Compliance July 9, 2021

Regulators Issue Guidance on Multiemployer Plan Assistance

PBGC has issued an interim final rule addressing assistance requirements, and the IRS has released a notice for plan sponsors that are required to reinstate certain previously suspended benefits as a condition of receiving assistance.

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The American Rescue Plan Act (ARPA), signed into law earlier this year, allows multiemployer plans that are in critical and declining status to get a lump sum of money to make benefit payments for the next 30 years, or through 2051.

Plans can use the money to make benefit payments and pay plan expenses. They must track the money they receive and earnings on that money separately from other funds. Unlike the previously introduced Butch Lewis Act, the payment a multiemployer plan would be able to receive under the legislation is not a loan, so there is no obligation to repay it.

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The Pension Benefit Guaranty Corporation (PBGC) has issued an interim final rule that lays out the requirements for special financial assistance (SFA) applications and related restrictions and conditions. In the regulation, the agency sets forth what information a plan is required to file to demonstrate eligibility for SFA and the amount of SFA to be paid by PBGC to the plan. It identifies which plans will be given priority to file applications before March 11, 2023, and provides for a processing system, which will accommodate the filing and review of many applications in a limited amount of time. It also establishes permissible investments for SFA funds and restrictions and conditions on plans that receive SFA.

There is a 30-day period from July 12—the date the interim final rule will be published in the Federal Register—for stakeholders to submit comments.

During a media call, PBGC Director Gordon Hartogensis said the legislation and related regulations also address the solvency of the agency’s multiemployer program which was projected to become insolvent in 2026. He said the agency expects more than 200 plans will likely be eligible for SFA, impacting over 3 million participants. An estimated $94 billion in assistance will be provided to those eligible plans.

Ted Goldman, director of policy research and analysis at PBGC, noted that SFA payments are funded by Treasury general revenue transfers to PBGC, not by PBGC premiums. He also said applications for SFA will be allowed through December 31, 2025.

The interim final rule says, “When a plan sponsor applies for SFA claiming the plan’s eligibility based on a certification of either critical status or critical and declining status completed before January 1, 2021, PBGC is required to accept the assumptions incorporated into that certification unless the assumptions are clearly erroneous. When a plan sponsor applies for SFA and claims the plan is eligible based on a certification of plan status for a plan year that was not completed before January 1, 2021, the sponsor must determine whether the plan is in critical status or critical and declining status using the assumptions that were used in the plan’s most recently completed certification before January 1, 2021, unless those assumptions (excluding the plan’s interest rate) are unreasonable.” Evidence and support for any changes in assumptions must be submitted.

The interim final rule goes on to discuss what should be included in the calculation of the amount of assistance needed to cover benefits through 2051 and the interest rate assumptions to be used. For each plan, the SFA payment will be the amount by which the value of all plan obligations exceeds the value of all plan resources. The SFA also includes the amount needed to make up payments for participants whose benefits had been reduced under the Multiemployer Pension Reform Act of 2014 (MPRA).

ARPA requires that SFA funds be invested in investment-grade bonds or other investments permitted by PBGC. The agency said it understands that SFA funds should be invested in relatively safe vehicles that will help ensure that short-term needs to pay benefits and plan expenses can be met. It adds that the allowance for “other investments permitted by the corporation” could provide some flexibility (as well as limited exposure to other assets), but, the agency says, in this interim final rule, it is reluctant to allow for investment vehicles with fundamentally different characteristics than investment-grade bonds without further input from the public. SFA assets may be held in individual fixed income securities or commingled funds such as exchange-traded fund (ETFs), mutual funds or pooled funds.

An annual filing of compliance with all conditions will be required, and PBGC may conduct occasional audits to ensure compliance.

