Are multiemployer plans ready for new regulation and legislation?
Multiemployer plans are back to Capitol Hill with more exciting issues on the table. The latest proposal comes from two Republican Senators, Chuck Grassley (Iowa) and Lamar Alexander (Tennessee), with the Multiemployer Pension Recapitalization and Reform Plan (MPRRP).
Included are many provisions that can affect multiemployer plans:
- Increasing Pension Benefit Guaranty Corporation (PBGC) premiums
- New rules for actuarial valuations
- Changes to zone¹ status rules
- Changes to withdrawal liability determination
- Establishing composite plans² not subjected to PBGC guarantees or premiums based on experience and assets
- Expanding potential for plan partitions³
PBGC premiums would increase under this proposal, with the current flat rate premium going from $29 to $80 per participant.
Additional new premiums include:
- Variable rate premium: 1% of unfunded current liability, with a maximum of $250 per participant.
- Stakeholder copayment: $2.50 per active participant, assessed to the union and the contributing employers.
- Retiree copayment based on funded status: for Green plans the copay is 0%, for Endangered plans the copay will be 3%, for Critical it will be 5%, for those that had a partition is will be 10% and everyone else subject to 7%. The copay will be phased out for retirees over 75 and eliminated for disabled retirees.
- New Actuarial Rates: the long-term rate historically used for funding valuations will be replaced with a new rate structure. Rates will now be set to the 24 month average of the third segment rate plus 2%, with a maximum of 6%.
Withdrawal Liability Specifics
Withdrawal liability would bring the focus to the payment stream, specifically how long payments must be made. The payment amount will be the highest contribution units in the last 20 years times the highest rate in the last 10 years, with a minimum of the highest dollar amount in the last 20 years.
Payments will be made for a period based on the funded status of the plan (using the new discount rate structure):
- Over 140% means no payments
- 90%-139% requires 5 years
- Below 90% adds 1-year for every 2 percentage points until reaching 20 years of payments at 60% funded or lower
More to Come
Lawmakers have a lot to consider around multiemployer plans and the challenges they face. This legislation along with the Rehabilitation for Multiemployer Plans Act of 2019, or HR 397, we spoke about over the summer brings hope for further discussion and attention to this important area. Other changes have been planned for governance, reportable events for multiemployer plans, Annual Funding Notice and Zone Status Notice.
From our perspective, this proposal is touching on a wide range of issues affecting plan security. While many of the issues are aimed at addressing known problem areas, the proposed solutions may face difficulty in garnering support to continue any forward progress. As with any legislative, regulatory or market change and trends, we keep our clients up to date on any developments. In the meantime time, feel free to ask me a question.Ask Jon a Question
¹The zone system ranges from the so-called “Green Zone” for healthy plans to “Yellow Zone” and “Red Zone” status as the health of the plan declines.
²Sponsors of a multiemployer plan can set up a hybrid plan (composite plan) that pools employer contributions for investing, but only provides benefits to participants based on the contributions and any associated gains on their investment.
³Partitioning permits financially healthy employers to maintain a plan by carving out plan liabilities attributable to participants who have been “orphaned” by employers who have exited the plan without paying their full share of contributions.
Information provided by SEI Investments Management Corporation, a registered investment adviser and wholly owned subsidiary of SEI Investments Company.