Food and Dairy Industry Criticizes Proposed Pension Benefits Regs

We are writing on behalf of The Association of Food and Dairy Retailers, Wholesalers and Distributors (the "Association") to provide comments on the proposed regulations issued by the Internal Revenue Service on February 11, 2016, under section 432(e)(9) of the Internal Revenue Code (the "Code"), as amended by section 201 of MPRA (the "Proposed Regulations"). As discussed in more detail below, the Association believes that the Proposed Regulations correctly apply the ordering requirements of Section 432(e)(9)(vii) and correctly adopt an individual participant-by-participant approach rather than an aggregate approach. However, the Association believes that the proper interpretation of Section 432(e)(9)(D)(vii)(III) ("Subclause III") requires that the benefits subject to Subclause III be restricted to only those benefits of participants that are covered by a make-whole agreement (as defined below).

The Association is comprised of fifteen employers in the food and dairy industry. These companies consist of retailers, wholesalers and manufacturers, food service companies and companies providing logistic and/or transport services to the food and dairy industry. Each member of the Association is a contributing employer to one or more multiemployer plans (a "multiemployer plan"). Collectively, the members of the Association employ over 700,000 associates and members nationwide.

Section 432(e)(9) of the Code, as amended by Section 201 of MPRA, establishes a new type of multiemployer plan certification (known as critical and declining status) and permits plan sponsors of multiemployer plans in critical and declining status to suspend plan benefits payable to participants and beneficiaries but only under very limited circumstances. Section 432(e)(9)(D)(vii) provides a special rule applicable to a multiemployer plan that includes benefits directly attributable to a participant's service with an employer which, prior to the enactment of MPRA, withdrew from the multiemployer plan, paid the full amount of its withdrawal liability, and under its collective bargaining agreement assumed liability under a separate single-employer plan for providing benefits for these participants and beneficiaries in an amount equal to any benefits that are reduced under the multiemployer plan as a result of the financial status of that plan (referred to as a "make-whole agreement").

In the case of a plan described in section 432(e)(9)(D)(vii), benefit suspensions are subject to additional requirements. Specifically, section 432(e)(9)(D)(vii) provides three subclauses with respect to benefit suspensions. Subclause I provides that benefit suspensions must first be applied, to the maximum extent permissible, to benefits attributable to service with employers that withdrew from the plan without paying their full withdrawal liability. Subclause II provides that benefits suspensions "be applied to all other benefits that may be suspended under [section 432(e)(9)] except as provided by subclause III." Subclause III provides that benefit suspensions may be applied "third" to benefits directly attributable to an employer subject to a make-whole agreement. Notably, Subclause II does not does not require suspensions "to the maximum extent permissible" before suspensions can be made under Subclause III.

In our view, the Proposed Regulations correctly apply the ordering requirements of Section 432(e)(9)(vii) and correctly adopt an individual participant-by-participant approach rather than an aggregate approach. While Subclause I requires that benefits attributable to service with certain withdrawn employers be suspended "to the maximum extent permissible" before benefits may be suspended under Subclause II or III, there is no such requirement with respect to benefit suspensions under Subclause II. While Subclause III does not make a distinction as to benefits described in Subclause II or III (with respect to the required level of suspensions), the ordering rule clearly places Subclause II before Subclause III. The only way to read section 432(e)(9)(D)(vii) so as not to render the statutory language superfluous is to read Subclauses II and III as requiring that (i) benefit suspensions must first be made under Subclause II before suspensions can be made under Subclause III, and (ii) the level of suspension for any participant with service under subclause II must be at least as great as the level of suspension for an otherwise identical participant with service under subclause III. This is exactly the position taken by the Proposed Regulations.

We do not believe the alternative ordering rule discussed in the Proposed Regulations is consistent with the language of section 432(e)(9)(D)(vii). While section 432(e)(9)(D)(vii) requires that benefits of Subclause II participants be suspended (to some degree) before those of Subclause III participants, nowhere does section 432(e)(9)(D)(vii) contain language that could be read as requiring greater suspensions under Subclause II than Subclause III. If Congress had intended that the suspensions under Subclause II be greater than suspensions under Subclause III, it would have said so. The analogy to section 4044 of Employee Retirement Income Security Act of 1974, as amended ("ERISA") in the commentary accompanying the Proposed Regulations is misapplied. Unlike section 432(e)(9)(D)(vii), ERISA section 4044 specifically requires that assets be allocated "in the following order". More importantly, ERISA section 4044(b) makes it clear that the assets of the plan must be fully allocated to a particular category before any assets can be allocated to a lower category. Section 432(e)(9)(D)(vii) contains no such priority language. Had Congress desired to require a greater level of benefit suspensions under Subclause II than Subclause III, it would have said so. Therefore, the only logical way to interpret section 432(e)(9)(D)(vii) is to read Subclauses II and III as requiring that benefit suspensions must first be made under Subclause II before subclause III, and that the level of suspensions for any participant with service under Subclause II must be at least as great as the level of suspensions for an otherwise identical participant with service under Subclause III.

While we agree with the ordering rule as described in the Proposed Regulations, we do not believe that Subclause III should be read as applying to all benefits directly attributable to a Subclause III employer. Rather, the proper interpretation of Subclause III requires that the benefits subject to Subclause III be restricted to only those benefits of participants that are covered by a make-whole agreement ("Covered Participants").

There is no justification for concluding that Congress intended to provide a preference to participants employed by a Subclause III employer who are not Covered Participants. To do so would be to single out participants employed by a single employer and require that they be treated better than similarly situated participants. Moreover, under the reading suggested by the Proposed Regulations, a make-whole agreement covering a small group of Covered Participants (for example, where Covered Participants represent less than 1% of the employer's total participants) would result in all of the employer's participants being treated as part of Subclause III, even though 99% of the participants are not Covered Participants. Congress could not have intended such a result.

The additional protection provided to participants by subclause III was intended to recognize that Covered Participants are protected by the make-whole agreement, and that any plan of benefit suspensions that did not provide some priority to these participants would have the effect of shifting the burden to the Subclause III employer by virtue of the make-whole agreement. Thus, Congress provided that Covered Participants be treated at least as well as a similarly-situated Subclause II participants. This same logic does not extend to a former participant of a Subclause III employer who is not a Covered Participant. The multiemployer plan should have the flexibility to treat these participants like any other subclause II participant and to equitably distribute benefits suspensions across this class of participants based on the factors specified in section 432(e)(9)(D)(vi).

The Association appreciates the opportunity to comment on the Proposed Regulations. If you have any questions concerning these comments or the views of the Association regarding the Proposed Regulations, please contact the undersigned.