Pension Benefit Guaranty Corporation Amends Multiemployer Regulations on Valuation and Merger Filing Requirements

Targeted News Service

WASHINGTON, May 28 -- The Pension Benefit Guaranty Corporation published the following rule in the Federal Register:

Multiemployer Plans; Valuation and Notice Requirements

A Rule by the Pension Benefit Guaranty Corporation on 05/28/2014

Publication Date: Wednesday, May 28, 2014

Agency: Pension Benefit Guaranty Corporation

Dates: Effective June 27, 2014. See Applicability in SUPPLEMENTARY INFORMATION.

Effective Date: 06/27/2014

Entry Type: Rule

Action: Final rule.

Document Citation: 79 FR 30459

Page: 30459 -30463 (5 pages)

CFR: 29 CFR 4041

RIN: 1212-AB13

Document Number: 2014-12154

Shorter URL: https://federalregister.gov/a/2014-12154

Action

Final Rule.

Summary

This final rule amends the Pension Benefit Guaranty Corporation's (PBGC) multiemployer regulations to make the provision of information to PBGC and plan participants more efficient and effective and to reduce burden on plans and sponsors. The amendments reduce the number of actuarial valuations required for certain small terminated but not insolvent plans, shorten the advance notice filing requirements for mergers in situations that do not involve a compliance determination, and remove certain insolvency notice and update requirements. The amendments are a result of PBGC's regulatory review under Executive Order 13563 (Improving Regulation and Regulatory Review).

DATES:

Effective June 27, 2014. See Applicability in SUPPLEMENTARY INFORMATION.

FOR FURTHER INFORMATION CONTACT:

Catherine B. Klion ([email protected]), Assistant General Counsel for Regulatory Affairs, or Daniel Liebman ([email protected]), Attorney, Office of the General Counsel, Pension Benefit Guaranty Corporation, 1200 K Street NW., Washington, DC 20005-4026; 202-326-4024. (TTY/TDD users may call the Federal relay service toll-free at 1-800-877-8339 and ask to be connected to 202-326-4024.)

SUPPLEMENTARY INFORMATION:

Executive Summary--Purpose of the Regulatory Action

This final rule amends certain regulations governing PBGC's multiemployer program to make the provision of information to PBGC and plan participants more efficient and effective. This rule is needed to reduce burden on multiemployer plans and sponsors and to facilitate potentially beneficial plan merger transactions. The rule reduces burden by allowing certain small terminated but not insolvent plans to provide valuations less frequently, easing reporting requirements for plan sponsors contemplating a merger transaction, and streamlining and removing certain notice requirements for insolvent plans. [1] This will reduce administrative costs and preserve plan assets that could otherwise have been used to fund plan benefits.

PBGC's legal authority for this regulatory action comes from section 4002(b)(3) of the Employee Retirement Income Security Act of 1974 (ERISA), which authorizes PBGC to issue regulations to carry out the purposes of title IV of ERISA; section 4041A(f)(2), which gives PBGC authority to prescribe reporting requirements for terminated plans; section 4231(a), which gives PBGC authority to prescribe regulations setting the requirements for one or more multiemployer plans to merge; and section 4281(d), which directs PBGC to prescribe by regulation the notice requirements to plan participants and beneficiaries in the event of a benefit suspension.

Executive Summary--Major Provisions of the Regulatory Action

Annual Valuations

When a multiemployer plan terminates, the plan must perform an annual valuation of the plan's assets and benefits. This final rule allows valuations for plans that were terminated by mass withdrawal but are not insolvent and where the value of nonforfeitable benefits is $25 million or less to be performed every three years instead of annually as required under the current regulations.

Filing Requirements for Mergers

Under PBGC's regulations, a merger or a transfer of assets and liabilities between multiemployer plans must satisfy certain requirements, including a requirement that plan sponsors of all plans involved in a merger or transfer must jointly file a notice with PBGC before the transaction. This final rule shortens the notice period from 120 days to 45 days where no compliance determination is requested. Insolvency Notices and Updates

Terminated multiemployer plans that determine that they will be insolvent for a plan year must provide a series of notices and updates to notices to PBGC and participants and beneficiaries, including a notice of insolvency. The final rule eliminates the requirement to provide annual updates to the notice of insolvency.

