The American Rescue Plan Act of 2021 (ARP) provided a lifeline to financially distressed multiemployer defined benefit plans by allowing eligible plans to apply to the Pension Benefit Guaranty Corporation (PBGC) for special financial assistance (SFA), funded by transfers from the U.S. Treasury. The SFA amount is the lowest amount needed to pay a plan’s projected benefit payments and administrative expenses through the plan year ending in 2051, taking into account the plan’s current assets and assumed future contributions, withdrawal liability payments, and asset returns.

Certain conditions and restrictions apply to a plan that has received SFA (SFA plan), as outlined in Internal Revenue Code Section (IRC) Section 432, IRS Notice 2021-38, ERISA Section 4262, and the PBGC final rule. In this article, we review the conditions and restrictions that trustees and their advisers must navigate going forward, as well as additional disclosures required by the U.S. Department of Labor (DOL) for the annual funding notice.

Using SFA

The SFA funds and their future earnings must be segregated from other plan assets and may only be used to pay benefit payments and administrative expenses. These assets may be used before other plan assets when paying benefits and plan expenses.

The SFA assets must be excluded for ERISA minimum funding purposes, so the plan will not see an immediate improvement in its Pension Protection Act of 2006 (PPA) funded percentage or the credit balance measurements. Instead, the SFA will be recognized in these measurements over time. While SFA assets are used to pay benefits and expenses, non-SFA assets are expected to grow, creating actuarial gains that will be amortized over 15 years for minimum funding purposes.

Investing SFA

Up to 33% of the SFA may be invested in return-seeking assets. The 33% threshold may be exceeded during the year due to changes in the value of SFA assets. However, the 33% threshold may not be exceeded at the time the plan purchases return-seeking assets, and at least one day during each 12-month rolling period from the date the plan receives SFA. The remaining SFA can be invested in investment-grade fixed income securities and cash. How these investments are defined is found in the PBGC’s final rule and frequently asked questions. In addition, a portion of plan assets (both SFA and non-SFA), sufficient to pay at least one year of projected benefit payments and administrative expenses, must be invested in investment-grade fixed income.

Reinstating suspended benefits

Plans in critical and declining status can apply to the U.S. Department of the Treasury to suspend certain benefits under the Multiemployer Pension Reform Act of 2014 (MPRA). Plans that received approval for those suspensions must reinstate those benefits when applying for SFA. The reinstated benefits go into effect as of the month in which SFA is paid to the plan, and makeup payments for prior suspended benefits to participants and beneficiaries in pay status must be paid either as a lump sum within three months or in equal monthly installments over five years. The plan must also notify affected individuals of the reinstatement.

Zone status

SFA plans are deemed to be in critical status through the plan year ending in 2051 regardless of what their PPA zone status funding measurements look like.

Observation. Informal correspondence with the IRS confirmed that critical and declining status is a subcategory of critical status. Plans in critical and declining status are plans in critical status that are projected to become insolvent in 15 years (or 20 years if the ratio of inactive to active participants is more than 2:1, or if the funded percentage is less than 80%). Therefore, if the SFA plan is projected to go insolvent during the SFA coverage period¹ as described above, then it should be certified in critical and declining status.

Benefit increases

SFA plans are restricted from making certain plan amendments increasing benefits during the SFA coverage period:

• Retroactive increases: The plan is not permitted to adopt an amendment increasing benefits for service accrued or other events occurring prior to the adoption date of the amendment.
• Prospective increases: Plans may adopt amendments increasing benefits prospectively if the plan actuary certifies that additional contributions not included in the determination of SFA are sufficient to pay for the benefit increase.
• Exception after 10 years: A plan can request the PBGC to approve an exception to the above rules starting 10 years after the plan year in which it receives SFA. The request must demonstrate that the plan will avoid insolvency after taking the proposed benefit increase into account, in addition to providing other identifying, actuarial, and financial information about the plan.

In addition to the above restrictions, SFA plans will also be subject to restrictions on benefit increases that apply to all critical status plans. In general, plans cannot adopt amendments that are inconsistent with the rehabilitation plan. Plan amendments increasing benefits, including future benefit accruals, may be adopted if the plan actuary certifies that the increase is paid for with additional contributions not contemplated by the rehabilitation plan, and, after taking the benefit increase into account, the plan is reasonably expected to emerge from critical status by the end of the rehabilitation period on the schedule contemplated by the rehabilitation plan.

