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Compliance December 10, 2014
Bill Would Extend PPA Provisions for Multiemployer Plans
The U.S. House of Representatives has approved a bill that would extend funding and benefit rules for multiemployer plans.
Reported by PLANSPONSOR staff
A bill that is aimed at extending tax relief that is set to expire includes provisions of the Pension Protection Act of 2006 related to funding methods and special benefit provisions for multiemployer plans.
H.R. 5771, known as the Tax Increase Prevention Act of 2014, would extend through 2015 the ability of multiemployer pension plans to take an additional five years to amortize funding shortfalls. The proposal was enacted in the Pension Protection Act of 2006 (PPA), but expires at the end of 2014 unless extension action is taken.
A summary of the bill says multiemployer plans generally have 15 years to amortize shortfalls and can seek Department of Treasury approval for an additional 10 years. A plan receiving such Treasury approval may not combine the two extensions.
The bill would also extend through 2015 the special rules for three categories of severely underfunded multiemployer plans, as well as the ability of multiemployer plans to generally start or stop using the shortfall funding method without obtaining approval from the Treasury.
The PPA defines endangered (yellow zone) plans as either less than 80% funded or projected not to meet minimum required contributions within seven years. A plan is seriously endangered (orange zone) if both are the case. In general, critical (red zone) plans generally must be either less than 65% funded or projected to be unable to meet minimum required contributions or pay promised benefits within four to 10 years.
Under the PPA, yellow and orange zone plans must adopt a funding improvement plan under which the plan is projected to reduce underfunding by one-third or one-fifth over 10 or 15 years, respectively. Red zone plans must adopt a rehabilitation plan under which the plan is projected to emerge from critical status in 10 years, or if not possible using all reasonable measures, use all reasonable measures to postpone insolvency.
Yellow zone and orange zone plans are generally prohibited from increasing benefits or reducing contributions. Red zone plans are permitted to cut certain ancillary vested benefits. In addition, red zone plans are effectively exempt from the minimum required contribution rules.
Plans using the shortfall funding method amortize shortfalls on a different basis than a number of years, such as units of production, which could result in a longer amortization period than is otherwise applicable. Before the PPA, plans were generally required to obtain Department of Treasury approval to start or stop using the shortfall funding method.
H.R. 5771 is now being reviewed in the U.S. Senate.