The Internal Revenue Service (IRS) expanded the temporary relief for frozen defined benefit plans to include nondiscrimination requirements relating to benefits, rights and features, available for plan years beginning before 2021. The expanded relief enables frozen pension plans to satisfy the nondiscrimination requirements that apply to benefits, rights or features.
Todd Solomon and Brian Tiemann presented on alternative investments for pension plans during the Association for Financial Professionals (AFP) Conference in Chicago. They discussed various rules benefit plan investors should consider, including the “look-through” rule and the “significant” investment rule. They also addressed common hedge fund structural and operational issues, and problems if a fund holds ERISA plan assets.
The Internal Revenue Service (IRS) recently extended the temporary nondiscrimination relief for closed defined benefit plans. This extended relief is intended to enable closed pension plans (defined as pension plans that have been closed to new participants but continue to provide ongoing benefit accruals for certain participants) to more easily satisfy certain nondiscrimination testing requirements. In most cases where the relief applies, the closed defined benefit plan is aggregated with a defined contribution plan to satisfy the nondiscrimination testing requirements, and the relief assists the aggregated plan in passing nondiscrimination requirements that apply to accrued benefits and to certain rights and features relating to those benefits.
The original nondiscrimination testing relief for closed pension plans was provided several years ago in an earlier IRS Notice. This relief was already extended on two prior occasions, and the recent IRS Notice further extends the relief until the end of plan years that begin before 2019, as long as the conditions of the original IRS Notice continue to be satisfied. In 2018, the IRS also intends to issue final regulations under Section 401(a)(4) of the tax code that address the nondiscrimination requirements for closed pension plans. Until then, the IRS indicated that plan sponsors can still rely on the proposed 2016 IRS regulations under Section 401(a)(4) for plan years that begin before 2019.
Structuring Private Equity Deals in 2017: Considerations for Buyers While They Wait for the Sun Capital Appeals to Play Out
Sun Capital Partners III, LP v. New England Teamsters and Trucking Industry Pension Fund has been analyzed extensively over the past four years, as it has made its way from the US District Court for the District of Massachusetts to the First Circuit Court of Appeals and back again. With the case once again on appeal, we must wait to see how the latest court decision will further influence the structure of private equity deals. In the meantime, private equity funds should use the most recent District Court and First Circuit Sun Capital decisions as a road map for structuring deals where the target portfolio company has defined benefit pension plan or multiemployer pension plan liabilities.
The Department of Treasury and Internal Revenue Service issued final regulations addressing the minimum present value requirements for pension benefits payable partly as an annuity and partly in an accelerated form, usually a lump sum. With these regulations, Treasury and IRS take another step in promoting lifetime income alternatives for retirement plan participants with simplified calculations for partial annuity payments.
DOL Official Says Office Is Investigating Large Defined Benefit Plans Regarding Locating and Paying Terminated Vested Participants
Recent comments from an official with the Department of Labor (DOL) indicate that the DOL’s Employee Benefits Security Administration (EBSA) has begun investigating large defined benefit plans to review how plan administrators are keeping track of benefits owed to terminated vested participants and if they are really paying participants like they should be. According to the February 2, 2015 BNA Pension & Benefits Reporter, Elizabeth Hopkins, counsel for appellate and special litigation for the DOL’s Office of the Solicitor, Plan Benefits Security Division, stated at a pension conference that EBSA is interested in monitoring whether plan administrators are following their own procedures to locate and pay out terminated vested participants. In particular, EBSA is investigating how plan administrators locate and pay out terminated vested participants over the age of 70 ½ who are owed required minimum distributions.
Defined benefit pension plans must provide that they will distribute benefits beginning no later than the required beginning date, which for most plan participants means April 1 of the calendar year following the later of (i) the calendar year in which a participant turns 70 ½ or (2) the calendar year in which the participant retires. As we noted in our recent article on the “Top IRS and DOL Audit Issues for Retirement Plans,” plan sponsors have a fiduciary duty to try to locate missing participants, to contact terminated vested participants, and to begin distributing benefits within required timeframes. Failure to pay required minimum distributions after a participant turns 70 ½ is a plan qualification error, and participants who miss required distributions may be subject to a 50 percent excise tax. The DOL has also indicated that it may impose personal liability on plan fiduciaries for any tax consequences owed to their employees. For all of these reasons, it is crucial that plan sponsors ensure that proper procedures are in place, and that plan procedures are being followed, to locate and contact terminated vested participants.
President Barack Obama signed into law the Bipartisan Budget Act of 2015 (the Budget Act), which raised Pension Benefit Guaranty Corporation (PBGC) premium rates beginning in 2017.
Single-employer defined benefit pension plans must pay annual premiums to the Pension Benefit Guaranty Corporation (PBGC), the U.S. government agency that insures these plans. All single-employer defined benefit pension plans pay an annual fixed premium. Those plans with unfunded vested benefits at year-end must pay an additional variable rate premium. The due date for payment of these premiums has generally been the fifteenth day of the tenth full calendar month of the premium payment year.
