3739 / Under the Multiemployer Pension Reform Act of 2014, can a plan reduce a participant’s benefit levels?

In some cases, a plan may reduce the benefits of plan participants and beneficiaries. The Multiemployer Pension Reform Act of 2014¹ (MPRA) created a new type of plan status, known as “critical and declining status” that applies to plans that are projected to become insolvent within either (1) the current plan year, or within 14 subsequent plan years or (2) the current year, or within 19 subsequent plan years if (a) the ratio of inactive to active participants exceeds two to one or (b) the plan is less than 80 percent funded.²

If a plan is in critical and declining status, the plan may temporarily or permanently reduce any current or future payment obligations to plan participants or beneficiaries, whether or not those benefits are in pay status at the time of the reduction.³ Once benefits are suspended, the plan has no future liability for payment of benefits that were reduced while in critical and declining status.⁴

In order to reduce benefits, however, the plan actuary must certify that the plan is projected to avoid insolvency, assuming that the reductions remain in place either indefinitely or until the expiration date set by the plan’s own terms. The plan sponsor must also determine that the plan is projected to remain insolvent unless benefits are reduced, despite the fact that the plan has taken all reasonable measures to avoid insolvency.⁵

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Planning Point: There has been increasing activity to reduce plan benefits under the 2014 law in recent years, so much of an increase that the U.S. Chamber of Commerce described the situation as a “crisis.”⁶ The multiemployer Central States Pension Fund applied to the PBGC to approve benefit reductions but was rejected on the basis the cuts would be insufficient to save the fund. However, the request of the Ironworks Union Local No. 17 Pension Fund was approved by the PBGC and by its members in 2017 to become the first to reduce retiree pension benefits under the law.⁷ More plans have now followed. ⁸

The problem of insolvent multi-employer pension plans recently received study from the GAO as part of its “High Risk Series.” In the report, the GAO assessed the risks of these pension liabilities and made recommendations to Congress in February of 2017. In addition, the head of the PBGC has predicted that based upon current trends the PBGC’s fund could be expended by 2025. This has become a priority for Congress and new legislation, allowing loans to plans and consolidation of plans to increase solvency, might be expected as a consequence.⁹ In light of the rapidly evolving guidance and perhaps new law in this area, practitioners will need to check the status of any legislation and all new PBGC guidance before proceeding to formally request a reduction in benefits for a plan.

In 2021, the American Rescue Plan Act (ARPA) provided relief designed to address the insolvency problem. The PBGC has since issued an interim final rule implementing the special financial assistance (SFA) rule for multiemployer pension plans in the ARPA. Eligible plans may apply to receive a lump-sum payment from a new Treasury-backed PBGC fund. Under the new rules, eligible plans are entitled to amounts that are sufficient to pay all benefits for the next 30 years. According to the PBGC interpretation, that means sufficient funds to forestall insolvency through 2051 (but not thereafter). Plans are entitled to receive the difference between their obligations and resources for the period. “Obligations” are defined to include benefits and administrative expenses that the plan is reasonably expected to pay through the last day of the plan year ending in 2051. “Resources” are defined to include the fair market value of plan assets and the present value of future anticipated contributions, withdrawal payments, and other expected payments.

Surprisingly, the PBGC rule provides that SFA funds will be taken into account when calculating a plan’s withdrawal liability. However, plans are required to use mass withdrawal interest rate assumptions published by the PBGC when calculating withdrawal liability until the later of: (1) 10 years after the end of the year in which the plan received the SFA or (2) the time when the plan no longer holds SFA funds. The PBGC has also stated that it intends to propose a separate rule under ERISA Section 4213(a) to prescribe actuarial assumptions that may be used by a plan actuary in determining an employer’s withdrawal liability.

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