March 23, 2021
Key Pension Plan Provisions in the American Rescue Plan Act
On March 11th, President Biden signed the American Rescue Plan Act (ARPA) into law, providing significant funding and other economic relief to Atlanta families, individuals, organizations, and businesses. Not only is there another round of economic impact payments, unemployment extension, and expanded tax credits, but important changes to the Paycheck Protection Program (PPP) and Employee Retention Tax Credit were also made. Specific funding provisions were included for local government agencies, vaccine distribution, school reopening, and more. Although not widely reported there were also important relief provisions for both Single (SEPP) and Multiemployer Pension Plans (MEPPs). To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.
Single-Employer Pension Plans
- Amortization Period Extension – Under ERISA rules, SEPPs are subject to certain minimum funding requirements. As part of the minimum funding calculation, plans need to determine the shortfall amortization charge, which permits the funding losses to be spread over a certain number of years. Under prior regulations, SEPPs were only allowed to use a seven-year amortization period, but ARPA has extended it to fifteen years. In addition, all shortfall amounts have been set to zero for the plan year starting after December 31, 2021.
- Funding Stabilization – Interest rates play an important role in determining the value of plan liabilities. Typically, higher interest rates lead to lower plan liability value. The rates used for minimum funding are based on recent market rates, but there are limits based on a “corridor” of a 25-year historical rate average. The ARPA decreased the rate to 5% for plan years through 2020, delayed the rate increase to 30% until 2026, and implemented a permanent 5% interest rate floor for each of the three 25-year average segment rates. This is an important change because the rates used will impact required minimum contributions and benefit restrictions.
Plan sponsors are permitted to determine when to adopt these changes but must comply by January 1, 2022.
Multiemployer Pension Plans
Special Assistance Fund (SAF)
The SAF which is managed by the Pension Benefit Guaranty Corporation (PBGC) provides immediate financial relief to MEPPs on the verge of insolvency and offers access to funds through 2051. To participate, a plan must meet one of the following criteria:
- A MEPP must be in critical and declining status for any plan year starting in 2020 through 2022.
- Cuts to benefits have been previously approved by the Treasury Department prior to the date of ARPA enactment.
- Any MEPP that was insolvent after December 16, 2014, have remained insolvent and have not terminated as of the date of ARPA enactment,
- Any plan year starting with 2020-2022, a MEPP certified to be in critical status, uses a modified funding percentage of less than 40% and has a ratio of active to inactive participants of less than two to three.
Application Details
Since the ARPA was recently passed the PBGC has not yet had enough time to provide detailed guidance. However, the PBCG has 120 days from March 11th to publish guidelines including materials that should accompany an application and the date of fund transfer if the applicant is approved. It is important to note the ARPA provides the PBGC discretion to limit application acceptance in the first two years. This means that plans projected to become insolvent in the next 5 years or have already implemented a benefit suspension may be given preferential treatment. The PBCG is required to approve an application, unless the applicant is otherwise notified, within 120 days of application submission.
Relief Amount
The amount of relief will be equal to the amount needed to pay all benefits owed from the date of fund disbursement through the last day of the plan year in 2051. The PBGC will issue a single lump-sum payment once an applicant is approved, and the relief amount determined.
Repayment Requirements
Program participants are not required to repay the amount of financial assistance received. While the money can only be spent on benefits and plan expenses, the PBCG can implement rules that require payback in cases of non-compliance. It is important to note plans are not relieved from making PBGC premium payments which are applicable to underfunded plans.
Other Important Changes
In addition to the SAF, there were other changes passed as part of the ARPA that benefit MEPPs. These include:
- Temporary Delay Funding Zone Designation – A plan can make an election to use the same funding zone status that was certified in the prior year for up to two years beginning on March 1, 2020, regardless of current funding status. The change is designed to provide administrative burdens and offers increased flexibility. It is important to note once the election has been made it can not be changed without permission from the Treasury Department.
- Temporary Extension of Funding Improvement & Rehabilitation Plans – A plan that is classified as endangered or critical is required to have an annual review of the funding improvement plan. ARPA removes the requirement for the first two plan years starting on or after March 1, 2020. In addition, plans in either status can also elect to extend the rehabilitation period by five years, and under certain conditions longer. This change will provide the extra time needed to improve contribution rates and enhance plan funding.
- Amortization of Losses – Plans are typically required to amortize funding shortfalls arising from actuarial losses over a 15-year period. The ARPA has changed this rule to permit MEPPs to amortize investment losses, employer contribution reductions, and other COVID-19 losses from 2020 and 2021 over a 30-year period. In addition, plans may also change asset valuation methods to manage the difference between expected and actual investment returns.
Contact Us
The relief is welcome news to pension plans facing funding issues exacerbated by the COVID-19 pandemic. Due to the complexity of the changes and the resulting impact on pension plans, it is important to consult with a qualified advisor to determine how your plan will be impacted. If you have questions about the information outlined above or need assistance with a plan administration or audit issue, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.
