PBGC Multiemployer ProgramNYC Bar Association Employee Benefits and

Executive Compensation CommitteeNew York, NY

June 11, 2014

Karen Morris – Deputy Chief CounselBeth Bangert – Assistant Chief Counsel

Office Of Chief CounselThe opinions of Ms. Morris and Ms. Bangert are theirs alone and do not

represent the views of the PBGC

Presentation Overview

• Part 1: Program Financials & Key Statistics• Part 2: Mass Withdrawal and Multiemployer Plan

Termination• Part 3: Insolvent Plans and PBGC Multiemployer Plan

Guarantee • Part 4: Programmatic Update: Partition• Part 5: Reducing Regulatory Burden

2

Part 1: Program Financials - 2013

3

Net Position September 30, 2012 ($5.2 billion)

2013 Snapshot:Premium Income$110 millionInvestment Loss

($96 million)

Assets$1.7 billion

Liabilities($10.0 billion)

Net Position September 30, 2013 ($8.3 billion)

Part 1: Key StatisticsPBGC Multiemployer Program Net Financial Position

4

BILLIONS

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013-$9

-$8

-$7

-$6

-$5

-$4

-$3

-$2

-$1

$0

Part 1: Key StatisticsProbable Plans

• As of September 30, 2013, the PBGC expects 173 multiemployer plans will exhaust plan assets and need financial assistance from the agency to pay guaranteed benefits and plan administrative expenses. This is up from 104 plans in 2009.

• The present value of nonrecoverable future financial assistance for these 173 plans is $9.9 billion, compared to $2.3 billion in 2009.

• The 173 plans in 2013 fall into three categories: – (1) plans currently receiving financial assistance (44 plans); – (2) plans that have terminated but have not yet started receiving financial

assistance from PBGC (65 plans); and – (3) ongoing plans (not terminated) that PBGC expects will require financial

assistance in the future (64 plans).

5

Part 1: Key Statistics Reasonably Possible Plans

• Reasonably possible multiemployer classification is defined as an ongoing plan with a projected insolvency date between 10 and 20 years from the valuation date

• PBGC’s estimate of its multiemployer reasonably possible exposure increased to $36.7 billion in FY 2013, a $9.9 billion increase over the $26.8 billion in FY 2012. The increase was due primarily to the addition of 28 new plans to the reasonably possible list

• PBGC’s estimate of reasonably possible exposure in 2009 was $326 million

6

Part 1: Key StatisticsReasonably Possible Plans

7

2009 2010 2011 2012 20130

5

10

15

20

25

30

35

40Reasonably Possible Contingencies

$ (in

bill

ions

)

Sources: http://www.pbgc.gov/open/index.html; http://www.pbgc.gov/res/data-books.html(1) A number of plans received financial assistance in more than one year.(2) 2012 figures rounded.

8

Part 1: Key Statistics Financial Assistance to Insolvent ME Plans

Assistance (1)

(2)2012 49 $95,000

2001 22 $4,5262006 33 $70,097

1990 3 $1,0001996 12 $4,022

1981 1 $3111985 3 $1,300

PBGC Financial Assistance To Insolvent Plans (1981-2012)Multiemployer Program

YearPlans Receiving Total Amount of

Financial Financial Assistance(in thousands)

Part 2: Mass Withdrawal and Plan Termination

• Under ERISA § 4041A(a), there are two ways a multiemployer plan can terminate – by mass withdrawal or by plan amendment.

• A mass withdrawal termination occurs when all employers withdraw or cease to be obligated to contribute to the plan.

• A plan amendment termination occurs when the plan adopts an amendment that provides that participants will receive no credit for service with any employer after a specified date, or an amendment that makes it no longer a covered plan. See also ERISA § 4041A(e).

• Unlike single-employer plans, terminated multiemployer plans continue to pay all vested benefits out of existing plan assets and withdrawal liability payments.

9

Part 2: Mass Withdrawal

• Most commonly, plans are terminated by mass withdrawal under ERISA § 4041A(a)(2):– Cut back to nonforfeitable benefit level as of date of termination.

