2021 Single Employer and Multiemployer Defined Benefit Pension Plan Provisions: The American Rescue Plan Act and Infrastructure Investment and Jobs Act

On March 11, 2021, President Biden signed into law the American Rescue Plan Act of 2021 (“ARPA”),  which was designed to provide relief from the public health and economic chaos caused by the COVID-19 pandemic and to help rescue the American economy.   On August 10, 2021, the Senate passed the $1 trillion Infrastructure Investment and Jobs Act (the “Infrastructure Bill”).  There is uncertainty about whether the Infrastructure Bill will pass before or after the Democrat’s $3.5 billion budget reconciliation bill (the “Reconciliation Bill”).  House Speaker Pelosi has indicated, along with progressive lawmakers, that support of the bipartisan Infrastructure Bill is conditioned on passage of the Reconciliation Bill, while a number of moderate Democrats have vowed to oppose the Reconciliation Bill until there is a vote on the Infrastructure Bill.

This article provides an overview of the generally applicable single employer and multiemployer defined benefit pension plan relief measures provided in the Infrastructure Bill and ARPA.

Single Employer Defined Benefit Pension Plan Relief under the ARPA and the Infrastructure Bill

ARPA - Funding Shortfall and Interest Rate Relief

Funding Shortfall Relief

1. Extended Shortfall Amortization Period from 7 to 15 Years
The ARPA permits plans to extend the amortization period for determining the shortfall amortization charge over 15 years.  Under the Pension Protection Act of 2006 (“PPA”),  plans were required to amortize future unfunded liabilities (called the “shortfall amortization charge”) over a seven-year period when calculating minimum funding liabilities. The shortfall amortization charge is the amount needed to amortize the plans’ funding shortfall, as determined by the “shortfall amortization bases” and “shortfall amortization installments.” The shortfall amortization base for a given plan year is the remaining funding shortfall that exists after taking into account unamortized prior shortfalls—in other words, the current year’s shortfall amortization base is the plan’s total shortfall reduced by the present value of outstanding shortfall amortization installments from prior plan years.

2. Fresh Start - Pre-ARPA Shortfall Amortization Bases Reduced to Zero
The ARPA also allows plans to reduce all pre-ARPA shortfall amortization bases to zero, thereby erasing all associated shortfall amortization installments.  This significant change provides a “fresh start” calculation of the plan’s outstanding funding shortfall, which is then, as described above, amortized over a 15-year (rather than seven-year) period. The fresh start only applies the first plan year following a single designated plan year.

These funding shortfall relief and fresh start provisions apply to plan years beginning after December 31, 2021 (or at the plan sponsor’s election, to plan years beginning after December 31, 2018, 2019, and 2020).

Interest Rate Relief - Enhanced and Extended Interest Rate Stabilization Percentages

The ARPA extends and enhances the interest rate stabilization provisions first introduced in the Moving Ahead for Progress in the 21st Century Act (2012), which established a funding “corridor” with minimum and maximum interest rates used to determine a plan’s liabilities. Under the Bipartisan Budget Act of 2015 (“BBA”),  the minimum and maximum rates of 90% and 110% were to begin phasing out (i.e., widening the corridor) starting in 2021. 

A wider corridor produces a lower interest rate that is used to calculate the plan’s minimum funding requirements, which increases the plan’s minimum funding requirements (and minimum required contributions). A narrower corridor produces a higher interest rate, which reduces the plan’s minimum funding requirements (and minimum required contributions).

The ARPA also defers for five years the widening of the corridor established in the BBA from 2021 to 2026 by establishing minimum and maximum rates of 95% and 105% for the 2020 through 2025 plan years.   Compared to prior law, the ARPA has the effect of generally reducing minimum funding requirements for years before 2030.

The table below summarizes the minimum and maximum interest rates that establish the corridor under the BBA compared to the ARPA:

Further, the ARPA sets a permanent 5% floor on the 25-year average segment rates averages used to calculate the plan’s liabilities.  Thus, for example, if the 25-year average segment rate was 4% for a given year, this provision allows the plan to use 5%. As noted above, the higher the interest rate, the lower the plan’s minimum funding requirements (and minimum required contributions) for a given plan year.

