition of the SFA measurement date from the last day of the calendar quarter immediately preceding the date of the plan’s initial application filing, to the last day of the third calendar month immediately preceding the date of the plan’s initial application filing.
 Special Financial Assistance by PBGC, 87 Fed. Reg. 40,968 (July 8, 2022) (to be codified at 29 CFR pt. 4262).
 Historically, multiemployer plan financial assistance was provided through loans from the PBGC, which rarely (if ever) were repaid.
 “SFA coverage period” means the period beginning on the plan’s SFA measurement date (ie, the last day of the third calendar month immediately preceding the date on which a multiemployer plan’s initial application for SFA is filed) and ending on the last day of the last plan year ending in 2051.