In 2016, the fixed premium is set at $64 per participant. The variable rate premium is based on the amount of potential liability that the plan creates for the PBGC. Calculated on a per-participant basis, the variable rate premium is a specified dollar amount for each $1000 of unfunded vested benefits under the plan as of the end of the preceding year, subject to a $500 per-participant cap. For 2016, it will equal $30 per $1000 of underfunding, subject to the cap. Both premiums are indexed for inflation.
Changes to PBGC Rates
The Budget Act makes the following changes:
- Single-employer fixed premiums will be raised to $69 per participant for plan years beginning in 2017, $74 per participant for plan years beginning in 2018 and $80 per participant for plan years beginning in 2019. In 2020, the fixed premium will be re-indexed for inflation.
- Single-employer variable rate premiums, which will continue to be adjusted for inflation, will increase by an additional $3 for plan years beginning in 2017 (from $30 to $33 per $1000 of underfunding, subject to indexing); by an additional $4 for plan years beginning in 2018 (from $33 to $37 per $1000 of underfunding, subject to indexing); and by an additional $4 for plan years beginning in 2019 (from $37 to $41 per $1000 of underfunding, subject to indexing). There are no scheduled increases (other than indexing) for years after 2019.
- To include the 2025 premium revenue within the 10-year budget window, the premium due date for plan years beginning in 2025 will be the fifteenth day of the ninth calendar month beginning on or after the first day of the premium payment year.
For more information regarding the PBGC premium increases described above or the other employee benefits provisions included in the Budget Act, please contact your regular McDermott lawyer or one of the authors.
Effective January 1, 2016, the Pension Benefit Guaranty Corporation (PBGC) altered the reportable event rules for defined benefit pension plans. Although new PBGC regulations make electronic filing of all reportable event notices mandatory, the regulations also substantially reduce the reporting requirements for pension plan administrators, sponsors and contributing employers.
Recently, the U.S. Supreme Court issued a number of significant ERISA cases. In its 2013-14 term, the Supreme Court decided two ERISA-based appeals – Fifth Third Bancorp v. Dudenhoeffer and Heimeshoff v. Hartford Life & Acc. Ins. Co. In the current 2014-15 term, the Supreme Court already issued one ERISA decision in M&G Polymers USA, LLC v. Tackett, and will issue another ERISA decision soon in Tibble v. Edison Int’l. Although these four cases have received much attention within the ERISA community, each year there are hundreds of other decisions issued by federal appellate and district courts that also impact a plan sponsor’s daily administration of welfare and retirement plans. In fact, many of these district court and appellate decisions are interpreting issues raised or addressed in these Supreme Court opinions. This article will address a few of these cases, which may not have received a lot of attention by the press, but could have long-lasting impacts on plan administration and litigation in future years.
On September 16, 2014, the United States Senate unanimously approved Senate Bill 2511, which would amend Section 4062(e) of the Employee Retirement Income Security Act of 1974, as amended (ERISA), to clarify the definition of substantial cessation of operations. ERISA Section 4062(e) enables the Pension Benefit Guaranty Corporation to require that employers financially guarantee pension obligations based on a plan’s underfunded termination liability when an employer that maintains a pension plan shuts down operations at a facility, and as a result, more than 20 percent of the employer’s employees who are plan participants incur a separation from employment.
The bill revises ERISA Section 4062(e) to clarify that a “substantial cessation of operations” occurs when an employer permanently ceases operations at a facility and, as a result, there is a “workforce reduction” of more than 15 percent of all eligible employees at all facilities in the contributing employer’s controlled group. Under the amendment, a “workforce reduction” would mean the number of eligible employees at a facility who are separated from employment by reason of the permanent cessation of operations of the employer at the facility. Certain eligible employees would be excluded from the reduction analysis, including employees who, within a reasonable period of time, are replaced by the employer, at the same or another facility in the United States, by an employee who is a citizen or resident of the United States. In addition, employees would not be not taken into consideration for these purposes following the sale or other disposition of the assets or stock of the employer if the acquiring entity maintains the single-employer plan of the predecessor employer that includes assets and liabilities attributable to the accrued benefit of the employee and either (1) the employee is separated from employment at the facility, but within a reasonable period of time, is replaced by the acquiring entity by an employee who is a citizen or resident of the United States, or (2) the eligible employees continues to be employed at the facility of the acquiring entity.
The Congressional Budget Office estimates that Senate Bill 2511 would reduce the contributions that plan sponsors are required to make to their plans as a result of terminating operations at a facility, leading to increases in employer revenues and decreases in direct spending. The House of Representatives concluded its fall session on September 19, 2014 without acting on the bill. It remains to be seen whether the House will take up the Senate bill when it returns for a “lame-duck” session after the mid-term elections.