Finally, SFA plans that received IRS approval to extend the amortization bases under IRC 431(d) are subject to the most stringent benefit increase restrictions. The plan will lose the extensions if it adopts a plan amendment that increases plan liabilities due to “any increase in benefits, any change in the accrual of benefits, or any change in the rate at which benefits become nonforfeitable under the plan.”² Exceptions to this rule are if the IRS determines the amendment is reasonable and increases plan liabilities by only a de minimis amount, or if the amendment is required to maintain the plan’s tax-qualified status.

Contribution rate decreases

During the SFA coverage period, contribution rates for each contribution base unit (CBU), e.g., hours, shift, month, must not be less than the contribution rates specified in the collective bargaining agreements (CBA) or plan document in effect on March 11, 2021, unless the trustees determine the change reduces the risk of loss to plan participants. If the contribution rate decrease affects more than $10 million of annual contributions and over 10% of all employer contributions, then the plan must request PBGC approval. The request must include extensive financial information related to the employer proposing to reduce its contributions as well as its controlled group.

Allocating contributions and other practices

During the SFA coverage period, if income or expenses are allocated between the SFA plan and another employee benefit plan, then the proportion of income to the SFA plan may not be decreased and the proportion of expenses to the SFA plan may not be increased. Exceptions to this rule apply to reciprocity contributions, costs of securing shared space, goods, or services in which the allocation is not an ERISA-prohibited transaction, actual third-party costs of services, and contribution rate decreases as described above.

Five years after the plan year the SFA is received, a plan may request an exception to the allocation condition from the PBGC. The request must include a demonstration that the plan will avoid insolvency after accounting for the proposed contribution reallocation, the reallocation is needed because of a significant increase in health costs due to a change in federal law that goes into effect after March 11, 2021, the reallocation is no more than 10% of the contribution rate negotiated on or before March 11, 2021 to the pension plan, and the reallocation relating to a change in federal law will not last longer than five years. Any continuation beyond five years must satisfy the contribution rate decrease rule described above, and a plan may not reallocate contributions under this exception for more than 10 years during the SFA coverage period.

Example. An employer’s negotiated rate is $60 per CBU, with $30 allocated to the pension plan and $30 allocated to the health plan. The plan requests PBGC approval to reduce the pension plan’s contribution allocation by 10% (to $27) and increase the health plan’s contribution to $33. This temporary reallocation buys the bargaining parties five years to renegotiate contributions to the health plan under the CBA. When the CBA is renegotiated, the contribution rate to the pension plan must be raised to at least the original $30, and any other agreed-upon increase may be allocated to the health plan.

Transfers or mergers

During the SFA coverage period, an SFA plan must request PBGC approval for any transfers (including spinoffs) or mergers with other plans. The PBGC will approve such a transaction if it complies with the general criteria for any merger under ERISA Section 4231(a)-(d) and does not “unreasonably increase PBGC’s risk of loss with respect to any plan involved in the transaction and is not reasonably expected to be adverse to the overall interests of the participants and beneficiaries of any of the plans involved in the transaction.”

Withdrawal liability

Beginning with the plan year the SFA is received, plans are required to use the same interest rates the PBGC prescribes for plans terminating by mass withdrawal. This requirement continues until the later of a) the end of the 10th plan year after the year the plan receives SFA, or b) the year the SFA is projected to be exhausted in the plan’s application for SFA plus the number of years between the plan year that includes the SFA measurement date and the plan year the SFA is received, if any.

The original SFA amount is phased into the value of assets used to determine unfunded vested benefits (UVB) over the number of years the SFA is projected to be exhausted (adjusted as described above).

Example: A calendar-year plan applies for SFA using a measurement date in 2023 and receives $1 million in SFA in 2024. In the SFA application, the SFA is projected to be exhausted in 2028. For withdrawal liability purposes, the exhaustion year is 2029, 2028 plus one year between the year the plan received SFA (2024) and the year of the measurement date (2023). The SFA assets will be phased in as shown in Figure 1.

Observation. The actual value of SFA assets as of the UVB date is not used. Only the phased-in SFA amount above is used.

Withdrawal liability settlements

During the SFA coverage period, proposed settlements of withdrawal liability amounts exceeding $50 million must be approved by the PBGC. The PBGC will approve such settlement if it determines that the settlement is in the best interests of participants and beneficiaries, and it does not create an unreasonable risk of loss to the PBGC.