These provisions are generally effective for plan years beginning after December 31, 2019; however, plan sponsors may defer application of these provisions to plan years beginning before January 1, 2022—for all purposes or solely for determining the adjusted target attainment percentage (“AFTAP”) that dictates the applicability of benefit restrictions under Internal Revenue Code Section 436 and ERISA Section 206(g) (29 U.S.C. §1056(g)).

IRS Notice 2021-48 provides detailed guidance to assist plan sponsors and plan administrators in implementing the changes discussed above. 

Infrastructure Bill - Extended Interest Rate Stabilization Percentages under ARPA

The Infrastructure Bill would further extend the enhanced interest rate stabilization percentages established under the ARPA for another five years. Thus, the widening of the corridor that was set to occur in 2026 under the ARPA will not occur until 2031, as follows:  

A Win for Plan Sponsors and Congress

The changes under the ARPA and Infrastructure Bill mark a win for plan sponsors, as they will provide plans with additional flexibility and produce more predictable, lower minimum funding requirements in the short term. Many in the pension community also note that these changes are a win for Congress, as they will produce higher tax revenues in the short term that can be used to offset new spending, as less, untaxable pension plan contributions by plan sponsors means more taxable revenue. Notably, plan sponsors will eventually have to make up the difference with higher contributions, so the tax revenues generated by these provisions will eventually disappear.  

Multiemployer Defined Benefit Pension Plan Relief under the ARPA 

The ARPA provides funding relief related to COVID-19 and special financial assistance for certain highly distressed plans, as well as increases to PBGC premiums.

COVID-19-Related Relief

For one plan year beginning on or after March 1, 2020 and ending on February 28, 2021 (or the next succeeding plan year), plans in endangered, critical, or critical and declining status can elect to maintain the same zone status certified for the previous plan year.  Plans in endangered or critical status the year preceding the designated plan year need not update their funding improvement or rehabilitation plans or schedules for the designated plan year.  

If by operation of the zone freeze a plan is no longer in endangered or critical status, the plan need not provide the notice otherwise required under Code Section 432(b)(3)(D) and ERISA Section 305(b)(3)(D) (29 U.S.C. § 1085(b)(3)(D)).  Such plans must provide interested parties (participants, beneficiaries, bargaining parties, the Pension Benefit Guaranty Corporation (“PBGC”), and the Department of Labor) notice of their election to rely on the zone freeze.  However, if by operation of the zone freeze a plan already certified to be in critical status for any plan year is considered in endangered status, the plan must provide the notices that otherwise apply to plans certified to be in endangered status. 

Further, plans in critical or endangered status for plan years beginning 2020 or 2021 (including plans that elect the zone freeze described above) may extend the funding improvement or rehabilitation periods for five years.  

Certain plans (subject to solvency tests and benefit improvement restrictions, and which do not access the special financial assistance described below) may use a 30-year period (rather than the current 15-year period) to amortize investment and COVID-19 related losses incurred in either or both of the first two plan years ending after February 29, 2020.   Further, for these two plan years, plans may change their asset valuation method to spread losses over a 10-years period (increased from five years) and determine the value of plan assets using a widened corridor—specifically, the value of plan assets can exceed fair market value by 30% (rather than the current 20%).  

Special Financial Assistance (“SFA”)

In response to the many multiemployer plans facing insolvency, and with the multiemployer side of the PBGC estimated to become insolvent by 2026,  ARPA establishes a first-of-its-kind fund that the PBGC will administer to assist certain highly distressed plans in paying plan benefits.  Unlike PBGC’s prior funding mechanism, which relied exclusively on plan premiums, this fund is financed from treasury general funds (i.e., taxpayer dollars). The SFA to be provided to such plans is effectively a grant with no repayment required.

