By Israel Goldowitz
In March 2021, Congress enacted the American Rescue Plan Act (ARPA), which authorized the Pension Benefit Guaranty Corporation (PBGC) to provide taxpayer-funded special financial assistance (SFA) to multiemployer plans to allow them to continue paying benefits at plan levels. Until then, if a plan became insolvent, PBGC would provide only traditional financial assistance, which is limited to $35.75 per month per year of service or slightly less than $13,000 per year for a 30-year career.
On October 26, 2023, the U.S. District Court for the Eastern District of New York upheld PBGC’s denial of $132 million in SFA to a terminated multiemployer plan, the Bakery Drivers Local 550 Plan (Local 550 Plan or Plan).
The dispute was foreshadowed by PBGC’s July 2021 interim final SFA rule, which would deny SFA to multiemployer plans that terminated before 2020. In the rule’s preamble, PBGC explained that ARPA authorizes SFA for four categories of plans, including those in critical and declining status for the 2020, 2021, or 2022 plan year. That category would exclude plans that terminated before 2020, as the zone status rules do not apply to terminated plans.
In a comment on the interim final rule, the Local 550 Plan argued against that interpretation, based on PBGC’s approval of an “innovative transaction” in 2016. The Plan explained that Hostess Bakery, which had accounted for about 60% of the Plan’s active workers, withdrew in 2011 and filed for bankruptcy in 2012, with its withdrawal liability going unpaid. That left Bimbo Bakery USA (BBU) responsible for most of the Plan’s unfunded benefit obligations.
In 2016, BBU, smaller employers, and the union set up a new Teamsters Bakery Drivers Plan for active participants. That was followed by the transfer of active participants’ liabilities to the Teamsters Plan and a $19 million employer contribution to the Teamsters Plan, as well as a mass withdrawal from the Local 550 Plan and $7 million in withdrawal liability payments to that Plan in the following year.
The Fund’s comment concluded that, as a result of the transaction, active and inactive participants and the PBGC were better off because actives’ benefits were not subject to near-term insolvency and insolvency for retirees’ benefits was forestalled by two years.
PBGC rejected the comment, reiterating in the preamble to its July 2022 final rule that ARPA “provides a list of four types of plans that are eligible to apply for SFA, and PBGC cannot extend eligibility for SFA through its regulation to a plan that is not included in that list.”
In August 2022, BBU and the union amended the collective bargaining agreement to provide for a bargaining unit to resume participating in the Local 550 Plan. According to the district court record, the unit consisted of 18 employees, for whom BBU would contribute $100 per week per employee, or a total of $90,000 per 50-week year. The Local 550 Plan then applied for SFA, asserting that it was eligible as a critical and declining status plan since it was no longer terminated, assuming a plan that terminated before 2020 is ineligible. Holding that a multiemployer plan cannot be restored to its pre-termination status, PBGC denied the application in January 2023.
The trustees sued, and the parties filed cross-motions for summary judgment. The court agreed with PBGC that a terminated plan that remains terminated does not have a zone status and therefore cannot qualify for SFA as a critical and declining status plan. On whether a multiemployer plan could be restored, the court applied the Chevron doctrine on deferral to agency interpretations.
At Chevron “Step Zero,” the court concluded that Congress gave PBGC rulemaking authority specific to SFA and general interpretive authority over ERISA Title IV. The court then rejected PBGC’s argument that Congress had “directly spoken” to the question (Chevron Step One). The court reasoned that ERISA governs termination of single- and multiemployer plans and PBGC restoration of single-employer plans, but it does not address whether the bargaining parties can restore a terminated multiemployer plan. And that silence does not necessarily preclude such a restoration.
ERISA is therefore “silent or ambiguous,” and the court proceeded to Chevron Step Two, whether PBGCs interpretation was “permissible.” The court held that it was, as PBGC could reasonably infer from ERISA’s text that only terminated single-employer plans can be restored. The court also noted that, before SFA existed, there would be no reason for the parties to seek restoration of a multiemployer plan.
PBGC’s decision, though seemingly harsh, is not the first to curb perceived abuse of the multiemployer pension insurance system. For instance, in Opinion Letter 2001-2, PBGC opined that a multiemployer plan cannot become a single-employer plan when all but one employer withdraws. PBGC distinguished between the single- and multiemployer plan insurance systems, such as the higher premiums (then $19 per participant plus $9 per $1,000 of underfunding compared to $2.60 per participant); the higher guaranty limit for single-employer plans (then about $39,000 per year compared to about $6,000); and the relative ease of meeting the distress termination requirement for single-employer plans (the employer’s inability to meet minimum funding) compared to the insurable event for multiemployer plans (plan insolvency, defined as inability to pay benefits due in the approaching plan year). Thus, a multiemployer plan cannot devolve to a single-employer plan, eligible for the higher guaranty on a showing of financial distress of the remaining employer, but can qualify for traditional financial assistance if the plan itself is insolvent.
In addition, PBGC asserted that it may terminate a multiemployer plan involuntarily to prevent the agency’s potential long-run loss from increasing unreasonably, which the court in the Local 550 Plan case accepted. PBGC has apparently acted on that basis in at least one case. See Is PBGC Adding “Early Warning” and “Follow-On” to its Toolbox for Multiemployer Plans? (wagnerlawgroup.com/blog)
Finally, PBGC has used its restoration authority in the single-employer context. In the Renco case, PBGC sued the former parent of a failed steelmaker for evading or avoiding termination liability when it sold the company to a private equity fund. As part of a settlement, Renco accepted a restoration of the plan, providing retirees with full plan benefits rather than benefits limited by the PBGC guaranty. See PBGC to Restore RG Steel Pension Plans to Renco Group | Pension Benefit Guaranty Corporation.
The Local 550 Plan may appeal the district court’s decision. Regardless of the outcome, the decision illustrates PBGC’s vigilance in cases of arguable abuse of the pension insurance system. It also illustrates the role of Congress, the PBGC, and the courts on novel questions concerning defined benefit pension plans. Wagner’s lawyers can help navigate these issues, given their decades of experience with PBGC and defined benefit plans and with the interplay between legislation, rulemaking, and litigation affecting those plans.