Pension & Benefits News IRS issues guidance for multiemployer DB plans receiving special financial assistance from PBGC
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Wednesday, July 28, 2021

IRS issues guidance for multiemployer DB plans receiving special financial assistance from PBGC

By Pension and Benefits Editorial Staff

The IRS has provided guidance for multiemployer defined benefit (DB) retirement plans that receive special financial assistance from the Pension Benefit Guaranty Corporation (PBGC) and for participants and beneficiaries in those plans under PBGC interim final regulations (see the story above). The guidance covers the rules under Code Sec. 432(k) for plan sponsors that are required to reinstate certain previously suspended benefits as a condition of receiving special financial assistance from the PBGC under section 9704 of the American Rescue Plan Act (ARP) Act of 2021 (P.L. 117-2). The IRS also provides guidance on whether make-up payments with respect to previously suspended benefits are eligible to be rolled over to another eligible retirement plan under Code Sec. 402(c), and the extent to which any special financial assistance received by the plan is not taken into account in determining contributions required under Code Sec. 431.

Background. Code Sec. 432(k) provides rules relating to an eligible multiemployer plan that applies to the PBGC for special financial assistance. Code Sec. 432(k)(1)(A) provides that the application must be made in accordance with PBGC guidance. Code Sec. 432(k)(1)(B) requires that, in the case of an eligible multiemployer plan for which benefits have been suspended under Code Sec. 432(e)(9), the application must describe the manner in which the plan will reinstate suspended benefits in accordance with Code Sec. 432(k)(2)(A). Code Sec. 432(k)(1)(C) sets forth the actuarial assumptions that a plan must use in an application for special financial assistance. Under Code Sec. 432(k)(1)(D), in the case of a plan applying to the PBGC for special financial assistance during any temporary priority period established under ERISA Sec. 4262(d), the application must also be submitted to the Department of the Treasury.

Reinstatement of suspended benefits. Under Code Sec. 432(k)(2)(A)(i), if an eligible multiemployer plan receiving special financial assistance was previously amended to suspend benefits pursuant to Code Sec. 432(e)(9) or ERISA Sec. 4245(a) (which corresponds to Code Sec. 418E(a)), the plan must be amended to reinstate those suspended benefits, effective as of the month in which the special financial assistance is paid to the plan, for individuals who are participants or beneficiaries as of that month. Thus, that month’s benefit payment and any future payment of benefits to a participant or beneficiary must be made as if the amendment suspending benefits had never been adopted. If a plan has been amended to suspend benefits under Code Sec. 432(e)(9), then the benefits that must be reinstated pursuant to Code Sec. 432(k)(2)(A)(i) include all benefits suspended pursuant to that plan amendment, without regard to whether those benefits would have been reduced or eliminated in the absence of the suspension.

If an eligible multiemployer plan receiving special financial assistance had suspended benefits operationally under Code Sec. 418E(a) without adopting a plan amendment, the plan must be amended to reinstate suspended benefits, effective as of the month in which the special financial assistance is paid to the plan, for individuals who are participants or beneficiaries as of that month. The reinstatement will apply through the end of the plan year in which the effective date of the special financial assistance occurs. For subsequent plan years, the plan must apply Code Sec. 418E by taking into account all plan assets, including the special financial assistance.

Under Code Sec. 432(k)(2)(A)(ii), an eligible multiemployer plan that receives special financial assistance must also be amended to provide make-up payments to individuals who are participants or beneficiaries on, and who have commenced benefits by, the date the special financial assistance is paid to the plan. Without regard to whether the benefits are paid to a participant or to a beneficiary, the make-up payments equal the total amount of benefits that were not paid to that individual on account of the suspension, with no actuarial adjustments (such as for interest).

The plan amendment providing for the make-up payments must also specify which distribution form (that is, as a lump-sum payment or as monthly installments) will apply for the make-up payments to a participant or beneficiary. If the make-up payments are paid over five years, then the installments do not include any adjustment for interest and must be paid without regard to whether the participant or beneficiary survives to the end of the five-year period.

Rollover eligibility of make-up payments. Because a multiemployer plan that receives special financial assistance is required to be amended to provide make-up payments to retirees and beneficiaries in addition to the annuity payments those individuals already receive, these make-up payments are independent payments under IRS Reg. §1.402(c)-2, Q&A-6(a) for purposes of Code Secs. 401(a)(31), 402(c) and 402(f), and 3405(c)(1) unless the payments satisfy the requirements of IRS Reg. §1.402(c)-2, Q&A-6(b)(2), to be treated as supplemental payments that are part of a series of substantially equal periodic payments.

