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.
House Education and Labor Chairman Bobby Scott (D-VA) recently introduced legislation that seeks to provide aid to multiemployer pension plans (MEPs) facing insolvency. Entitled the Emergency Pension Plan Relief Act (EPPRA), the bill would fund this aid directly from the U.S. Treasury.
MEPs are pension plans created by agreement between two or more employers, typically within the same industry, and a union. A MEP is administered by a board of trustees, which must include an equal number of employer and union representatives. Of the 1,400 MEPS, about 100 face insolvency within 20 years, and some much sooner.
EPPRA seeks to aid the most seriously at-risk MEPs by directing the Pension Benefit Guaranty Corporation (PBGC) to “partition” these plans. In a partition, the PBGC (which, as a federally chartered corporation) takes over the responsibility for the payment of enough of the retiree benefits so that the partitioned MEP can avoid insolvency without cutting into the earned benefits of participants and beneficiaries. In theory, EPPRA’s partition program would expand the PBGC’s existing authority to partition plans, increase the number of eligible plans, and simplify the application process. This would leave the MEP trustees to administer two smaller plans. The government would reimburse the trustees for the benefits in the successor plan.
EPPRA would also increase the PBGC payment to retirees who have participated in MEPs that already became insolvent, or will become insolvent in the future. Currently, these retirees receive a maximum yearly payment of $12,870. Under the current system, retirees who, for example, might have received $35,000 per year from their plan, experience dramatic pension reductions when/if their plan fails. Under EPPRA, this yearly government guarantee would be increased to $24,300.
Finally, EPPRA would “disregard” a PBGC partition for purposes of calculating an employer’s withdrawal liability to the plan for 15 years following the date of the partition. This limitation is to prevent employers from immediately leaving these plans after they become better funded.
Withdrawal liability was added in 1980 to address employers that leave underfunded MEPs. Even in 1980, some MEPs did not have enough money to cover vested benefits of their participants and retirees. In an attempt to solve this, Congress amended ERISA to require any participating employer that exited a MEP to pay its pro rata share of the MEP’s unfunded vested benefits. The theory behind withdrawal liability was that employers would remain in the plans rather than face withdrawal liability. Therefore, the MEPs would receive sufficient employer contributions to return to health.
Despite the imposition of withdrawal liability, some MEPs have continued to deteriorate because of a variety of reasons. For employers in severely underfunded plans, withdrawal liability has become a top concern that threatens the company’s existence. In our experience, for employers in severely underfunded plans where many of the employers have left the plan and the liabilities have remained, it is not uncommon for employers to face potential exposure of $500,000 per full-time-equivalent employee on whose behalf the employer contributes to the MEP. So, a small unionized garage with only four union-represented employees could face $2,000,000 in withdrawal liability. This liability is likely significantly higher than the vested benefits of the company’s own employees because it represents payment for all unfunded vested benefits, not just those related to that employer. This contingent withdrawal liability leaves employers with few options.
In a narrowly divided Congress, the fate of EPPRA is unclear. Nevertheless, EPPRA’s swift introduction shows that multiemployer pension relief remains a priority for some in Congress. WPI will keep you apprised of relevant developments.