Rehabilitation for Multiemployer Pensions — H.R.397

HR 397, Rehabilitation for Multiemployer Pensions Act 

The bill establishes a new agency within the Treasury Department (the Pension Rehabilitation Administration) to provide 30-year loans to multiemployer defined benefit pension plans that are in critical or declining financial condition so that they can meet their pension obligations to current retirees. It also provides for such pension plans to receive financial assistance from the Pension Benefits Guaranty Corporation (PBGC) in conjunction with Treasury loans. Democrats say the bill will save the pensions of more than a million Americans and prevent those retirees from having to rely on taxpayer-funded social safety net programs. Republicans say it constitutes a "bailout" for certain union pension funds and will not make failing pension plans more solvent over time or end pension plan underfunding.

The Ways and Means Committee reported the bill by a 25-17 vote and the Education and Labor Committee reported it by a 26-18 vote (no written report was available as of press time). The Appropriations Committee has not acted on the measure.

Multiemployer Pension Plans

    Multiemployer pension plans are governed by provisions established in 1947 under the Taft-Hartley Act: they are employee pension plans that cover the employees of two or more unrelated companies. Workers covered by these plans usually have the same kind of jobs, such as in the building and construction industries, trucking and transportation, manufacturing, retail and service industries, and entertainment industries. The plans are organized in accordance with collective bargaining agreements, with contributions being made by the employer, usually based on some measure of the employee's work. The contributions are pooled into a common fund and usually invested in order to grow.

     The financial crisis of 2008 and the simultaneous economic recession badly damaged many multiemployer pension plans as their investments were hit hard at the same time that many individuals lost their jobs. Although most of these plans have since recovered, it is estimated that as many as 130 multiemployer pension plans — covering more than 1 million out of 10 million participants — could run out of money in the next 20 years.

    Multiemployer pension plans are guaranteed by the Pension Benefit Guaranty Corporation (PBGC), a federal agency that helps to pay out benefits in the event a "defined benefit" pension plan is unable to meet its obligations. (The PBGC does not cover "defined contribution" plans, such as 401(k) plans.) Unlike for single-employer pension plans that fail and are terminated, for which the PBGC assumes full responsibility and becomes the plan's trustee, the Congressional Research Service (CRS) notes that multiemployer plans do not terminate — so when a multiemployer plan becomes insolvent and is not able to pay promised benefits the PBGC provides financial assistance to the plan in the form of loans, although it does not expect the loans will be repaid. The PBGC in some cases may provide a loan to a distressed multiemployer plan year after year; if the plan recovers from insolvency, it must begin repaying loans on reasonable terms in accordance with regulations.

    CRS in a March 2019 report notes that for FY 2018 the PBGC paid pension benefits to 62,300 participants in 78 multiemployer plans. The PBGC benefit for a participant in multiemployer plans that receives PBGC assistance is based on the number of years of service in the plan, with the current maximum benefit for a participant with 30 years of service eligible to receive up to $12,870 per year.

    CRS noted that at the end of FY 2018 PBGC's multiemployer plan account had a deficit (liabilities in excess of assets) of $53.9 billion. PBGC in its FY 2017 projections report estimated that its multiemployer program will likely run out of money in FY 2025 or FY 2026 because of the expected insolvency of several large multiemployer pension plans. Once resources are exhausted in the multiemployer program, benefits for participants in insolvent plans would have to be reduced to levels that could be sustained solely through PBGC premium collections.

Member Concerns

    Supporters of the bill, primarily Democrats, say it will save the pensions of more than a million Americans and prevent those retirees from having to rely on taxpayer-funded social safety net programs. Without the bill, employers will increasingly be forced to decide between hiring employees and staying in pension plans, with employer withdrawals putting additional cost pressure on employers who remain to make up for the contributions of those employers who withdrew. That increase in liability will impair employers' ability to access credit, thereby increasing the cost of borrowing and stifling their ability to grow and create jobs. Simply allowing the multiemployer pension system to collapse would cost hundreds of billions of dollars, therefore the bill's provisions will save the nation money. And they argue that the bill will be budget-neutral in the long run because the multiemployer plans that take out loans will eventually repay them.