The IRS also issued guidance in Notice 2021-38 for sponsors of multiemployer plans that are required to reinstate certain previously suspended benefits as a condition of receiving SFA from PBGC. The notice specifically addresses three important areas regarding:

  • The reinstatement of previously suspended pension benefits, along with makeup payments, as a condition that eligible multiemployer plans must meet if they receive SFA;
  • The individual income tax treatment of these makeup payments; and
  • How a plan that receives SFA must treat the SFA account for purposes of the minimum funding requirements for multiemployer defined benefit (DB) plans.
More information about PBGC’s interim final rule, as well as a schedule of application dates for different priority groups of plans, can be found here.
Compliance July 9, 2021

Land O’Lakes Lawsuit Stayed for Mediation

The judge in the fiduciary breach lawsuit has approved a joint motion to stay the proceedings while the parties engaged in mediation towards a potential settlement.

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The U.S. District Court for the District of Minnesota has stayed the Employee Retirement Income Security Act (ERISA) lawsuit filed in May 2020 against the Land O’Lakes dairy company.

The judge’s order comes after the filing of a joint motion to stay the proceedings while the parties enter a mediation process. The underlying lawsuit, one of many filed in recent years by the law firm Capozzi Adler, alleges fiduciaries of the Land O’Lakes Employee Savings & Supplemental Retirement Plan have failed to objectively and adequately review the plan’s investment portfolio with due care to ensure that each investment option was prudent in terms of cost.

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The suit also alleges the defendants impermissibly maintained certain funds in the plan despite the availability of identical or similar investment options with lower costs and/or better performance histories. Additionally, the complaint includes allegations of disloyal actions taken by plan fiduciaries in the negotiation of service provider relationships.

Back in February, a ruling published by the same district court granted some elements of the defense’s motion to dismiss, while rejecting others. That ruling came in response to the Land O’Lakes defendants’ motion to dismiss the suit based on a lack of subject matter jurisdiction and failure to state a plausible claim.

Before analyzing and ruling on the issues at hand, the preliminary ruling stepped through the various arguments included in the complaint, noting how much of the suit is spent comparing the plan’s investment options with others it allegedly could have and should have used, and in comparing the administrative fees paid by the plan to those allegedly paid by peer plans.

“Plaintiffs challenge 18 of the plan’s 25 investment options, even though they only enrolled in three of those options,” the February ruling states. “Defendants argue that plaintiffs lack standing to challenge investment options in which they were not enrolled because they do not have a particularized and concrete injury relating to those options. Plaintiffs respond that they need not personally invest in each fund to have standing because they suffered overall injury from defendants’ fiduciary breaches and are entitled to bring a class action suit in a representative capacity. The court finds that plaintiffs have standing to challenge the entire plan.”

This determination followed in the footsteps of many prior rulings across the U.S., in which district court judges have embraced the concept that, once a plaintiff properly pleads an injury under their plan, that individual can pursue remedies on behalf of the whole plan and other participants, even though such allegations go beyond the individual’s injury. After this point of success for the plaintiffs, the ruling went on to side in one important way with the Land O’Lakes defendants.

“Plaintiffs compare the expense ratios of the plan’s funds to the median expense ratios in comparable funds in similarly sized plans,” the February ruling states. “This comparison demonstrates that all of the plan’s investment options were above ‘comparable’ median expense ratios of similarly sized plans. Defendants respond that the median expense ratios from the study are not meaningful benchmarks because the study does not distinguish between actively and passively managed accounts. The court agrees with defendants and finds that the study’s median expense ratios are not meaningful benchmarks.”

Though the outcome of the Land O’Lakes mediation process remains to be seen, context for what may come next can be found in the recent settlement agreement inked by Navy defense contractor Serco Inc. in a substantially similar piece of litigation. In that matter, which involved a somewhat smaller retirement plan but related allegations, the parties reached a $1.2 million settlement agreement after nearly a year of discovery, motions and mediation. In addition to the monetary settlement, the agreement includes an injunction on the plaintiffs from filing additional lawsuits on the same grounds as the original case, and the defense denies all allegations and liability for the allegations and claims.

The text of the new Land O’Lakes stay order is available here.

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