By Israel Goldowitz
Corporate sponsors of defined benefit pension plans may be familiar with the Pension Benefit Guaranty Corporation’s (PBGC) Early Warning program and its Follow-on policy. Under Early Warning, PBGC intervenes when a corporate spinoff or other transaction puts pensions at risk. PBGC seeks to mitigate that risk by obtaining advance funding, security, contractual guarantees, or other financial protections for the plan. Under the Follow-on policy, PBGC guards against plans that replace benefits under terminated plans. A Follow-on plan can enable employers and unions to maintain benefits while shifting much of the cost to PBGC.
PBGC may now be using these tools in the multiemployer arena. As we suggested earlier this year, PBGC takes exception to newly formed multiemployer plans that jeopardize legacy plans when bargaining parties divert too many contribution dollars to them. In its 2021 Annual Report, the agency says that it is investigating seven of these cases, which it calls “Split Plan arrangements that Isolate Legacy Liabilities,” or “SPILLs.”
In the Annual Report, the agency explains its concerns as follows:
A SPILL occurs when a multiemployer plan is frozen, and a new multiemployer plan is created for future benefit accruals. Contributions are split between the legacy plan and the new plan, increasing the risk of underfunding the legacy plan.
PBGC recounts its intervention in the FELRA/UFCW case, involving a Washington-DC area multiemployer plan covering grocery and warehouse workers. In 2013, the bargaining parties established a new plan, ultimately contributing more than $100 million that might have gone to reduce the legacy plan’s underfunding. That threatened to accelerate the legacy plan’s insolvency and that of the PBGC multiemployer plan insurance program.
At the end of 2020, PBGC entered into a settlement with the employer association, the union, and the plan. The settlement required the two plans to merge and the combined plan to terminate by mass withdrawal, resulting in withdrawal liability assessments against all employers. The two largest employers agreed to make withdrawal liability payments totaling $56 million per year for 25 years, in exchange for a release from further withdrawal liability.
Though not mentioned in the Annual Report or in the New Year’s Day announcement of the FELRA settlement, PBGC’s actions seem to implicate both its Early Warning policy and its Follow-on policy.
Early Warning’s legal basis is ERISA Section 4042(a)(4), which permits the agency to initiate plan termination proceedings whenever it determines that “the possible long-run loss of the corporation with respect to the plan may reasonably be expected to increase unreasonably if the plan is not terminated.” Absent a settlement, PBGC might proceed with a termination, crystalizing the controlled group’s liability for the plan’s unfunded benefit liabilities before the transaction closes. PBGC has used this tool to protect pensions in such cases as Daimler’s sale of Chrysler, TEGNA’s spinoff of Gannett, and Sears’ sales of the Craftsman brand.
The program has historically been limited to single-employer plans. This may be because PBGC’s involuntary termination powers have been thought to apply only to single-employer plans, as the Multiemployer Pension Plan Amendments Act of 1980 mainly puts enforcement in the hands of the multiemployer plan itself. But Section 4042(a), on its face, is not limited to single-employer plans: “The corporation may institute proceedings under this section to terminate a plan [emphasis added]…” And the remainder of Section 4042 makes several explicit references to multiemployer plans, suggesting that Congress knew how to distinguish between single- and multiemployer plans. Section 4042(a) may have given PBGC legal leverage in the FELRA case where moral suasion failed.
The Follow-on policy, while largely nonstatutory, has also been thought to apply only to single-employer plans. In the best-known example, PBGC restored LTV’s terminated pension plans to LTV sponsorship after the company established new plans designed to wrap around the PBGC benefit guarantee at a fraction of the cost of funding all promised benefits. In 1990, the Supreme Court upheld the PBGC’s action, based on ERISA Section 4047, which allows the agency “to restore [a terminated] plan to its pretermination status.”
As the Supreme Court said, the Follow-on policy is based on “the agency’s belief that such plans are ‘abusive’ of the insurance program and result in the PBGC’s subsidizing an employer’s ongoing pension program in a way not contemplated by Title IV [of ERISA].” That concern seems applicable to SPILLs, which involve follow-on plans, though the legacy plan is merely frozen, not terminated.
PBGC has authority to police against such abuse under the special financial assistance provisions of the American Rescue Plan Act of 2021. As we noted in our July 30, 2021 Alert, ARPA allows PBGC to set conditions on assistance, including restrictions on “diversion of contributions to, and allocation of expenses to, other benefit plans….” ARPA might be considered to occupy the field. But the Annual Report does not link the open SPILL investigations to special financial assistance applications.
In short, PBGC’s Early Warning and Follow-on policies may now apply to multiemployer plans. This should be a sobering thought for bargaining parties. At the same time, PBGC has always been open to negotiation, and it settles many more cases than it takes to court.
The Wagner Law Group is experienced in working with PBGC and in representing multiemployer plans and parties involved with multiemployer plans. Please contact Israel Goldowitz or your regular Wagner attorney if you need assistance with PBGC or multiemployer plan issues.