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An Opportunity to Save Failing Pension Plans: The PBGC Issues New Regulations on “Partitions” of Multiemployer Pension Plans

By Bradley G. Kafka and W. Andrew Douglass

The Multiemployer Pension Reform Act of 2014 (“MPRA”) was passed as a part of a Congressional effort to aid failing multiemployer pension plans. Partition is one tool the MPRA provides to the Pension Benefit Guaranty Corporation (the “PBGC”) to assist troubled multiemployer pension plans. Partition separates plan participants and beneficiaries whose employers are no longer contributing to the plan due to bankruptcy or other reasons, from the participants and beneficiaries who are still covered by a contributing employer. In June, the PBGC released final proposed rules that provide guidance on how a struggling multiemployer pension plan can apply for plan partitions.

A partition is the transfer of a portion of an original multiemployer pension plan’s liabilities to a successor plan, which is financially backed by the PBGC, in order to prevent the original plan from reaching insolvency. To be eligible for partition, the multiemployer pension plan must meet multiple requirements, set forth in the application for partition filed by the plan sponsor. The plan must be in “critical and declining status.” “Critical” is generally defined by ERISA § 305(b), as a plan that has less than 65% of the funding necessary to pay its pension benefit obligations. The plan is “declining” if it is projected to become insolvent during the current plan year, during any of the 14 succeeding plan years, or during any of the 19 succeeding plan years if the plan has a ratio of inactive participants to active participants that exceeds two to one. The plan sponsor also must establish that all reasonable measures to avoid insolvency have been exhausted, including a “suspension” of benefits. The partition must be necessary in order for the plan to remain solvent, and must reduce the PBGC’s expected long-term loss concerning the plan. The PBGC must be able to continue satisfying its existing financial obligations to other plans, as the costs for partition are funded by the PBGC.

If the PBGC grants partition, the participants and beneficiaries whose employers are no longer plan contributors are separated into the successor plan. The PBGC then provides 100% of the minimum statutorily guaranteed benefits to the participants and beneficiaries allocated to the successor plan. (The minimum guaranteed benefits are a small percentage of the benefits originally promised by pension funds, often no more than one third of the promised benefits.) Since a partition application must show the plan has taken all reasonable measures to avoid insolvency, including benefit suspension, the PBGC expects (and will probably require) any plan applying for partition will also apply for a proposed suspension of benefits. Under a suspension of benefits, the participants and beneficiaries covered by the successor plan receive 110% minimum statutory guarantee. The PBGC covers 100% of the statutorily guaranteed rate, and the original plan remains responsible for the additional 10% owed to the partitioned participants and beneficiaries. With respect to suspension of benefits, there are various requirements and limitations; for example, the suspension of disability benefits and benefits for those over 80 years old are prohibited. If the plan’s application for partition and benefit suspension is accepted, it must be approved by a vote of eligible plan participants and beneficiaries before implementation.

In summary, the purpose of partition under the MPRA is to allow multiemployer pension plans to provide fuller benefits to contributing employers’ participants and beneficiaries, while allowing those without a contributing employer to receive more benefits than those statutorily guaranteed. While applying for partition includes many challenging steps for the fund, it may be a useful tool to avoid insolvency of a multiemployer pension plan.

To read more on Polsinelli’s coverage of the MPRA, please see: 

Volume 1, February 2015

Volume 2, March 2015

Volume 3, April 2015

Volume 4, July 2015