New Pension Legislation Adopted as Part of the Government Spending Legislation

Written By Blaine Brickhouse

On December 16, President Obama signed into law new pension legislation affecting both multiemployer and single employer pension plans. The legislation was a part of the government spending legislation which will fund most of the federal government through September 2015.

Multiemployer Pension Plan Provisions
The most significant and controversial provision of the new legislation is the one that allows plans which are in critical and declining status to reduce pension benefits for certain retirees. Benefits for retirees over age 80 would not be reduced and those between age 75 and 80 would have smaller reductions than those retirees under age 75. Critical and declining status generally includes plans which are projected to become insolvent (1) within 15 years, or (2) within 20 years if the ratio of inactive to active participants exceeds 2 to 1 or the plan is under 80% funded. Such plans would need to receive approval from the IRS, DOL, and Pension Benefit Guarantee Corporation (“PBGC”) in order to cut pensions. Plan members would need to vote to reduce benefits before such reduction could take place. Members of large plans with over $1 billion in projected required PBGC assistance would not be eligible to vote on reductions.

The rationale of allowing cut backs is that plan members might be better off with some reduction in benefits, which could be paid over a longer period of time, than continue with no reduction and have the plan become insolvent with much smaller benefits being provided by the PBGC.

Other multiemployer provisions include:

  •  An ncrease in the multiemployer PBGC premium from $13 per participant (previously scheduled for 2015) to $26 per participant.
  • The Pension Protection Funding Rules become permanent (they were scheduled to expire December 31, 2014). These rules require the trustees to take action to improve the funded status of the plan if the plan falls in endangered or critical status.
  • Plans which are projected to fall into the critical status within five years are allowed to declare critical status immediately.

Single Employer Pension Plan Provisions
The legislation limits the PBGC’s enforcement in the case of a plan sponsor’s downsizing under Section 4062(e) of ERISA. Section 4062(e) required plan sponsors who shut down a major facility with accompanying layoffs to provide security to the PBGC in the event of a subsequent distress termination of the plan. The PBGC has often aggressively interpreted when these situations have occurred. The new legislation clarifies and limits the situations covered by Section 4062(e).

The new legislation allows plans which previously had a normal retirement age of the earlier of a specified age and 30 years of service to continue this definition for employees hired before January 1, 2017. In 2007, the IRS had issued restrictions on the definition of normal retirement age if the age was earlier than 62.

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