The Pension Protection Act of 2006 added emphasis to the “stewardship” of multiemployer plans, Eli Greenblum, an actuary and senior vice president of the Segal Co., said March 21 at a BNA-sponsored pension conference.

The idea behind the reform was that multiemployer plans needed to be better managed, Greenblum said. Although the original funding rules remain essentially the same, the PPA added tools for plans that are endangered or are in critical status, he added.

The PPA provisions came about as a compromise among employers, unions, and plans, Greenblum said. While the law as enacted is “ideal to no one,” it nevertheless is “tolerable to most,” he said. The multiemployer provisions generally are effective beginning in 2008.

Multiemployer plans, defined by the Employee Retirement Income Security Act Section 3(37), are collectively bargained plans to which more than one employer contributes and which are jointly run by management and union trustees.

The law gives bargaining parties and trustees the tools they need to keep plans funded, Marc LeBlanc, fund administrator and general counsel for the Sheet Metal Workers National Pension Fund, Alexandria, Va., said.

The PPA provided new multiemployer plan funding rules, such as reducing from 30 years to 15 years the funding timeline for new benefit increases, Greenblum said. Plans also may be eligible for five-year amortization extensions under tax code Section 412(e), he said.

Deduction limits also were raised. Employers now can contribute and deduct up to 140 percent of a plan's unfunded current liability, up from 100 percent, they said.

Red Zone, Yellow Zone Plans.

Actuaries categorize plans in three separate categories: green for healthy, yellow for endangered, and red for critical, Greenblum said.

Greenblum said several conditions apply for classifying a plan as critical, including:

• if the market value of the plan assets plus five years' worth of contributions are insufficient to pay benefits and expenses for five years;

• a funding deficiency occurs within four years; and

• if the plan is less than 65 percent funded and has experienced a funding deficiency within the last five years.

The critical status actually continues until there is no funding standard account deficiency projected for the plan's next 10 years, Greenblum said.

Red Zone Plans.

If a plan goes into the red zone, which the plan's actuary must certify no later than 90 days after the beginning of the plan year, the trustees must adopt a rehabilitation plan that must follow a set schedule. The schedule can be accelerated, but it cannot be postponed, he said.

For example, at 120 days after the beginning of the plan year, the trustees must notify participants, bargaining parties, and the relevant government agencies of the plan's status. By the 330th day, the rehabilitation plan must be adopted and by the 360th day, the trustees must provide plan contribution/benefit schedules to the bargaining parties, according to Greenblum and LeBlanc.

Trustees may only meet three or four times a year so there is a lot of work to do in a short time, the speakers said.

Trustees and bargaining parties have several options to consider in designing a rehabilitation plan, they said. Red zone plans, unlike yellow zone plans, may reduce protected or “adjustable benefits,” Greenblum said. Such benefits include any early retirement benefit or retirement-type subsidy; any payment option, other than qualified joint and survivor annuities; and postretirement death benefits. Plans also may reduce future accrual rates, although no lower than below the equivalent of 1 percent of contributions or the current rate, whichever is lower. The floor only applies to the default schedule, Greenblum said. Bargaining parties can negotiate deeper cuts if the plan's trustees develop an alternative schedule under the rehabilitation plan, he said.

However, plans cannot reduce benefits payable at normal retirement age, other than for rollback of recent increases, and cannot reduce benefits for people who retired before the plan gave notice of critical status, other than for rollback of recent increases, the speakers said.

A plan may fail to emerge from the red zone or achieve its rehabilitation plan goals even if the trustees do their job well, the speakers added. Under these conditions, the Internal Revenue Service should waive the funding-deficiency excise tax and other penalties for employers, they said.

IRS can waive the excise tax for unexpected and material market changes, the loss of a major contributing employer, or other factors that would make the imposition of the tax excessive or unfair, the speaker said.

Rehabilitation plans should be updated annually in response to emerging events and should be modified if the original goals of the plan become unrealistic, Greenblum and LeBlanc said.

Yellow Zone Plans.

Plans are in the yellow zone, or endangered, if they are less than 80 percent funded, or have had a funding deficiency within the past seven years, Greenblum said. Plans that have hit both conditions are considered seriously endangered.

The mechanics for yellow zone plans are similar to red zone plans, except that yellow zone plans cannot cut protected or adjustable benefits, there is no official shelter from funding-deficiency penalties, and there are no employer surcharges, Greenblum said.

Planning Ahead.

There are several actions trustees should consider before the PPA's 2008 multiemployer provisions effective date, Greenblum and LeBlanc said. Plans should review assumptions, such as the reduction of the amortization horizon from 30 years to 15 years. Trustees also should project the plan position on the PPA effective date and later, including projections for investment and demographic experience, any plan changes, any contribution rate changes, and any other known or likely events.

The speakers also said trustees should consider alternatives to strengthen the financial position of their plans before the 2008 actuarial certification. Some of these alternatives included increases in the contribution rates, adjustments to the benefit accrual rates, and asset allocation and actuarial methods.

Trustees also should prepare themselves for the new disclosure rules, which require broader and earlier disclosure of materials, the speakers said. If a plan is likely to be classified as either endangered or critical, trustees should consider communications to prepare participants and employers, they said.

By Sean Forbes