Background

PBGC administers two insurance programs for private-sector defined benefit plans under title IV of the Employee Retirement Income Security Act of 1974 (ERISA): A single-employer plan termination insurance program and a multiemployer plan insolvency insurance program.

A multiemployer plan is a collectively bargained pension arrangement involving several employers that are not within the same controlled group, usually in a common industry, such as construction, trucking, textiles, or coal mining. By contrast, a single-employer plan may be sponsored by either one employer (pursuant or not pursuant to a collective bargaining agreement) or by several unrelated employers (but not pursuant to a collective bargaining agreement).

ERISA section 4041A provides for two types of multiemployer plan terminations: Mass withdrawal and plan amendment. A mass withdrawal termination occurs when all employers withdraw or cease to be obligated to contribute to the plan. A plan amendment termination occurs when the plan adopts an amendment that provides that participants will receive no credit for service with any employer after a specified date, or an amendment that makes it no longer a covered plan. Unlike terminated single-employer plans, terminated multiemployer plans continue to pay all vested benefits out of existing plan assets and withdrawal liability payments. PBGC's guarantee of the benefits in a multiemployer plan--payable as financial assistance to the plan--starts only if and when the plan is unable to make payments at the statutorily guaranteed level.

This final rule reduces certain requirements for multiemployer plans that are terminated by mass withdrawal and mergers and transfers among multiemployer plans.

On January 18, 2011, the President issued Executive Order 13563 "Improving Regulation and Regulatory Review," to ensure that Federal regulations seek more affordable, less intrusive means to achieve policy goals, and that agencies give careful consideration to the benefits and costs of those regulations. PBGC's Plan for Regulatory Review, [2] identifies several regulatory areas for review, including the multiemployer regulations referred to above. PBGC will continue to review its regulations with a view to developing more ideas for improvement. Public comment on specific proposals will help PBGC determine whether its regulatory review process is moving in the right direction.

On January 29, 2014 (at 79 FR 4642), PBGC published a proposed rule to amend these regulations to reduce burden on plan sponsors. PBGC received one comment (from a business federation) on the proposed rule. This commenter applauded PBGC for the proposal and encouraged PBGC to finalize the proposed changes, remarking that the proposed rule would noticeably reduce certain reporting burdens associated with multiemployer defined benefit plan administration.

The final regulation is unchanged from the proposed regulation.

Regulatory Changes

Annual Valuation Requirement

ERISA section 4281(b) provides that the value of nonforfeitable benefits under a terminated plan to which section 4041A(d) applies, and the value of the plan's assets shall be determined in writing as of the end of the plan year during which section 4041A(d) becomes applicable, and each plan year thereafter. Part 4041A of PBGC's regulations establishes rules for notifying PBGC of the termination of a multiemployer plan and rules for the administration of multiemployer plans that have terminated by mass withdrawal. Subpart C prescribes basic duties of plan sponsors of plans terminated by mass withdrawal, including the annual valuation requirement at section 4041A.24. Section 4281.11(a) states that the valuation dates for the annual valuation required under section 4281(b) of ERISA is the last day of the plan year in which the plan terminates and the last day of each plan year thereafter. The details of the annual valuation requirement are set forth in the remainder of Subpart B of Part 4281, Duties of Plan Sponsor Following Mass Withdrawal.

The annual valuation requirement serves the statutory purpose of allowing the terminated plan to determine whether it needs to eliminate benefits that are not eligible for PBGC's guarantee. However, once the plan has reached the point where it has eliminated all nonguaranteed benefits, further valuations serve only to help PBGC estimate the liabilities it will incur when the plan becomes insolvent. While measuring PBGC's liabilities annually provides PBGC with information needed to understand its potential exposure, the requirement to do so results in the plan using scarce resources, at a potentially significant cost, for a limited purpose. [3] This may result in a faster diminution of assets that could lead to a reduced ability to pay plan benefits, an earlier insolvency, and an earlier elimination of any nonforfeitable benefits that exceed PBGC's statutory guarantee.

