On August 17, 2006, President Bush signed into law the Pension Protection Act of 2006 (the “PPA”). The PPA establishes new funding requirements for defined benefit pensions and included reforms that affect cash balance pension plans, defined contribution plans, multiemployer plans and deferred compensation plans for executives and highly compensated employees. However, as it relates to multiemployer plans such as union pension plans, most of the funding requirements for multiemployer plans that were in effect before enactment of the PPA remain in effect under the new law. The PPA simply establishes new requirements for multiemployer plans that are in financial distress as a result of being significantly underfunded. Essentially, the PPA abrogates certain anti-cutback rules and establishes a new set of rules for improving the funding of multiemployer plans that are deemed to be in “endangered”, “seriously endangered” or “critical” status. These new requirements will remain in effect through 2014.
In general, ERISA prohibits reductions in accrued, vested benefits. These ERISA provisions are commonly called “anti-cutback” rules. The PPA changes the ERISA anti-cutback rules so that plans in critical status are permitted to reduce or eliminate early retirement subsidies and other “adjustable benefits” to help improve their funding status if this is agreed to by the bargaining parties. Benefits payable at normal retirement age cannot be reduced, and plans are not permitted to cut any benefits of participants who retired before they were notified that the plan is in critical status. Adjustable benefits include certain optional forms of benefit payment, disability benefits, early retirement benefits, joint and survivor annuities (if the survivor benefit exceeds 50%), and benefit increases adopted or effective less than five years before the plan entered critical status.
A multiemployer plan is considered to be in critical status if: (1) it is less than 65% funded and has a projected funding deficiency within five years or will be unable to pay benefits within seven years; (2) it has a projected funding deficiency within four years or will be unable to pay benefits within five years (regardless of its funded percentage); or (3) its liabilities for inactive participants are greater than its liabilities for active participants, its contributions are less than carrying costs, and a funding deficiency is projected within five years. A plan in critical status has one year to develop a rehabilitation plan designed to reduce the amount of underfunding. Pursuant to such a rehabilitation plan, the plan is permitted to reduce or eliminate early retirement subsidies to help improve their funding status. In addition to giving plans the right to eliminate or reduce some benefit payment options and early retirement benefits for plan participants who have not yet retired, the law also establishes new disclosure requirements for multiemployer plans.
The plan must notify all affected parties within 30 days after a determination is made that the plan is in critical status. Beginning 30 days after this notification, a 5% employer surcharge will apply to keep plan funding from deteriorating while the rehabilitation plan is being developed. This surcharge increases to 10% in the second year and stays in effect until the rehabilitation plan has been approved. During this period, increases in benefits and reductions in contributions are prohibited. The surcharge is no longer required beginning on the effective date of a collective bargaining agreement that includes a rehabilitation plan. A plan has 10 years to move out of critical status from the earlier of (1) two years after adoption of the rehabilitation plan or (2) the first plan year after the beginning of collective bargaining agreements covering 75% of active participants. If the parties to the collective bargaining agreements fail to agree on a funding improvement plan, a default schedule will apply that assumes no increases in contributions — unless necessary to exit critical status — after benefit accruals and adjustable benefits have been reduced to the extent permitted by law. A plan exits critical status if it no longer projects a funding deficiency within 10 years.