In proposed regulations (REG-101701-16), the IRS provides guidance on a limitation on suspension of benefits applicable to certain pension plans. The regulations would affect active, retired, and deferred vested participants and beneficiaries under multiemployer plans in critical or declining status, in addition to employers contributing to, and sponsors and administrators of, these plans.

Background

The Multiemployer Pension Reform Act (MPRA) of 2014 permits plans in critical and declining status to suspend benefits if certain conditions are met. Critical and declining status is defined as a situation in which a plan is: (1) projected to become insolvent within 15 years, or (2) is projected to become insolvent within 20 years and either: (a) the plan's ratio of inactive to active participants is greater than 2 to ; or (b) the plan is less than 80% funded. An actuary is required to certify that a suspension of benefits will avoid insolvency. If a certification is issued and the plan sponsor wishes to suspend benefits, the MPRA requires plan participants to vote on the suspensions (Section 432(e)(9)(H)). The IRS issued temporary (TD 9735) and proposed (REG-123640-15) regulations under Section 432(e)(9) in September 2015 providing administrative guidance on how a multiemployer plan that is in critical and declining status must take a vote of plan participants following approval of plan sponsor's application to suspend benefits payable to plan participants and beneficiaries. (See Tax Alert 2015-1724.)

The MPRA allows a plan sponsor to reduce the pension benefits payable to plan participants if certain conditions and limitations are met. One limitation, codified under Section 432(e)(9)(D)(vii), pertains to suspending benefits under any plan that includes benefits directly attributable to a participant's service with any employer that has: (1) completely withdrawn from the plan, (2) paid its full withdrawal liability, and (3) assumed, under a collective bargaining agreement, liability for providing benefits to participants and beneficiaries equal to any benefits they have lost due to the impaired financial status of the plan. The latest proposed regulations provide guidance on applying this limitation. The preamble refers to the employer as "a subclause III employer," alluding to Section 432(e)(9)(D)(vii)(IIII), and refers to the agreement to assume liability for the depleted benefits as a "make-whole agreement."

If the Section 432(e)(9)(D)(vii) limitation applies to a plan:

1. The suspension of benefits must first be applied to the maximum extent permissible to benefits attributable to a participant's service with an employer that withdrew from the plan or failed to pay the full amount if its withdrawal liability (referred to as a "subclause I employer") (Section 432(e)(9)(D)(vii)(I))

2. A suspension of benefits must apply to all other benefits (except as provided in Section 432(e)(9)(D)(vii)(III) (Section 432(e)(9)(D)(vii)(II))

3. A suspension must apply to benefits under plans that are directly attributable to a participant's service with a subclause III employer (Section 432(e)(9)(D)(vii)(III))

Proposed regulations

Noting that Section 432(e)(9)(D)(vii) requires a suspension of benefits first to apply "to the maximum extent permissible," the preamble explains that the new regulations require that a suspension of benefits under a plan subject to Section 439(e)(9)(D)(vii) "will be applied to the maximum extent permissible to benefits attributable to service with a subclause I employer." If reasonable estimations indicate that taking this step will not be sufficient to avoid insolvency of the plan, a suspension may apply to benefits attributable to a participant's service with other employers. Because Section 432(e)(9)(D)(vii)(II) does not include the "to the maximum extent permissible" language, the IRS and Treasury interpret the provision to mean that "a suspension need not be applied to the maximum extent permissible to benefits described in subclause (II) before any suspension is applied to benefits described in subclause (III)."

Further, the IRS interprets Section 432(e)(9)(D)(vii) to mean that "the application of a suspension to benefits described in subclause (II) must be greater than or equal to the application of the suspension to benefits described in subclause (III)." Therefore, under the proposed regulations, "a suspension would not be permitted to reduce benefits directly attributable to an employee's service with a subclause III employer unless other benefits are first reduced or are reduced to at least the same extent." The proposed regulations generally provide that a suspension would not violate this restriction as long as "no participant's benefits that are directly attributable to service with a subclause III employer are reduced more than that individual's benefits would have been reduced if ... those benefits were attributable to that participant's service with any other employer." As a result of the proposed regulations, if a participant began receiving retirement benefits under a plan directly attributable to service with a subclause III employer and the employer subsequently entered into a make-whole agreement, the participant's benefits would be described in Section 432(e)(9)(D)(vii)(III), even if the benefits are not covered by the make-whole agreement.

The preamble notes that Treasury and the IRS are considering an alternative to the "ordering rule" set out in the proposed regulations. The alternative would retain the "to the maximum extent permissible" language that applies to benefits attributable to service with a subclause I employer, but would also provide that any suspension of benefits must apply to provide for a smaller reduction in benefits directly attributable to service with a subclause III employer than the reduction in benefits directly attributable to any other service.

Because Congress chose to draft Section 432(e)(9)(D)(vii) differently than it drafted other statutes (including section 4044 of ERISA) "that establish priority categories requiring claims to be fully satisfied under each earlier category before any claims are permitted to be satisfied under any subsequent category," Treasury and the IRS apparently have concluded Congress intended that a suspension of benefits under Section 432(e)(9)(D)(vii)(II) "does not need to be applied 'to the maximum extent permissible' before any suspension is permitted to be applied to benefits described in [S]ection 432(e)(9)(D)(vii)(III)," the preamble explains. This conclusion is founded in case law; in Loughrin v. United States, 132 S.Ct. 2384 (2014), the Supreme Court explained that, "when Congress includes particular language in one section of a statute but omits it in another ... this Court 'presumes' that Congress intended a difference in meaning."

Implications

Plan sponsors of multiemployer plans in critical and declining status contemplating suspension of benefits should carefully read the new proposed regulations to comply with the limitations associated with suspension of benefits for subclause III employers.

Subclause III employers will want to ensure that their employees' benefits are not reduced more than that of employees of any other employer and comply with the new proposed regulations.

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