Major Changes Ahead for Multiemployer Pension System
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Multiemployer plans are governed and administered by a board of trustees with equal representation from employers and unions. Employers make contributions to the plans based on hours worked by employees. The defined benefit due at retirement is based on years of service.
Multiemployer plans are subject to the provisions of the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Service (IRS), but have operated under rules that differ in some respects from the rules governing single employer plans. The Pension Protection Act of 2006 has strengthened some of these rules and added provisions that will enhance transparency in their financial reporting.
The Act has created two categories of underfunded plans: “endangered” plans, which are between 80 percent and 65 percent funded and “critical” plans, which are less than 65 percent funded. Funding targets that would trigger additional contributions did not exist before the law was passed. Trustees of plans that are in the ‘critical” category must develop a rehabilitation proposal and notice must be provided to plan participants and beneficiaries, any employer who has an obligation to contribute to the plan, and any employee organization representing employees in the plan, the law states, according to RIA Checkpoint.
The rehabilitation plan must include employer contribution increases, RIA Checkpoint says, as well as expense reductions and restrictions on future benefit accruals. The Act also contains the controversial provision, called the “red zone” by some commentators, that permits trustees of plans in ‘critical’ status to modify benefits due to participants. The law states:
“Subject to certain requirements, a multiemployer plan in reorganization status may also be amended to reduce or eliminate accrued benefits in excess of the amount of benefits guaranteed by the PBGC.” (RIA Checkpoint, paragraph 2504)
The Act goes on to say that if contributions to the plan are not increased, accrued benefits will be reduced or an excise tax will be imposed on employers obligated to contribute to the plan (RIA Checkpoint, paragraph 2504).
The United Parcel Service (UPS), whose employees participate in the largest multiemployer plan in the country, may be a beneficiary of the controversial clause, according to the New York Times. UPS will be negotiating with the Teamster’s Union in coming months, according to the New York Times, and “had been eager to increase its control over such troubled plans as the Teamsters' Central States Pension Fund.”
The changes relating to multi-employer plans in the Pension Protection Act are very detailed in the law but other highlights include, according to TaxWatch:
- changing the amortization schedule for any plan benefit amendments from 30 years to 15 years;
- increasing the maximum deductible limit to 140% of current liability, providing additional funding flexibility for plans each year;
- requiring plan trustees to improve the health of the plan by one-third within 10 years if a plan is less than 80% funded or will hit a funding deficiency within seven years. ).
Many unions participated in discussions with lawmakers that led to the drafting of the Pension Protection Act, and unlike the Teamsters, strongly support its provisions. Edward C. Sullivan, president of the Building and Construction Trades Department AFL-CIO, said in a press release, “This bipartisan bill includes desperately needed reforms for multiemployer plans that were carefully negotiated by labor and employer groups – working under the auspices of the Multiemployer Pension Plan Coalition. . . . Their proposals, which were incorporated in the bill, will help preserve the long term viability of multiemployer plans for current and future pensioners.”
Three quarters of the 65,000 employers participating in multiemployer pension plans have fewer than 100 employees, the Building and Construction Trade Department says.
In Toledo, Ohio, employees at Kayo Lumber Co. participate in three different kinds of retirement plans, including a multiemployer plan. Four are enrolled in a Teamster’s union plan, to which the company’s owner, James Eloff contributes. Eleven other workers are enrolled in a 401(k) plan. One worker is covered by Kayo’s defined benefit plan, which is frozen, the Toledo Blade reports.
Unlike single employer defined benefit plans, multiemployer plans will have to submit summary reports, RIA Checkpoint says, in addition to an annual report. Additional information will be required for the filing of 5500’s.
Moody’s Investors Service will be reviewing the debt ratings it assigns to the 62 companies it rates that have multiemployer pension plans, CFO.com says. Moody’s says it will consider a company’s share of an underfunded plan to be a long-term liability.
UPS, which does not consider pension fund contributions as long-term liabilities, objected to the change in Moody’s rating system. UPS says the contributions are labor costs.
Moody’s says it will not downgrade a company without consultation with management. The rating agency has found from their own research that contributions to multiemployer pension plans have been increasing in recent years, CFO.com says. Over the past three years, the 62 companies rated by Moody’s have increased their contributions approximately 10.3 percent.