Sunset of PPA Rule for Pensions Requires Clarification

If the plan actuary’s projections reveal an emerging funding problem, a plan will be classified as either being in “endangered status” (the yellow zone, identified as plans between 60% and 80% funded) or “critical status” (the red zone, identified as plans less than 60% funded). Those neither “endangered” nor “critical” are said to be in the green zone (identified as plans greater than 80% funded). The PPA not only requires plans to identify their status, but restricts withdrawal provisions for plans less than 80% funded and freezes accruals for plans less than 60% funded (see “Getting Prepared for the PPA – Defined Benefit”).

In addition, plans with yellow or red zone status a funding improvement plan (FIP) or rehabilitation plan (RP).

In a Compliance Alert, consulting firm Segal notes that Congress included as a safeguard a “sunset” provision (with a “continuation clause” to keep the rules in place for plans currently operating under them) that would require it to revisit these rules to determine if they were working as anticipated. Except for plans that are in endangered status (yellow zone) or critical status (red zone) and “operating under” an FIP or RP in the plan year beginning in 2014, those provisions are scheduled to expire (sunset) on the last day of the 2014 plan year (December 31, 2014 for calendar-year plans) unless Congress acts to extend or eliminate the deadline.

The impact on plans that were in the green zone in their 2014 plan year is relatively clear, Segal says. These plans will continue to operate under the funding rules for financially healthy plans put into place by the PPA. They will not revert to the pre-PPA funding rules, nor will the PPA single-employer plan rules apply to them. However, these plans will no longer be required to annually certify their status, to provide notice of that status (if it would have been yellow or red in some future year), or take any other actions related to their status that was required under one of the expired provisions.

Any of these plans that are in deteriorating financial health will no longer have access to the remedial actions offered under the zone rules. Instead, they will be able to address their financial condition only through traditional pre-PPA methods such as future benefit reductions, contribution increases, and possible mergers with stronger plans until they recover or become insolvent. In addition, employers contributing to these plans will have no special rules to relieve them of their minimum funding obligations or any related excise tax on deficiencies.

According to Segal, the impact of the sunset on plans that are subject to the continuation clause is less clear. There are many questions about how plans covered by the continuation clause rule will continue to operate:

• What does it mean for a plan to be “operating under” an FIP or RP for its 2014 plan year?;
• For a plan that is covered by the continuation clause, which of the provisions that would otherwise sunset remain in effect after 2014?;
• For purposes of the continuation clause, what is the period for which an FIP or RP remains in effect after the 2014 plan year?;
• Can a plan move to a different zone after 2014?;
• Can a plan exit the yellow or red zone? When and how?;
• Are updates to the FIP or RP required or optional?;
• Can or must goals/annual standards be changed?;
• Can or must schedules be updated?;
• What happens if a plan fails to meet “scheduled progress” under a zone?;
• What happens if a plan fails to meet FIP benchmarks at end of the funding improvement period?;
• What happens if a plan fails to meet RP benchmarks for three consecutive years?; and
• What happens if an employer fails to contribute in accordance with RP/FIP schedules?

In the Compliance Alert, Segal also addresses misconceptions about the sunset of the PPA provision. The Compliance Alert is here.