A make-up payment paid in monthly installments satisfies the requirements of IRS Reg. §1.402(c)-2, Q&A-6(b)(2)(i) (that the supplement is a benefit increase for annuitants); IRS Reg. §1.402(c)-2, Q&A-6(b)(2)(ii) (that the amount of the supplement is determined in a consistent manner for all similarly situated annuitants); and IRS Reg. § 1.402(c)-2, Q&A6(b)(2)(iii) (that the supplement is paid to annuitants who are otherwise receiving payments that would constitute substantially equal periodic payments). However, because the make-up payments vary in size relative to the size of a participant’s or beneficiary’s annuity payments, a make-up payment could fail to satisfy the maximum payment condition under IRS Reg. §1.402(c)-2, Q&A-6(b)(2)(iv) (that the aggregate supplement is less than or equal to the greater of 10% of the annual rate of payment for the annuity, or $750 or any higher amount prescribed by the Commissioner in guidance of general applicability).

Pursuant to the authority to increase the $750 limit, the IRS provides that, with respect to a make-up payment under Code Sec. 432(k)(2)(A)(ii) that is paid in the form of monthly installments over five years, to the extent that the aggregate supplement exceeds the limit set forth in IRS Reg. §1.402(c)-2, Q&A-6(b)(2)(iv), that limit is increased to the amount of the make-up payment. Thus, make-up payments that are paid in the form of monthly installments over five years are treated as part of a series of substantially equal periodic payments and are not eligible rollover distributions subject to the requirements of Code Secs. 401(a)(31), 402(f), or 3405(c)(1).

The IRS stated, however, that it is not exercising the Commissioner’s authority to increase the limit under IRS Reg. §1.402(c), Q&A-6(b)(2)(iv), with respect to make-up payments paid as lump sums. A make-up payment under Code Sec. 432(k)(2)(A)(ii) that is paid in the form of a lump sum also satisfies the requirements of IRS Reg.§1.402(c)-2, Q&A-6(b)(2)(i) - (iii) and, if the lump sum is less than or equal to the greater of 10% of the annual rate of payment for the annuity or $750 (determined without regard to the increase in the preceding paragraph), the lump sum also satisfies the requirements of IRS Reg. §1.402(c)-2, Q&A-6(b)(2)(iv). In that case, the lump sum is treated as part of a series of substantially equal periodic payments and, accordingly, is not an eligible rollover distribution.

By contrast, a makeup payment paid in the form of a lump sum that exceeds the limit under IRS Reg. §1.402(c)-2, Q&A-6(b)(2)(iv) is not a supplemental payment that is part of a series of periodic payments and retains its character as an independent payment that is an eligible rollover distribution. As a result, the plan administrator must provide the participant or beneficiary who is receiving the make-up payment in the form of a lump sum exceeding that limit with the Code Sec. 401(a)(31) election to make a direct rollover to an eligible retirement plan and the notice described under Code Sec. 402(f). Unless that participant or beneficiary elects to roll over that payment to an eligible retirement plan within the meaning of Code Sec. 402(c)(4), the make-up payment will be subject to withholding under Code Sec. 3405(c)(1) at the rate of 20%.

Minimum funding requirements for multiemployer plans. Code Sec. 432(k)(2)(D)(i) provides that any special financial assistance received by a multiemployer plan is not taken into account in determining contributions required under Code Sec. 431. Thus, the IRS provides that the amounts in the special financial assistance account established pursuant to ERISA Sec. 4262 are not included in the plan’s assets for purposes of determining the contributions required under Code Sec. 431. This exclusion of the special financial assistance account applies for all purposes under Code Sec. 431, including the determination of the fair market value of assets used under Code Sec. 431(c)(6) and the determination of the actuarial value of assets under Code Sec. 431(c)(2) (based on the fair market value of assets).

The amount in the special financial assistance account is equal to the initial special financial assistance paid by the PBGC as adjusted by the investment return on the assets held in that account and reduced by benefit payments and expenses that are paid from that account. To the extent that a liability for benefits or expenses is satisfied by payments from the special financial assistance account, there will be no corresponding reduction in the portion of the plan’s assets that are taken into account for purposes of Code Sec. 431. As a result, any benefit or plan expenses paid from the special financial assistance account during a plan year will generate an actuarial gain for that plan year. If the funding method used by the plan includes a determination of an actuarial gain or loss for each plan year, then the actuarial gain generated from any benefit or plan expense paid from the special financial assistance account in a plan year will be included in the actuarial gain or loss for that plan year and amortized over 15 years in accordance with Code Sec. 431(b)(3)(B)(ii).

Submission of certain applications to Treasury Department. Under Code Sec. 432(k)(1)(D), in the case of a plan applying to the PBGC for special financial assistance during any temporary priority period established under ERISA Sec. 4262(d), the application must also be submitted to the Department of the Treasury. For these applications, the IRS states that the requirement will be satisfied by submission to the PBGC in accordance with guidance issued by the PBGC. Under the PBGC interim final regulations, the PBGC will transmit the application to the Treasury Department on behalf of the plan.

Source: IRS Notice 2021-38.

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