    Opponents of the bill, primarily Republicans, say it does not make failing pension plans more stable or solvent over time and will not end pension plan underfunding. They say that forcing plans to accept crushing balloon payment loans they can never hope to repay only hurts workers, businesses and taxpayers, calling the bill a bailout for certain multiemployer pension plans that were improperly managed — which they say should be Congress' legislative focus. They point out that the bill undermines a key bipartisan agreement enacted in 2014 which has begun to address the multiemployer pension crisis by cutting benefits in order to allow the pension plans to regain solvency over time, saying any new legislation should build on those provisions. They also say the bill doubles down on the untenable assumption that the government can fully guarantee pension promises that were based on unrealistic assumptions of 7-8% annual returns.

SUMMARY: The Rules Committee is expected to make in order a modified version of the bill; following is a version of the bill expected to be considered.

    This bill establishes a new agency within the Treasury Department (the Pension Rehabilitation Administration) to provide 30-year loans to multiemployer defined benefit pension plans that are in critical or declining financial condition so that they may meet their pension obligations to current retirees. It also provides for such multiemployer pension plans to receive financial assistance from the Pension Benefits Guaranty Corporation (PBGC) in conjunction with Treasury loans.

    Funding for the loans would be generated through the sales of Treasury bonds that are deposited into a new, dedicated trust fund in the Treasury, as well as through general revenues. Loan proceeds must be invested by pension plans to generate the returns needed to pay current retirees as well as to raise funds to eventually pay off the loan. Pension plans would be required to pay only interest on the loans for the first 29 years, and then pay back the loan in year 30.

    To help offset the measure's cost, the bill increases numerous tax penalties. 

PRA/Treasury Loan Program

    The bill establishes the Pension Rehabilitation Administration (PRA) within the Treasury Department and authorizes it to make 30-year loans to multiemployer plans that are in critical and declining status, so those plans can meet their pension obligations to current retirees.

    Under the measure, the new agency must establish the loan program by Sept. 30, 2019, and in consultation with the Treasury and Labor departments and the Pension Benefit Guaranty Corporation (PBGC) issue guidance regarding the program by Dec. 31, 2019.

    Even before the loan program is established, a multiemployer pension plan may apply for a loan that the PRA must approve, if the loan is needed to ensure that pension plan payments to plan participants are not suspended. And once the program is in place, plans where benefits were suspended prior to the date of enactment would be required to apply for a loan.

Pension Plan Eligibility

    In order to be eligible for a PRA/Treasury loan, a multiemployer plan as of the date of enactment must be in critical status, have a modified funded percentage of less than 40%, and have a ratio of active to inactive participants less than two to five. A plan also would be eligible if it is insolvent as of the date of enactment, became insolvent after Dec. 16, 2014, and has not been terminated.

    In applying for the loan, the plan sponsor must demonstrate that the loan will enable the plan to avoid insolvency for the 30-year period of the loan, or to emerge from insolvency and avoid insolvency for the remainder of that period. The sponsor must also demonstrate that the plan is reasonably expected to be able to pay benefits and the interest on the loan and to be able to repay the principal when it is due.

    Plan sponsors when applying must also declare whether it is also applying for — or already receiving — financial assistance from PBGC. Applications would be reviewed by the PRA, as well as the Treasury and Labor departments and PBGC. Loan applications must be approved or denied within 90 days of submission; an application is deemed approved if it is not denied within 90 days.

