United States: PBGC Reports Five-Fold Increase In Multiemployer Program Deficit

Last Updated: November 23 2014
Article by James P. McElligott, Jr, Carolyn M. Trenda and Larry R. Goldstein

PBGC Reports Five-Fold Increase in Multiemployer Program Deficit

Earlier this week, the Pension Benefit Guaranty Corporation (PBGC) released its 2014 Annual Report, which showed that the deficit in its single-employer termination-insurance program is approximately $19.3 billion, a reduction of some $8.1 billion from the previous year. Unfortunately, the Annual Report also stated that the multiemployer program now has a deficit of $42.4 billion, compared with $8.3 billion last year.

The five-fold increase in PBGC's multiemployer program deficit is consistent with PBGC's FY 2013 Projections Report, released this past June, which projected that multiemployer plan insolvencies affecting more than one million of the 10 million beneficiaries in multiemployer plans are "more likely and more imminent." PBGC's multiemployer program is funded and maintained separately from other PBGC insurance programs, and the multiemployer program's ballooning deficit is due largely to PBGC's expectation that several large multiemployer plans will become insolvent within the next decade.

Struggling Multiemployer Pension Plans

Many multiemployer ("Taft-Hartley") pension plans have faced serious challenges for years from poor funding levels, poor investments and changes in the trucking, coal, construction, printing and textile industries. The Pension Protection Act of 2006 (PPA) required greater contributions to many multiemployer plans and imposed annual monitoring of plan funding, with surcharges on contributing employers and reductions of benefits where funding requirements are not met. "Endangered" ("yellow-zone") and "critical" ("red-zone") status plans must adopt "funding improvement plans" (FIPs) or "rehabilitation plans" (RPs), to which employers' collective bargaining agreements (CBAs) must conform.

Notwithstanding these reforms, one out of 10 multiemployer plans faces a bleak future. The Government Accountability Office (GAO) reported earlier this year that the number of insolvent multiemployer pension plans could more than double in the next three years. As increasing numbers of participating employers cease operations or withdraw from poorly-funded plans, the remaining employers face higher participation costs and risk greater withdrawal liability, including "mass-withdrawal" liabilities.

Withdrawal Liability Risks for Employers and Controlled-Group Members.

A withdrawing employer is liable to the pension plan for the employer's share of the plan's unfunded vested benefits. Withdrawal can be triggered by any significant reduction in the duty to contribute, resulting from layoffs, plant closures, sales or changes in the CBA. In an asset sale where the buyer assumes the seller's contribution obligation and complies with certain requirements in ERISA Section 4204, the seller may avoid withdrawal liability. Special rules under ERISA Section 4203 apply for withdrawals from multiemployer plans in certain industries, including construction, entertainment, retail food, trucking and coal.

Under ERISA, all trades or businesses that are under common control (the "controlled group") are jointly and severally liable for withdrawal liability incurred by any member. Multiemployer plans have been aggressive in asserting controlled-group withdrawal liability against investors and even lenders. The First Circuit in Sun Capital Partners III, LP v. New England Teamsters & Trucking Industry Pension Fund, 724 F.3d 129 (1st Cir. 2013), cert. denied, 82 U.S.L.W. 3351, 82 U.S.L.W. 3507, 82 U.S.L.W. 3509 (U.S. Mar. 3, 2014) (No. 13-648), ruled that a private equity fund could be a trade or business. If so, the fund would form a controlled group with its portfolio companies, thus exposing the fund to any withdrawal liability of those companies.

Multiemployer plans have also asserted claims for withdrawal liability under ERISA Section 4212(c), which permits courts to disregard transactions whose purpose is to "evade or avoid" withdrawal liability.

Plan Insolvency and PBGC Insolvency

Under ERISA and the Internal Revenue Code (Code), a multiemployer plan is insolvent if the plan's available resources are insufficient to pay benefits under the plan when due for the plan year. Upon insolvency, the plan must reduce benefit payments for the year to the levels that are supportable by projected assets for that year. Before a plan receives financial assistance from PBGC, it must suspend payment of all benefits in excess of the statutory guaranteed level.

PBGC does not "guarantee" multiemployer plan benefits, but instead loans money to the plan in an amount sufficient to allow the insolvent plan to continue to pay the guaranteed level of benefits. PBGC receives no tax moneys for its programs, and absent premium increases or changes in law, PBGC says, the multiemployer program is "more likely than not to run out of funds in eight years, and highly likely to do so in 10 years."

PBGC has estimated there is a 59 percent chance of insolvency in the multiemployer program by 2022. If and when the PBGC multiemployer program becomes insolvent, the only PBGC funds available to support benefits would be PBGC premiums that solvent plans are paying.

Implications for Employers and Employees

If a multiemployer plan is poorly funded and facing insolvency in the future, active employees may not receive much benefit from the employer's contributions or PBGC premiums paid by the plan that covers those employees. Even if a multiemployer plan were well funded, its PBGC premiums likely would be spent on insolvent plans and would provide no effective guarantee for current employees.

For these reasons, employers increasingly are considering withdrawal, preferably before a mass withdrawal, which would increase the liabilities of employers and therefore controlled-group members. In recent years, the Hostess and Patriot Coal bankruptcies raised issues of increased liability for other employers who stayed in the multiemployer plans to which these debtors had contributed.

Financial Accounting Standards Board rules already require specific disclosures concerning the employer's participation in multiemployer pension plans and the status of those plans, heightening interest of lenders and investors to these issues.

PPA Sunset

PPA provisions for determining "green" (at least 80 percent funded), yellow and red zones for multiemployer plans will "sunset" for plan years beginning on or after Jan. 1, 2015. Absent new legislation, plans that have funding issues on and after sunset likely will have to solve funding issues through contribution increases, future benefit reductions or mergers. The PPA's "continuation clause" for multiemployer plans means that an FIP or RP in effect on Dec. 31, 2014 will continue for the duration of its term. A multiemployer plan with an RP is currently exempt under the PPA from the Code's funding deficiency excise tax, but it is unclear whether this exemption will continue to protect such a plan from this tax after the PPA's sunset and until the duration of its RP.

Legislative Activity

A proposal from National Coordinating Committee for Multiemployer Plans ("Solutions Not Bailouts") has gained support from some unions, plans and employer groups. The proposal, issued in February 2013, highlights three recommended areas for Congressional action: preservation, including proposals to strengthen the current system; remediation, suggested measures to assist deeply troubled plans; and, innovation, using comparative analysis with similar plans in other jurisdictions to highlight new structures that may foster innovative plan design.

The GAO has recommended legislation permitting plans to reduce accrued benefits of working participants and retirees or giving PBGC additional authority and resources to assist severely-underfunded plans.

Other than holding a few hearings, however, Congress has taken no action nor expressed any desire to adopt any of these approaches.

What Should Employers Do?

Employers who participate in multiemployer plans, as well as their controlled-group affiliates, investors and lenders, need to understand the current and potential future status of these plans. In particular, they should determine:

  • What is the current and projected future funding level of the plan?
  • Are other employers withdrawing from the plan?
  • How is the plan protecting against future insolvency?
  • Who are the employer's controlled-group affiliates and is there a risk that investors will face controlled-group claims?
  • What is the employer's estimated withdrawal liability?
  • Are there appropriate transactions available to the employer to mitigate its risk consistent with ERISA, including withdrawal from the plan and a transfer of liability from the multiemployer plan to the employer's single-employer plan?
  • What is the best path forward for the employer to take as to continued participation or withdrawal?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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