ERISA § 4041A(c)(1); 29 C.F.R. § 4041A.22– Pay benefits only in form of annuity (except benefits valued at $1,750

or less). ERISA § 4041A(c)(2); 29 C.F.R. § 4041A.22– Funding requirements under IRC §§ 412, 431 and 432 do not apply

after the year the plan terminates IRC § 412(e)(4)

Part 2: Terminated Plans

• Summary of Plan Sponsor duties:– Limit payment of benefit to nonforfeitable benefits as of termination

date– If assets sufficient, may close out plan– If assets insufficient, benefits to be paid only in form of annuity– Value assets and nonforfeitable benefits– Reduce benefits as required– Assess and collect withdrawal liability (initial, redetermination and

reallocation liability)– Apply for PBGC financial assistance when assets insufficient to pay

basic benefits

11

Part 2: Terminated Plans

• Plan Close-Outs:

– Sponsor may close out plan if assets sufficient to pay nonforfeitable benefits. ERISA § 4041A(c)(2); 29 C.F.R. § 4041A.41

– Plan to be closed out through purchase of annuities or lump sum if elected by participant (and available under plan document). 29 C.F.R. § 4041A.43

12

Part 2: Terminated Plans

• Terminated Plans – Benefit Reductions:

– Amend plan when nonforfeitable benefits exceed plan assets by reducing benefits to extent not eligible for PBGC guarantee under ERISA § 4022A (b)—benefits in effect less than 5 years. ERISA § 4281(c)(2)(B); 29 C.F.R. §4041A.24(b)(1)

– Notice of Benefit Reductions provided to Participants, Beneficiaries, and PBGC. 29 C.F.R. §§ 4041A.24(c) and 4281.32

13

Part 3: Insolvent Plans

• If sponsor determines plan insolvent, sponsor must suspend benefits as necessary to reduce benefits to the greater of resource benefit level or level of guaranteed benefits. 29 C.F.R. § 4281.41

• Resource benefit level is highest level of monthly benefits payable from plan’s available resources. ERISA § 4245(b)(2)

• If resource benefit level is below level of basic benefits (guaranteed amount), sponsor must suspend payments to the level of basic benefits. ERISA §§ 4281(d)(1) and 4245(c)(3)

14

Part 3: Termination to Insolvency

15

Progression of Benefit Reductions as plan approaches Insolvency:

*For ongoing plans, if resource benefit level is less than level of basic benefits, suspend payments to basic benefit amount

Part 3: Insolvent Plans

• Notice of Insolvency– Sponsor must provide Notice of Insolvency and Annual Updates to

Participants, Beneficiaries, and PBGC. 29 C.F.R. §§ 4041A.25(d) and 4281.43– Starting no later than 30 days after plan sponsor determines insolvency and

updated annually

• Notice of Insolvency Benefit Level– Sponsor must provide Notice of Insolvency Benefit Level to Participants,

Beneficiaries, and PBGC. 29 C.F.R. §§ 4041A.25(d) and 4281.45– Annually starting no later than 60 days before the beginning of PY that plan

insolvent or 60 days after plan sponsor determines insolvency under 29 C.F.R. § 4041A.25(b)

16

Part 3: Insolvent Plans

• Summary:

– Participants and beneficiaries may be subject to benefit reductions or suspensions when:• The plan terminates• The plan sponsor determines assets are insufficient to pay all

nonforfeitable benefits• The plan is unable to pay more than the PBGC guaranteed benefit amount

17

Part 3: Insolvent PlansPBGC Guarantee

• Only benefits that are nonforfeitable on date of plan termination are guaranteed:

• Normal retirement benefits not guaranteed if participant had not met vesting requirements as of termination date

• Early retirement subsidies not guaranteed if participant had not satisfied age and service requirements (except for waiting periods) as of termination date

• QPSAs not guaranteed if participant dies after plan termination date

18

Part 3: PBGC Guarantee Calculation

• Example of calculation of PBGC guarantee under ERISA § 4022A(c) : Participant has 25 years of service and a plan benefit of $1,500/month at NRA (age 65)

Step 1: Determine accrual rate under the terms of the plan ($1,500 ÷ 25= $60.00)