Pension Plan Use of Loans

    Pension plans must use PRA/Treasury loans and any assistance from the PBGC to purchase annuity contracts or establish other investment portfolios (or a combination of the two) that will generate returns to pay the pension benefits of those plan participants who were receiving benefits at the time of the application, as well as to fully pay those retirees whose pension payments had previously been reduced or eliminated because of the plan's lack of funding. Total assistance received through a loan and PBGC assistance could not exceed the level needed to achieve those goals.

    The annuity contracts a plan purchases with the loan must be issued by an insurance company licensed under the laws of any state and rated A or better by a nationally recognized statistical rating organization. The measure defines the allowed portfolio that may be purchased with the loan as a cash matching portfolio or a duration matching portfolio consisting of investment grade fixed income investments or any other portfolio prescribed by the Treasury in regulations that has a similar risk profile and is equally protective of the interests of participants and beneficiaries.

    Investment portfolios would be subject to oversight by the PRA, which must conduct a triennial review of the adequacy of the portfolio to provide the required benefits.

Loan Terms

    PRA/Treasury loans generally would be for 30 years, with the pension plan to make interest payments for 29 years and pay off the loan in the 30th year. Plan sponsors could, however, when applying for the loan elect to repay the loan principal and remaining interest as equal installments over the final 10-year period beginning on the 21st year of the loan; in such cases, the interest rate on the loan would by reduced by 0.5 percentage points.

    Loan interest rates must be as low as is feasible, but cannot be lower than the interest rate on 30-year Treasury securities on the first day of the calendar year in which the loan is issued. And it cannot exceed the greater of a rate that 0.2 percentage points higher than the rate on 30-year Treasury securities or the rate necessary to administer the program.

    Pension plans that receive loans may not increase pension benefits, allow any employer participating in the plan to reduce its contributions, or accept a collective bargaining agreement that provides for reduced contribution rates during the 30-year period of the loan. In addition, any previously suspended benefits must be restored.

Treasury Trust Fund

    The bill creates within the Treasury a Pension Rehabilitation Trust Fund through which the PRA/Treasury loans would be financed.

    The trust fund itself would be financed by proceeds from the issuance of Treasury bonds for the loans, money transferred from Treasury's general fund, and payments of loan interest and principal.

    The trust fund would also pay for principal and interest on the bonds issued for loans and for administrative and operating expenses of the Pension Rehabilitation Administration, with the Treasury Department authorized to transfer to the trust fund otherwise unobligated funds within the Treasury for those administrative expenses.

Loan Repayment & Default

    The PRA is required to make every effort to collect repayment of the loans. However, if a plan sponsor is unable to make a payment when due, the PRA may negotiate revised terms for repayment, including payments over a reasonable period or forgiveness of part of the loan principal — but only to the extent necessary to avoid plan insolvency in the next 18 months.

    Within a year of enactment and annually thereafter, the PRA must report to Congress on any multiemployer pension plan that has failed to make a scheduled payment, has negotiated revised terms for repayment, or that is no longer reasonably expected to pay benefits or meet the terms of its loan.

Annual Reports to Treasury

    The bill requires multiemployer pension plans that receive PRA/Treasury loans to annually report to the Treasury within 90 days of the anniversary of the loan regarding the status of both the pension plan and the loan. These reports must be shared with the Labor Department and PBGC

    The report must detail the following: the plan's assets and liabilities; the value of contributions made by employers and employees; the value of all benefits paid; cash flow projections for that year and the next nine years; account projections for the plan year and the next nine years; the value of all investment gains and losses; any significant reduction in the number of active participants and the reason for the reduction; the employers that withdrew from the plan and the resulting reduction in contributions; the employers that paid withdrawal liability to the plan and the amount paid or remaining to be paid; changes to benefits, accrual rates or contribution rates and whether those changes relate to the terms of the loan; the number of active, pay status and terminated plan participants; and a breakdown of plan administrative expenses as well as participant and benefits data.

    The pension plan must also provide a summary of the information in the report to plan participants and beneficiaries and to each employer that contributes to the plan.