The final rule amends section 4041A.24 to ensure that PBGC has reasonably reliable data to measure its liabilities without significantly depleting plan assets. Under the amendment, terminated plans that are not insolvent and where the value of nonforfeitable benefits is $25 million or less (as of the valuation date of the most recent required valuation), are required to perform the next valuation in accordance with Subpart B of Part 4281 within three years instead of within one year as under the unamended regulation. To comply with the statutory requirement that there be a written determination of the value of nonforfeitable benefits each year, such plans may use the most recently performed valuation for the next two plan years.

All other plans will continue to be required to perform valuations in accordance with Subpart B of Part 4281 annually. [4] Plans can move in and out of the three-year or annual valuation cycle, as applicable, as the value of nonforfeitable benefits changes. Thus, a plan that has been performing new valuations every three years will be required to perform valuations annually if the next valuation indicates that the value of nonforfeitable benefits exceeds $25 million. Similarly, a plan that has been performing the valuation annually will have three years to do the next valuation in accordance with Subpart B of Part 4281 if the most recent valuation shows the value of nonforfeitable benefits to be $25 million or less.

This amendment targets the plans that expose PBGC to larger liability, while reducing burden on plans that present smaller exposure. PBGC believes that this amendment appropriately balances PBGC's need to fairly measure its exposure with minimizing the cost to plans and potentially to participants. Advance Notice of Multiemployer Mergers

ERISA section 4231 sets forth the statutory requirements for mergers of two or more multiemployer plans and transfers of plan assets or benefit liabilities among two or more multiemployer plans, including a requirement that a plan must give 120 days' advance notice of a merger or transfer to PBGC. Part 4231 of PBGC regulations implements this statutory requirement.

29 CFR section 4231.8 provides that plan sponsors of all plans involved in a merger or transfer, or their duly authorized representatives, must jointly file a notice with PBGC in advance of the transaction. Before the amendment, this notice was due to PBGC 120 days prior to the transaction. The notice must include information about the plans, the plan sponsors, the transaction, the proposed effective date, a copy of each provision stating that no participant's or beneficiary's accrued benefit will be lower immediately after the effective date of the transaction than the benefit immediately before that date, and various actuarial and plan asset and benefit valuation information.

The purpose of the notice provision is to confirm that plan sponsors have met the four criteria listed in section 4231(b) for a statutory transaction. [5] Plan sponsors may request a determination from PBGC that a merger or transfer that may otherwise be prohibited by sections 406(a) or (b)(2) of ERISA satisfies the requirements of ERISA section 4231. [6] Under section 4231.8(f), PBGC may waive the statutory notice requirement. [7]

However, PBGC now believes that the interests of PBGC and plan participants involved in such transactions are adequately protected by other parts of ERISA, particularly Title I, and there is little benefit to having such a long period to merely confirm that the notice requirements have been met.

Thus, to reduce burden, the final rule shortens the advance notice period to 45 days for transactions that do not involve a compliance determination under section 4231.9. PBGC's experience has been that many merger requests are received by PBGC with less than 120 days' notice and ask for a waiver of the notice requirement so that the merger can proceed as of the end of the plan year. The change to 45 days avoids the need for a waiver and still allows PBGC enough time to review these later-filed requests. PBGC believes the change to 45 days strikes the appropriate balance to better accommodate work flows and end-of-year rushes for both plan sponsors and PBGC staff. The current reporting requirements will remain in effect where a compliance determination is requested, as well as for transactions involving a transfer of plan assets or benefit liabilities, because those transactions may require a substantive investigation by PBGC that may well require more than 45 days to complete. [8] Annual Notice Updates Following Mass Withdrawal

When a multiemployer plan terminates by mass withdrawal under ERISA section 4041A(a)(2), the plan's assets and benefits are required to be valued annually and plan benefits may have to be reduced or suspended to the extent provided in ERISA section 4281(c) or (d). Before being amended, part 4281 of PBGC's regulations required a terminated multiemployer plan that determines that it will be insolvent for a plan year to provide a series of notices and updates to notices to PBGC and participants and beneficiaries.

