412(e) Experience Loss Relief

[Guest HarveyC]

Mulitemployer plans seeking net experience loss relief under 412(e) are subject to restrictions on benefit increases during the deferral period. Let's say a plan that seeks relief under 412(e) spins off certain participants who are then merged into another plan. Are these participants still subject to restictions on benefit increases under this new plan?

[SoCalActuary]

A couple of quick thoughts:

1. Is this a scheme to get around the rules?

2. Is the spin-off done with adequate funding to assure that withdrawal liability was satisfied under MEPPAA? The ability to spin-off carries the responsibility of the trustees to assure benefits were protected.

[Guest HarveyC]

Some background. The original plan is in bad shape and will be broken up and merged into other plans, so it will cease to exist. Prior to the breakup, it will seek relief under 412(e) to avoid or reduce any funding deficiency. We have a plan that will be taking in part of this plan and do not want the new participants to be restricted in terms of potential benefit improvments down the road.

I don't believe this is a scheme to get around the rules. A pre-condition (of the PBGC) of the spinoff/mergers is that benefits are protected.

[SoCalActuary]

Can you address the issue of withdrawal liability for the spun-off group?

Is the spinoff employer responsible for making their portion of the plan whole by putting in a big contribution? Does this presumed contribution relieve the plan of its funding deficit?

The issue is that you do not spin off a plan unless each participant is at least as protected as they were before the change.

It seems to me that unless the employers are willing to up the contribution rate, the underfunded plan will never be able to increase benefits.

[Guest HarveyC]

I'm not sure how withdrawal liability factors into any of this. I believe that all that is required by the PBGC in terms of protection of benefits is assurance via the plan doc of the receiving plan that such benefits will be protected.

The basic fact is that the plan is dire straits and the participants' benefits and interests can be best protected by breaking up the plan and merging the pieces into other plans that are in better shape.

My concern is that whether there is anything in the law that would prohibit granting benefit improvements to these participants that were in a plan that sought relief under 412(e), assuming that such benefit improvements can be afforded as part of this new plan.

[SoCalActuary]

After a group has transferred into a new plan, you transfer their prior accrued benefits.

What assets go with them? Are the asset/liability ratios of the old plan better or worse after the transfer? If worse, then I question whether the plans satisfy 414.

If the old plan drops a higher percent of liability than assets, did it also look to the withdrawal liability rules of MEPPAA, or do you think those are waived? Does the withdrawing group (really their employer) get hit with funding requirements to get out?

Finally, if the successor plan is willing to take on these underfunded benefits, they will eventually have to pay for them. If they are willing to do so, then it seems you should be able to give increases, since they are not participants in the plan that had the 412(e) ruling.

[Guest HarveyC]

The assets to be transferred are in proportion to the group’s PVAB. This is consistent with many other transfers/mergers we have been involved in with respect to multiemployer plans. Multiemployer plans are not subject to 414(l).

I don't think the withdrawal liability rules apply as there is no withdrawal. All employers are contributing to some successor plan after the spinoff/merger of the original plan. If they later withdrawal they are assessed under the successor plan who has taken over the liabilities.

I’m glad you’re supporting my hunch that the participants in the successor plan should not be subject to the benefit increase restrictions of 412(e). I could find nothing in the law to the contrary. Thanks for all your input.

[SoCalActuary]

I am still concerned that there is substantial risk of litigation by the participants who did not find a successor plan. I am also concerned about withdrawal liability when a group of employees leaves the plan.

We have a multiemployer plan that took over the benefits from a prior plan, and the new plan guaranteed the total of the prior benefits plus new accruals. In operation, the employees get their total accrued benefit, of which we get the amount to be paid by the prior plan and the new plan covered the remainder. However, the spinoff employers still got hit with over $1 million in withdrawal liability, since the prior plan was underfunded as well.

I assume you have a good ERISA counsel familiar with SEPPAA before you start spinoff actions.

[Guest HarveyC]

That's interesting to hear. Looks like I have some more home work to do. Thanks again for the info.