IRS issues final regs and revised procedures for multiemployer plans in critical and declining status seeking benefit reductions

The IRS has issued final regulations and revised procedures regarding applications for a suspension of benefits for participants and beneficiaries of a multiemployer defined benefit pension plan in critical and declining status under Code Sec. 432(e)(9), which was added by the Multiemployer Pension Reform Act of 2014 (MPRA), Division O of the Consolidated and Further Continuing Appropriations Act (P.L. 113-235). The final regulations are effective April 28, 2016, and applicable to a suspension for which the approval or denial is issued on or after April 26, 2016. In the case of a systematically important plan, the final regulations apply for any modified suspension implemented on or after April 26, 2016.


Under Code Sec. 432(e)(9), a sponsor of a multiemployer pension plan in critical and declining status may apply to the Treasury Department for approval to implement a suspension of benefits, which would result in a reduction of benefits currently being paid to retirees. Plans in critical and declining status are projected to have insufficient funds, at some point in the future, to pay the full benefits that participants and beneficiaries will be entitled to under the plans. Only plans that have already taken all reasonable measures to address their financial problems may consider reducing benefits. MPRA requires the Secretary of the Treasury, in consultation with the Pension Benefit Guaranty Corporation and the Secretary of Labor, to approve or deny applications by these plans to reduce benefits.

Note that some plan participants are protected from such a reduction, including retirees 80 years of age and older (partial protection beginning at age 75), and participants receiving disability benefits.

The regulations

The IRS has finalized two sets of temporary and proposed regulations. The first set of temporary and proposed regulations were issued on June 19, 2015, and provided guidance relating to the standards that would be applied in reviewing an application for suspension of benefits and the statutory limitations on a suspension of benefits. The second set of temporary and proposed regulations were issued on September 2, 2015, providing rules on participant voting under Code Sec. 432(e)(9)(H). The IRS notes that proposed regulations issued on February 11, 2016 regarding a specific limitation on a suspension of benefits under Code Sec. 432(e)(9)(D)(vii) are not included in these final regulations.

After consideration of comments received, the IRS has finalized the June 2015 and September 2015 proposed regulations with certain changes.

Contingent individual-level suspensions. The final regulations retain the general rule that contingent suspensions are not permitted, but allow a suspension that takes into account individual-level contingencies (such as retirement, death, or disability) for individuals who have not commenced benefits before the effective date of the suspension. For example, a suspension of benefits can reduce early retirement subsidies with respect to participants who have not commenced benefits before the effective date of the suspension. Note that the final regulations provide a revised definition of the effective date of suspension for an individual who is not receiving benefits as of the date the suspension is implemented that takes this change into account.

Expenses include communications expenses. The final regulations adopt the provision from the 2015 regulations that requires the plan to pay reasonable expenses incurred by the retiree representative, commensurate with the plan’s size and funded status. Numerous commenters noted the importance of communication between the retiree representative and the retired and deferred vested participants and beneficiaries. In response, the final regulations are modified to include any reasonable expenses incurred in communicating with the retired and deferred vested participants and beneficiaries of the plan about the proposed suspension (because communication with these individuals is generally necessary to advocate for their interests).

Determination of projected insolvency standard. A plan sponsor of a plan in critical and declining status that wants to suspend benefits must meet determination (initial and annual) requirements concerning the projection of insolvency under Code Sec. 432(e)(9)(c)(ii). Under the 2015 regulations, a plan sponsor would satisfy the annual plan sponsor determinations requirement for a plan year only if the plan sponsor determines, no later than the last day of that plan year, that: (1) all reasonable measures to avoid insolvency have been and continue to be taken, and (2) the plan is projected to become insolvent unless the suspension of benefits continues (or another suspension of benefits is implemented) for the plan. The final regulations clarify that the standard for this determination (as well as the initial determination) is whether, absent a suspension of benefits, the plan would not be projected to avoid insolvency.

Limitations on suspensions. The final regulations generally adopt the individual and aggregate limitations on a suspension of benefits under Code Sec. 432(e)(9)(D) as provided under the 2015 regulations, with minor clarifications. The regulations provide that after applying the individual limitations, the overall size and distribution of the suspension is subject to the aggregate limitations.

The provisions of the final regulations regarding the individual age-based limitation are generally the same as provisions of the 2015 regulations, except that the final regulations clarify that, with respect to a benefit payable to a beneficiary or alternate payee, the relevant date for determining the age of a participant, beneficiary, or alternate payee, as applicable, is the end of the month that includes the effective date of the suspension, instead of the effective date of the suspension.
As to aggregate limitations on suspensions, the final regulations clarify that the extended period used to demonstrate that the proposed suspension does not materially exceed the level that is reasonably estimated to enable the plan to avoid insolvency must be no shorter than the period used for the demonstration that the proposed suspension is reasonably estimated to avoid insolvency.

Notice of proposed suspensions

The final regulations prescribe rules implementing the statutory notice requirements in Code Sec. 432(e)(9)(F) that are generally the same as the rules in the 2015 regulations. The 2015 regulations contain two examples illustrating the efforts that constitute reasonable efforts to contact individuals for purposes of this notice requirement. In response to comments, these examples have been modified in the final regulations to describe in more detail the steps taken to locate participants whose notices were returned as undeliverable. These steps include contacting administrators of any other employee benefit plans (such as, to the extent such contact is permitted under applicable law, the administrators of a health fund or an apprenticeship training fund) for contact information regarding a missing individual. As in the 2015 regulations, these examples demonstrate that it is not sufficient to merely send notices to the individuals’ last known mailing addresses.

The revenue procedure

The IRS has issued revised procedures for applying for a suspension of benefits in a multiemployer defined benefit plan that is in critical and declining status. The revised procedures set out the specifics of the application process for approval of a proposed benefit suspension, including the information that must be provided in the application. The IRS notes that a plan sponsor may be required to provide additional information after the application is submitted. The revised procedures include a model notice informing participants and beneficiaries that the plan sponsor is proposing a benefit suspension, a power of attorney and declaration of representative before the Treasury Department, and a checklist (which must be included with the application). The model notice may be used by a plan sponsor proposing a benefit suspension to satisfy the statutory notice requirements concerning the content and readability of the notice.

The revised procedures supersede Rev. Proc. 2015-34 (under which applications could be made as of June 19, 2015), and apply to submissions made on or after April 26, 2016. Therefore, plan sponsors should follow the revised procedures when submitting an application for approval of a proposed benefit suspension on or after April 26, 2016. Plan sponsors that submitted an application under the superseded procedure may need to revise the proposed suspension or supplement the application to take into account the final regulations and the new revenue procedure.

Source: 81 FR 25539, April 28, 2016.

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