This Employee Benefits Report is the fifth of a series being issued regarding the Pension Protection Act of 2006. This Report summarizes the new funding rules the Act provides for single and multiemployer defined benefit plans.
The Act significantly modifies the minimum funding requirements for defined benefit plans under the Employee Retirement Income Security Act of 1974 ("ERISA") and the Internal Revenue Code (the "Code"), imposes limitations and additional funding requirements on plans that are considered "at risk" or "endangered", and expands the plan sponsor’s obligation to notify plan participants and beneficiaries of the plan’s funded status. Most provisions of the Act are effective for plan years beginning after December 31, 2007.
Single-Employer Defined Benefit Plans
In general, the Act requires that all single-employer defined benefit plans be fully funded within a seven year period, beginning in 2008. The Act also imposes specified interest rates and mortality tables that must be used in the calculation of a plan’s costs and liabilities, and in the determination of the present value of a participant's benefit.
Additional contributions and funding assumptions will be required for those plans deemed to be "at risk". A plan is "at risk" if the plan’s funding ratio is generally less than 80%. This 80% standard will be phased in over a four year period (65% in 2008, 70% in 2009, 75% in 2010 and 80% in 2011). However, plans with 500 or fewer participants will not subject to the additional "at risk" contributions. In addition, if a plan is "at risk" there are restrictions on the funding of executive compensation.
It is important to note that there is no delay in effectiveness with respect to the additional funding requirements for collectively bargained single-employer defined benefit plans, with the exception of the "at risk" plans. The effective date for collectively bargained plans with respect to the limitations for "at risk" plans is delayed until the later of the earlier of the expiration of the collective bargaining contract or plan years beginning in 2010.
In addition, plans that are considered "at risk" may not be amended to increase benefits. An amendment increasing benefits is also prohibited if, taking into account the amendment, the plan would be considered "at risk". Plans that are less than 60% funded are also prohibited from triggering shutdown benefits and from paying lump sums, and benefit accruals must be frozen.
The requirement that plan administrators provide participants with a summary annual report has been eliminated for all defined benefit plans. Instead, administrators of single-employer defined benefit plans must now send out a funding notice due 120 days after the beginning of the plan year. (Plans with less than 100 participants may send out this notice when the 5500 is filed). This notice must be sent to participants, beneficiaries, unions (if a collectively bargained plan) and to the PBGC.
Multiemployer Defined Benefit Plans
Under current law, multiemployer plans are generally subject to the same funding requirements as single employer plans. However, multiemployer plans have a longer amortization period (up to 15 years instead of the 7 year period for single-employer plans).
The Act adds new funding rules and benefit limitations for multiemployer plans that fall into one of two categories: (1) endangered, or (2) critical. The determination is generally based on the funding status of the plan – in general, a plan less than 80% funded is either "endangered" or "seriously endangered" and a plan that is less than 65% funded is "critical".
The determination of a plan’s status must be made by an actuary, within 90 days after the beginning of the plan year. If the actuary determines that a plan is endangered, then the Act requires that the plan sponsor adopt a funding improvement plan. If the actuary determines that a plan is critical, the Act requires that the plan sponsor adopt a rehabilitation plan. Both types of plans are to provide plan sponsors with a blueprint that is intended to improve the funding status of the plan over a period of 10-15 years.
If a plan has been certified critical, then the plan sponsor may provide for cutbacks in benefits, increase employer contributions (or both). The Act contemplates that the terms of the rehabilitation plan will be subject to bargaining, and accordingly provides for a default plan should the parties fail to reach an agreement. Failure to timely implement a rehabilitation plan may subject the plan sponsor to ERISA penalties (up to $1,100 a day) and excise taxes (up to 5% of the accumulated funding deficiency) under the Code. The multiemployer provisions are effective generally for plan years beginning in 2008.
The endangered and critical provisions above will sunset in 2014. However, plans that have adopted funding improvement and rehabilitation plans must continue to follow those plans.
The requirement that plan administrators provide participants with a summary annual report and the ERISA 4011 notice has been eliminated for all multiemployer defined benefit plans. However, a similar funding notice must be provided, within 120 days after the beginning of the plan year, that includes detailed information on the plan’s funding status and must provide additional information including whether the plan is endangered or critical, and how to get a copy of the funding improvement plan or the rehabilitation plan. This notice must be sent to participants, beneficiaries, contributing employers, unions, and to the PBGC. Plans with less than 100 participants may send out this notice when the 5500 is filed.
Commercial Airlines
The Act provides for special funding rules for commercial airlines that sponsor single-employer defined benefit plans, including a 10 year extension of the amortization period for frozen plans. Representatives of Congress have promised additional guidance after the August recess.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.