PBGC Institutes Major Changes in its Special Financial Assistance Final Rule

On July 7, 2022, the Pension Benefit Guaranty Corporation (PBGC), the independent federal corporation that insures private-sector defined benefit plans under Title IV of the Employee Retirement Income Security Act of 1974 (ERISA), announced its final rule setting requirements and procedures for the Special Financial Assistance (SFA) program for financially troubled multiemployer plans.  The final rule will replace PBGC’s interim final rule (IFR)1 that has been in place for nearly a year and under which 41 plans have applied for SFA.  As of July 6, 2022, PBGC has already approved SFA to 27 plans totaling over $6.7 billion.  The final rule will go into effect on August 7, 2022, 30 days after its July 8 publication in the Federal Register

The final rule implements several key changes to PBGC’s SFA program, which was established by the American Rescue Plan Act of 2021. Generally, the changes will not apply to plans that have received or will receive financial assistance before the final rule’s effective date, unless and until a supplemental application for assistance is filed.  Key changes in the final rule include:

  • Phased Recognition of SFA for Purposes of Calculating Withdrawal Liability: The final rule places a new condition on SFA recipients, requiring phased recognition of SFA as a plan asset for purposes of withdrawal liability calculations.  This condition requires that an additional portion of SFA be recognized each year until the full amount is recognized.  All SFA will be fully recognized as a plan asset for withdrawal liability purposes within 10 years of the plan’s receipt of the SFA.  PBGC adopted this provision to “ensure that SFA funds do not subsidize employer withdrawals…”2  This is the only provision of the final rule on which PBGC has sought comment. 
  • Separate Interest Rate for Projecting SFA Assets: Whereas the IFR required plans to use the same interest rate in projecting both non-SFA and SFA plan assets (which, by statute, must be kept segregated by SFA recipients), the final rule specifies an interest rate to be used in projecting SFA assets, which includes a cap that is lower than the cap on the interest rate assumption for projecting non-SFA plan assets.  The “SFA interest rate” will be the lesser of the interest rate used by the plan for funding standard account projections in the most recent certification of plan status before January 1, 2021, and a specified interest rate cap.  The cap is the rate that is 67 basis points higher than the lowest average of Treasury’s segment rates over a four-month period ending with the month in which the plan’s initial application is filed. This bifurcated interest rate will likely result in many plans’ receiving larger amounts of assistance than the single rate specified under the IFR.
  • SFA for Plans that Suspended Benefits under MPRA: In response to IFR comments raising the concern that either accepting or not accepting SFA could raise fiduciary concerns for plans that had suspended benefits under the Multiemployer Pension Reform Act of 2014 (MPRA), PBGC’s final rule establishes a separate methodology for determining the SFA amount for such plans.  The final rule allows so-called “MPRA plans” to apply for the greatest of (1) SFA as calculated for a non-MPRA plan, (2) the lowest amount of SFA sufficient to ensure the plan will project rising assets at the end of the 2051 plan year, or (3) an amount of SFA equal to the present value of reinstated benefits (taking into account make-up payments, reinstated benefits through 2051, and restoration of benefits).  Plans that select options (2) or (3) must meet additional conditions and requirements.
  • Permissible Investments for SFA Assets: The final rule amends the IFR’s investment limitations to permit SFA recipients to invest up to 33 percent of SFA assets and earnings in “return-seeking” assets.
  • Conditions for Merger with SFA Recipient: The final rule amends the IFR to remove certain conditions placed on merged plans.  Under the final rule, the IFR’s conditions relating to prospective benefit increases, allocation of plan assets, and allocating expenses will not apply to a merged plan, to encourage “beneficial” plan mergers.
  • Contribution Rate Increases after July 9, 2021, Not Considered “Plan Resources” in Determining Amount of SFA: In determining the amount of SFA needed for the plan to pay all benefits due through 2051, the final rule permits plans to exclude from consideration as “plan resources” any contribution rate increases agreed to on or after July 9, 2021.  PBGC states this is not expected to impact the amount of SFA issued, but instead is intended to discourage delayed negotiation of contribution rate increases.
  • Lock-in Applications: As previously discussed, PBGC established six priority groups to determine the order in which eligible fund applications may be received.  The final rule adds a provision that will allow plans in priority groups 5 and 6,3 and other priority groups that may be added before March 11, 2023, to file a “lock-in application” in situations where PBGC temporarily closes the application window due to a high volume of applications but otherwise would be accepting applications from the plan’s priority group.  In such cases, a plan could “lock in” the filing date, SFA measurement date, and date of determination of interest rate assumptions and census data.

PBGC seeks comment only on the final rule’s new condition requiring phased recognition of SFA for withdrawal liability purposes.  PBGC specifically seeks comment on the expected impact of the condition, and asks for input on whether an alternative provision, such as a shorter or longer phase-in period, a partial phase-in, or exemptions for plans requiring only small amounts of SFA, would strike a better balance among stakeholders.  Any comments must be submitted by August 7, 2022.

See Footnotes

1 86 Fed. Reg. 36598, Special Financial Assistance by PBGC (July 12, 2021).

2 PBGC, Press Release, PBGC Issues Final Rule on Special Financial Assistance (July 6, 2022).

3 Plans in priority group 5 are projected to become insolvent before March 11, 2036; those in priority group 6 have a present value of financial assistance in excess of $1 billion.

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.