The Pension Protection Act of 2006 (PPA) added special funding rules for significantly underfunded multiemployer pension plans. According to a study conducted by the DOL, IRS and PBGC, about 68% of multiemployer pension plans were in critical or endangered status, and thus subject to additional funding rules, in the 2009 plan year (the most recent year for which data were available). Under the PPA, if an actuary certifies that a plan is in “endangered” status, the plan sponsor must adopt a funding improvement plan designed to improve funding over a 10- or 15-year period. If a plan is certified to be in even more dire “critical” status, the plan sponsor must adopt a rehabilitation plan that continues for 10 years. These rules expire for plan years beginning after 2014, except for plans that are operating under a funding improvement or rehabilitation plan for the 2014 plan year. In that case, the plan must continue to operate under its funding improvement or rehabilitation plan after 2014, for however long the funding improvement or rehabilitation plan is in effect. All provisions of ERISA or the Code relating to the operation of that funding improvement or rehabilitation plan continue in effect during that period.

As a result of the sunset provision, multiemployer pension plans must consider the plan’s circumstances in 2014 to determine which funding rules apply. The DOL, IRS and the PBGC have identified a number of technical issues that may make this determination difficult. For example, if a plan enters endangered or critical status for the first time in 2014, is it required to adopt a funding improvement or rehabilitation plan before the rules sunset? What if the plan entered endangered or critical status in 2013, but has yet to adopt collective bargaining agreements pursuant to a funding improvement or rehabilitation plan by the end of 2014—is the plan subject to the pre-sunset rules then?

These questions were raised in a studyconducted by the agencies to review the effect of the PPA changes on the funding status of multiemployer plans. Although the study was intended to assist Congress in determining whether future legislative action is necessary, the agencies make no specific recommendations.

In the absence of clear direction from the agencies or additional legislation, what steps should plans sponsor take now to be ready for 2014?

--Vanessa Walts

Tax Law Editor (Compensation Planning)