Background on the Multiemployer program

PBGC’s insurance programs were created as part of ERISA in 1974 to assure retirees’ pension benefit protection. In 1980 Congress enacted the Multiemployer Pension Plan Amendments Act (MPPAA) to strengthen the pension protection program for multiemployer plans. The amendments established mandatory requirements for financially weak multiemployer plans in “reorganization” and imposed new financial requirements on employers dropping out of multiemployer programs.   Employers who cease to have an obligation to contribute to multiemployer plans are generally liable to the plan for their share of the plan’s underfunding.  

Multiemployer Pension Plan Amendments Act of 1980

The amendments:

• Strengthened the funding requirements for multiemployer pension plans generally,
• Prescribed new funding and benefit adjustment rules for financially distressed plans,
• Revised the termination insurance system applicable to multiemployer plans to reduce the potential burden on PBGC and to provide better incentives for funding, and
• Established withdrawal liability.

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Key Aspects of MPPAA

Withdrawal Liability

One of the most significant changes made by MPPAA was to provide multiemployer plans with the tools to ensure the plan’s financial stability even if employers terminated their participation in the plan.

The primary mechanism for this is making employers who “withdraw” from a multiemployer pension plan liable for continuing to fund a proportionate share of the plan's unfunded vested liabilities by paying "withdrawal liability" to the plan. This withdrawal liability is to be assessed and collected by the plan, not by the PBGC. It is described in more detail below.

Avoiding Plan Insolvency

One of the goals of the 1980 multiemployer reforms was to keep plans from becoming insolvent. To do that, two steps were taken. First, the law required plans to fund new past service benefit liabilities over a shorter period of time. Second, a new reorganization was established to identify plans in potential financial difficulty so that all necessary steps could be taken to avoid insolvency.

Reorganization

(ERISA Secs. 4241, 4242, 4243, 4244 and 4244A )

A plan is in reorganization if it meets a special funding test. Typically this situation will arise if the plan’s funding level is low and current accruals are small, relative to vested accrued liabilities.Once in reorganization, a plan will be subject to a higher minimum contribution requirement and may eliminate any new or increased benefits less than five years old. Participants must have six months prior notice before their benefits can be reduced.

Insolvent plans

(ERISA Sec. 4245)

Despite taking all of the above steps, if a multiemployer plan becomes insolvent, it is required to limit its benefit payments to the amount of assets it has available, based on the projected assets for the year. This level is called the “resource benefit level.”

No later than two months before the start of the year that the plan is projected to be insolvent, the plan administrator must notify the PBGC, plan participants and beneficiaries, and the Secretary of the Treasury. PBGC has issued regulations on the manner in which this notice must be provided.

In addition, participants who are expected to be in pay status during the insolvency year must be notified of the level of benefits that they will be paid.

Financial Assistance by the PBGC

(ERISA Sec. 4261)

Congress also changed the event triggering PBGC intervention from plan termination to plan insolvency. If a PBGC-insured multiemployer plan is unable to pay guaranteed benefits when due, the PBGC will provide the plan with financial assistance. This assistance is a loan that allows the plan to pay participants their guaranteed benefits and to pay the plan’s reasonable administrative expenses.

PBGC has broad discretion to set the conditions for this financial assistance. Typically the PBGC will require that:

1. the loan will be repaid if the plan’s financial condition improves,
2. benefits may only be paid at the guaranteed level,
3. PBGC’s loan is collateralized by employer contributions, withdrawal liability payments, and other plan assets, and
4. PBGC has broad audit authority over the plan.

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