    Plans that fail to file reports would be subject to monetary penalties.

PBGC Financial Assistance

    The bill allows a multiemployer pension plan that is applying for a PRA/Treasury loan to also apply for assistance from the Pension Benefits Guaranty Corporation (PBGC), and it appropriates to PBGC "such sums as may be necessary" each fiscal year to provide such financial aid.

    Under the measure, PBGC can provide such financial assistance if it determines that the plan's current five-year projection for pension expenditures exceeds the fair market value of the plans's assets.

    The financial assistance provided by the PBGC in coordination with a PRA/Treasury loan would not have to be repaid before that loan is repaid in full, and PBGC would be authorized to forego repayment if necessary to avoid any suspension of benefit payments.

    Requests for such PBGC aid must be made jointly to the PRA and PBGC at the same time as a plan's request for a PRA/Treasury loan; if an insolvent (but still active) pension plan is already receiving financial assistance from the PBGC, a simplified loan application form would be provided to the PRA.

Tax Code Impact

    The bill establishes special rules regarding the tax liability and funding rules for companies covered by multiemployer pension plans that receive PRA/Treasury loans.

    Under the measure, if an employer participating in a multiemployer pension plan that received a pension rehabilitation loan withdraws from the plan before the end of the loan term, the employer's withdrawal liability would be determined as if the plan was being terminated because of the withdrawal of every employer from the plan.

    Annuity contracts and investment portfolios purchased with the loan funds would not be taken into account as plan assets for such withdrawing employers. However, an amount equal to the greater of the benefits provided by the contracts or portfolios or the remaining payments due on the loan would be counted as unfunded vested benefits in determining withdrawal liability.

Beneficiary Distribution Provisions

    The bill modifies some of the required distribution rules for designated beneficiaries.

    It generally provides that if an employee dies before receiving all of his or her interest in a multiemployer defined contribution pension plan, the remaining distribution must take place within 10 years of the employee's death (rather than five years, as under current law). Such distribution must be made whether or not distributions to the employee had already begun.

    It also generally provides that certain lifetime distributions that would otherwise convey to certain survivors when the original beneficiary dies be distributed to survivors within 10 years of the original beneficiary's death.

Offsets

    The modified version of the bill posted on the Rules Committee website for floor consideration includes offsets to help pay for the measure's cost — although no estimate has been provided as to the value of those offsets.

    The offsets include increasing from $330 to $435 the penalty for failing to file a tax return, which would be imposed beginning Dec. 31, 2019.

    Other offsets include the following:

•     Increases from $25 to $250 the daily penalty for failure to file retirement plan returns, and increases from $15,000 to $150,000 the maximum such penalty that be imposed.

•     Increases from $1 to $10 per pension plan participant the penalty for a failure to file an annual registration statement or a notification of changes, and increases from $5,000 to $50,000 the maximum aggregate penalty for failure to file a registration statement and from $1,000 to $10,000 the maximum aggregate penalty for failure to file a notification of changes.

•     Increases from $10 to $100 per beneficiary the penalty for failure to provide a notice of distributions to beneficiaries, and increases from $5,000 to $50,000 the maximum aggregate penalty for such violations.

    Those penalties dealing with the filing of retirement plan returns, statements and notifications would become effective for filings required after Dec. 31, 2019.

CBO Cost Estimate

    As of press time, the Congressional Budget Office (CBO) had not released a cost estimate for the version of the bill expected to be considered.

    CBO in early July released an estimate of a discussion draft of the legislation that had been released by the Ways and Means Committee prior to its markup, which estimated that the measure would result in $67.7 billion in direct spending and a net $64.4 billion increase in the deficit. However, Ways and Means during its markup modified the bill to broaden the multiemployer insurance plans that would be eligible for loans and assistance, and the version of the bill posted by the Rules Committee for floor consideration includes provisions intended to help offset the measure's cost — although no estimate has been provided as to the value of those offsets.