Annual reporting to the PBGC

SFA plans must file a statement of compliance with the PBGC each year through the plan year ending in 2051. The statement of compliance is due no later than 90 days after the end of each plan year. The first statement of compliance is due the year following the plan year in which the SFA is received, except that, if there are six months or fewer remaining in the plan year following the month the SFA is received, then the first statement of compliance is due in the second year following the year SFA is received.

Example: The plan year for an SFA plan is the calendar year. If the plan receives SFA on June 2, 2023, then the first statement of compliance is due no later than March 31, 2025, and covers the period from June 2, 2023, through December 31, 2024. If instead it received SFA on May 29, 2023, then the first statement of compliance would be due no later than March 30, 2024, and would cover the period from May 29, 2023, through December 31, 2023.

The PBGC posted a form on its website for plans to use for the annual statement of compliance, and plans should be prepared to submit supporting documentation to demonstrate compliance or explain any noncompliance and corrective actions taken.

Periodic PBGC audits

The PBGC may audit the SFA plan periodically to ensure the plan is following the SFA conditions.

Loss of eligibility for MPRA suspensions

SFA plans will not be eligible for MPRA benefit suspensions in the future if the plan is ever certified in critical and declining status.

Partitions

If the SFA plan meets the eligibility requirements, it can apply for a partition. A plan is eligible for partition if it is certified in critical and declining status, the PBGC determines the plan sponsor has taken all reasonable measures to avoid insolvency, the PBGC expects the partition to be necessary for the plan to remain solvent, and the partition will reduce the agency’s expected long-term loss with respect to the plan. All reasonable measures generally include MPRA benefit suspensions but because they are prohibited for SFA plans, this requirement does not apply.

Additional disclosures on the annual funding notice

The DOL issued Field Assistance Bulletin 2023-01, which provides the following guidance for the annual funding notice (AFN) for SFA plans and other plans eligible to apply for SFA. The DOL will treat compliance with this guidance as a reasonable, good faith interpretation of the annual funding notice disclosure requirements.

• The SFA should be excluded when determining the plan’s PPA funded percentage and actuarial value of assets disclosed on the AFN. In addition, the Field Assistance Bulletin contains model language to show what the funded percentages would be if the SFA was reflected.
• The SFA account should be included when disclosing the plan’s market value of assets at the end of the year. In addition, the Field Assistance Bulletin contains model language to explain how the SFA is reflected.
• The SFA plan’s investment policy must reflect the restrictions and limitations on how the SFA is invested and the condition that an amount equal to one year of projected benefit payments and administrative expenses must be invested in investment-grade fixed income. The asset allocation percentages do not need to be separately identified for SFA, just the plan as a whole. Model language was provided to make this clear.
• Because SFA plans are deemed to be in critical status through the plan year ending in 2051, the Field Assistance Bulletin provides model language to describe the plan’s zone status.
• Receipt of SFA is considered an event having a material effect on plan assets, regardless of the amount of SFA received. The material effect explanation must be included in the AFN for the plan year the SFA (or supplemented SFA) is received.
  
  Some SFA plans reinstated benefits that were suspended under MPRA or suspended due to insolvency. The reinstated benefits and makeup payments to participants and beneficiaries in pay status on the SFA payment date could have a material effect on plan liabilities.
  
  Because the SFA received is expected to offset the increase in liabilities through the 2051 plan year, plans are not required to project the effect on plan liabilities through the end of the current plan year.
  
  The Field Assistance Bulletin contains model language to disclose the date and amount of SFA (or supplemented SFA) received, briefly describe the conditions that apply to plans that receive SFA, and provide additional explanations for plans that reinstated suspended benefits, if any. If a plan receives supplemented SFA in a subsequent plan year, then the AFN needs to disclose the amount of supplemented SFA but does not need to include the conditions or explanations of reinstated benefits in the later AFN.
• The AFN should continue to include the summary of the rules related to insolvent plans.
• The Field Assistance Bulletin provides model language that insolvent plans may (but are not required to) use if they are eligible for SFA but have not yet applied for it by the end of the plan year the notice applies.
• In addition, the Field Assistance Bulletin provides model language that SFA plans may (but are not required to) use that explains the prohibition from applying for MPRA benefit suspensions in the future.

Please contact your Milliman consultant to discuss how these provisions may impact your plan(s).

¹ The SFA coverage period is the period beginning on the plan’s SFA measurement date and ending on the last day of the plan year ending in 2051.

² IRC Section 412(c)(7).