Eligibility

A plan is eligible for SFA if any one or more of the below conditions are satisfied:

• The plan is in critical or declining status any plan year beginning 2020 through 2022;
• A suspension of benefits was approved with respect to the plan as of March 11, 2021;
• That plan was certified to be in critical status for any plan year beginning 2020 through 2022, with a current asset to liability ratio (as defined in the act) of less than 40% (or less) and a ratio of active to inactive participants of less than two to three; or
• The plan became insolvent after December 31, 2014, has remained insolvent, and has not terminated as of March 11, 2021.

Actuarial Assumptions

For purposes of determining SFA eligibility, PBGC will accept the actuarial assumptions incorporated into a plan’s determination that it is in critical or critical and declining status for certifications completed before January 1, 2021, unless the assumptions are clearly erroneous. For plan certifications completed after December 31, 2020, PBGC will accept the actuarial assumptions by plans as to whether they are in critical or declining status using the actuarial assumptions in the plan’s most recently completed certification, unless such assumptions are clearly erroneous.

For purposes of determining the amount of SFA to be provided, plans rely on the interest rates  and other assumptions (unless unreasonable) included in the plan’s most recently completed certification before January 1, 2021.

Application Details

Applications for SFA must be filed by December 31, 2025 (or by December 31, 2026 for revised applications). Applications are deemed approved unless PBGC notifies the plan of an issue within 120 days of submission. If not approved, plans can resubmit the application, which is deemed approved unless PBGC notifies the plan of an issue.

Amount and Manner of Payment

Assistance must be effective no later than one year after the application is approved, but no amounts shall be paid after September 30, 2030. SFA is to be paid in a lump sum as soon as practicable after approval (without taking into account the guaranteed benefit limit). Generally, the SFA amount granted shall be what is necessary to ensure plan solvency through 2051. There will be no reduction in accrued benefits (except adjusted benefits) and the SFA will account for reinstatement of previously suspended benefits.

Restrictions on SFA Use

SFA must be used to pay plan benefits and expenses. Notably, SFA must be invested in investment-grade bonds or other investments permitted by PBGC. Plans that receive SFA cannot impose a new suspension of benefits. Additionally, PBGC may impose reasonable conditions relating to: (i) increases in future accrual rates and retroactive benefit improvements; (ii) allocation of plan assets; (iii) reductions in employer contribution rates; (iv) diversion of contributions (and allocation of expenses) to other benefit plans; and (v) withdrawal liability.

Limits on SFA Use Restrictions Imposed by PBGC

PBGC cannot impose conditions related to: (i) a prospective reduction or adjustment of plan benefits; (ii) plan governance (including selection, removal, or terms of contracts with trustees, actuaries, investment managers, and other service providers); or (iii) funding rules.

Additional Notable SFA Rules and Information

Plans receiving SFA must continue to pay PBGC premiums and are deemed to be in critical status until the plan year ending 2051. As required under ARPA, PBGC published an interim final rule on July 9, 2021 (“IFR”), which sets forth the requirements for SFA applications.  The IFR, as well as PBGC’s SFA webpage, describes the applications PBGC will prioritize  as well as other important information regarding the SFA program. PBGC’s SFA webpage indicates that it will only accept as many applications as it estimates it can process within 120 days. Once the number of applications reaches that level, the application period will temporarily close until PBGC has capacity to process more applications. PBGC will update its SFA webpage when the application period opens and closes, and it will provide ongoing information on the status of submitted applications.  

PBGC Premium Increase

The ARPA increased multiemployer plan PBGC premiums to $52 per participant starting with the 2031 plan year.  

A Win for Plan Sponsors and Participants

The ARPA’s funding relief provisions mark another win for plan sponsors, providing flexibility and predictability in order to address the dire insolvency situation pervasive in the multiemployer defined benefit pension plan community. Further, the unprecedented SFA fund will help plan sponsors provide (and ensure participants receive) the benefits that were promised without stripping the benefits down to the “guaranteed” levels under the current PBGC regime and without assessing solvent plans for the mismanagement of the insolvent plans, while also avoiding the insolvency of the multiemployer side of the PBGC.