Once the plan projects that it can only pay benefits at the PBGC guarantee level, ERISA section 4281.43(b) requires the plan to issue a notice of insolvency and annual updates to PBGC and plan participants and beneficiaries. Subpart D of Part 4281 of PBGC's regulations sets forth the notice requirements for a terminated plan when plan assets are sufficient to pay PBGC guaranteed benefits, but not sufficient to pay at the promised plan level. In such situations, the plan sponsor must determine what benefits the assets will cover, and suspend benefits above that amount. At all times, however, the plan has a "floor" benefit set at the PBGC guarantee level (i.e., benefits cannot be suspended to an amount that would pay less than the guarantee). [9]

When PBGC first issued this regulation, PBGC anticipated that a plan's insolvency would be short in duration and that it could financially recover. However, PBGC's experience has been that once a multiemployer plan becomes insolvent, it will remain so. Thus, once a plan has made the initial notices, there is little need to require similar subsequent notices. After reviewing the regulation, PBGC now believes that eliminating such annual updates will not pose any increase in the risk of loss to PBGC or to plan participants.

These notice requirements can be detrimental to plan participants because the costs of compliance may deplete assets that otherwise would be available to pay plan benefits. PBGC's experience is that the rules for annual updates to a notice of insolvency can be confusing to practitioners. While the incremental cost to the plan is small, PBGC believes that the professional time spent understanding the rules and other costs in the actual compliance would be better spent on benefits. [10]

Consequently, for these reasons this final rule eliminates the annual updates to the notice of insolvency. [11]

Applicability

The amendment to section 4041A.24 that changes the annual valuation requirement for terminated but not insolvent plans where the value of nonforfeitable benefits is $25 million or less is applicable to the first post-termination valuation after June 27, 2014.

The amendment to section 4231.8 that changes the notification requirements for a proposed merger is applicable to mergers planned to be consummated on or after the 45th day after June 27, 2014.

The amendment to section 4281.43 that eliminates the annual update notices to PBGC and participants and beneficiaries is applicable as of June 27, 2014.

Executive Orders 12866 and 13563

PBGC has determined that this rule is not a "significant regulatory action" under Executive Order 12866.

Executive Orders 12866 and 13563 direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. This rule is associated with retrospective review and analysis in PBGC's Plan for Regulatory Review issued in accordance with Executive Order 13563.

Under Section 3(f)(1) of Executive Order 12866, a regulatory action is economically significant if "it is likely to result in a rule that may . . . [h]ave an annual effect on the economy of $100 million or more or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or tribal governments or communities." PBGC has determined that this final rule does not cross the $100 million threshold for economic significance and is not otherwise economically significant.

As explained below, PBGC estimates that aggregate annual savings from the combined regulatory changes will be about $460,000.

Annual Valuation Requirement

PBGC has estimated the value of this final rule on the annual valuation requirement for plans terminated by mass withdrawal. As of the end of its 2012 fiscal year, PBGC's total estimated liability for nonforfeitable benefits of the 61 mass withdrawal-terminated plans that were not insolvent was $1.7 billion. Of that total, there were 23 plans in the over $25 million category; such plans constituted nearly 80 percent of such liabilities in all 61 terminated plans, thus preserving a high degree of exactitude for PBGC's measurement of its financial contingencies. At the same time, each year that the 38 plans where the value of nonforfeitable benefits was $25 million or less will not have to do an annual valuation, there will be an annual aggregate savings of approximately $399,000 (assuming an annual valuation cost of $10,500 per plan) to these plans. These savings will grow as the terminated plan universe grows.

Advance Notice of Multiemployer Mergers

PBGC believes that reducing the required notice period in advance of a proposed merger transaction from 120 days to 45 days prior to the effectiveness of the merger will result in a small decrease in administrative burden on plan sponsors. By reducing the notice period, PBGC expects that there will be less interaction between plan sponsors, their representatives, and PBGC staff to address timing and approval issues. PBGC estimates that 18 plans submit advance notice of a merger in a given year. PBGC further estimates that an affected plan will save about one-quarter hour of professional time, at $350 per hour, and one-quarter hour managerial time, at $115 per hour, resulting in an aggregate annual savings of $2,093, as a result of the reduced length of the notice period.

Annual Notice Updates Following Mass Withdrawal

PBGC estimates that the annual aggregate cost of conducting the annual insolvency update is $61,425. This estimate is based on an estimated 54 plans required to issue the update annually at 12.5 hours of combined professional, clerical, and managerial time at an average rate of $91 per hour. Eliminating the annual update will save plan sponsors approximately $1,138 each per year and $61,425 in the aggregate.

[*Federal RegisterVJ 2014-05-28]

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