Step 2: Apply PBGC guarantee. For each year of service PBGC guarantees 100% of the first $11

of the accrual rate, plus 75% of the next $33

($11 x 100%)+($33 x 75%) = $35.75Step 3: Determine the guaranteed monthly benefit

($35.75 x 25 = $893.75/month)

19

Part 4: Programmatic UpdatePartition under ERISA § 4233

• ERISA § 4233(a) – The PBGC may order a partition• ERISA § 4233(b) – Plan sponsor may apply for an order of

partition• ERISA § 4233(b) – The PBGC cannot order the partition except

upon notice to the plan sponsor and participants and beneficiaries whose vested benefits will be affected by the partition

20

Part 4: Partition

• ERISA § 4233(b) – The PBGC must also make a finding that the following tests have been met

(1) – a substantial reduction in the amount of aggregate contributions under the plan has resulted or will result

from employer bankruptcies

(2) – the plan is likely to become insolvent

21

Part 4: Partition

(3) – contributions will have to be increased significantly in reorganization to meet minimum contribution requirements and prevent insolvency

-- generally, under ERISA § 4241 a plan is in reorganization if annual

payments to fund unfunded retiree liability over 10 years, and the remaining unfunded liabilities over 25 years, is greater than what is required under the IRC funding rules. IRC § 418.

22

Part 4: Partition

(4) – partition will significantly reduce the likelihood of plan insolvency

ERISA § 4233(d) – Order of partition can transfer no more than the nonforfeitable benefits directly attributable to service with a bankrupt employer and an equitable share of plan assets

23

Part 4: Partition

• ERISA § 4233(e)(1) – The plan created by the partition is a successor plan to which ERISA § 4022A applies

• ERISA § 4233(e)(2) – The plan created by the partition is a terminated plan

24

Part 4: Bakery Drivers Partition

• PBGC used partition authority for only the third time ever• Bakery Drivers applied for partition because the plan was

down to one contributing employer• Hostess’ bankruptcy and liquidation met the substantial

reduction in aggregate contribution requirement• Hostess did not pay any withdrawal liability• Taken together, the loss of contributions and non-payments of

withdrawal liability accelerated funding concerns• No means of replacing the lost contribution income

25

Part 4: Bakery Drivers Partition

• Following the Hostess bankruptcy, the plan certified it was in critical status

• The plan was projected to be insolvent in the near term• To avoid insolvency, contributions would have to increase

greatly• No chance of other employers joining the plan

26

Part 4: Bakery Drivers Partition

• Partition alone reduced the likelihood of insolvency, but the statute required a significant reduction in the likelihood of insolvency of the remaining plan

• A merger was a possible way to help the participants and better meet this requirement

• A merger meant more contributing employers, economies of scale, and partially reduced administrative costs

• The merger partner is a green zone plan in the same general vicinity and is also a Teamsters-related plan: Milk Drivers Local 246 plan

27

Part 4: Bakery Drivers Partition

• Hostess participants are in the terminated, insolvent plan• The Hostess participants’ benefits will be adjusted to the

PBGC guarantee level – 342 participants• The average Hostess retiree could see a benefit adjustment to

$520 a month from $650 (average reduction is 17%)• Some participants may see more significant reductions and

some will see no reduction• The other participants (404 participants) will continue to

receive plan-level benefits, instead of seeing adjustments when the entire plan became insolvent

28

• In response to Executive Order 13563 on Improving Regulation and Regulatory Review, PBGC recently issued the multiemployer notice and valuation requirements final rules - 79 FR 30459 (5/28/2014)

• Specifically pertaining to Multiemployer Program:– Annual valuation requirement for terminated, but not insolvent multiemployer

plans ($25 million or less in nonforfeitable benefits – 3 years from the last valuation) (Section 4041A.24)

– Notices of insolvency (elimination of annual update requirement) (Section 4281)

– Filing requirements for mergers of multiemployer plans (45 days notice for mergers without compliance determinations) (Section 4231.8)

29

Part 5: Reducing Regulatory Burden

30

PBGC Multiemployer Program

Thank you