Attorneys Seek Clarification, Revision of Proposed Multiemployer Plan Regs

As a courtesy I am enclosing a copy of public: comments submitted by Richard D. Sommers of Schwartz, Steinsapir, Dohrmann & Sommers LLP and by Mitchel D. Whitehead of Seyfarth Shaw LLP, regarding the above-referenced proposed regulations. These were submitted electronically on regulations.gov (tracking number 8062970) today, June 16, 2008.

We are pleased to submit these comments on proposed Treasury Regulations §§ 1.432(a)-(b) regarding Multiemployer Plan Funding Guidance. The proposed regulations were published in Volume 73, No. 53 of the Federal Register on March 18, 2008 at page 14417.

We are making these comments on behalf of the Southern California United Food and Commercial Workers Unions and Food Employers Joint Pension Plan.^1,1a As of March 31, 2008, this multiemployer plan is paying benefits to 36,250 retirees; it has a total of 156,605 participants. In the most recent month for which records are complete, February of 2008, thirty-seven employers made contributions to the Southern California Pension Plan in respect of 89,711 payroll employees.

The Southern California Plan's Response to Funding Difficulties

The Southern California Pension Plan obtained a conditional five-year amortization extension under section 412(e)² of the Internal Revenue Code, as then in effect, on June 15, 2.006, pursuant to an application filed March 13, 2004. The amortization extension was a key component of the Southern California Pension Plan's effort to improve its funded position after it experienced investment losses; between 2000 and 2003.

These efforts also included major sacrifices for Plan participants and employers alike. Existing participants saw their rate of benefit accrual drop by a third, while newcomers to the plan were placed in a lower benefit tier; meanwhile, employers raised their contributions by two-thirds. The Southern California Plan also adopted a Long Term Funding Policy that requires further reductions in benefit accrual rates if the plan actuary projects the plan will incur accumulated funding deficiencies within seven years of each annual actuarial report to the trustees. These measures were all negotiated as part of a region-wide collective bargaining agreement entered in February of 2004. The adoption of the 2004 agreement ended a 20-week strike/lockout of grocery employees throughout Southern California.

The Scope and Nature of § 412(e) Relief

The Southern California Pension Plan is not unique: the IRS has granted at least fourteen amortization extensions under § 412(e) to multiemployer plans since 1996,³ with the vast majority of the extensions approved after 2004, under the terms of IRS Revenue Procedure 2004-44. All or nearly all of these fourteen extensions would, by their terms, remain in effect now. Like the Southern California Pension Plan, the other multiemployer pension plans that obtained § 412(e) amortization extensions did so as part of a broader effort to avoid potential funding deficiencies and secure their financial future. These efforts included significant sacrifices by employers and employees. Employees gave up some or all of their future benefit accrual, as well as the ability to retire early; employer contributions increased more than twofold for some of these pension plans.

Matters of Concern in the Proposed Regulations

We believe that the proposed regulations need revision and clarification in two key areas.

First, if the proposed regulations take effect in their current form, actuaries for multiemployer pension plans would be required to disregard amortization extensions granted under § 412(e) in certifying a plan's funded status under § 432 of the Code. As a result, multiemployer pension plans that obtained amortization extensions under § 412(e) may be subject to the rehabilitation plan requirements and surcharges on employer contributions of § 432(e)-(f), as well as the excise taxes on contributing employers and plan sponsors described in § 4971(g), in circumstances that Congress did not intend. The Pension Protection Act does not expressly proscribe actuaries from using § 412(e) amortization extensions in determining whether a multiemployer plan is in critical status within the meaning of § 432(b)(2). We urge an interpretation of the statute that confirms that a multiemployer pension plan actuary may take amortization extensions granted under § 412(e) into consideration in certifying a plan's funded status.

Second, the final regulations should clarify that § 1.432(b)-1 relates solely to the actuarial certification of a multiemployer pension plan's funded status, and not to the requirements for a plan to emerge from critical status under § 432(e)(4), or to the effect of such emergence. The preamble to the proposed regulations identifies their intended scope clearly: "[s]pecifically, these regulations provide guidance regarding the determination of when a plan is in endangered status or critical status."⁴ Moreover, in spite of the "revolving door" problem that may arise from the interaction between the certification of funded status and the test for emergence from critical status, the PPA provides only one measure of whether a plan that has been in critical status is no longer in critical status: the emergence test of § 432(e)(4)(B). We believe that this limitation should be explicit in the text of the final regulations.

Finally, we take the present opportunity to comment or. these proposed regulations to highlight a related area in which guidance would be of assistance to plan sponsors. Specifically, we seek regulatory or other guidance regarding the effect of a plan's prospective emergence from critical status on the basis of a rehabilitation plan already in place.

In addition to submitting these public comments, we respectfully request that a public hearing be held regarding these proposed regulations.

I. § 412(e) Relief and Certification of Critical Status

Three provisions of the PPA show that amortization extensions granted under § 412(e) of the Code should not be disregarded in determining whether a multiemployer pension plan is in critical status. First, the PPA specifically "grandfathers" certain § 412(e) extensions, requiring that they continue to be administered and applied as before its effective date. Second, key differences between amortization extensions granted under § 412(e) and extensions granted under § 431(d) justify consideration of § 412(e) extensions in the § 432(b)(2) tests for certification of a plan's critical status. Finally, the "grandfathering" of § 412(e) extensions is part of a consistent policy to preserve in place amortizations booked in respect of plan years beginning before the effective date of the PPA.

The broad language of § 204(b)(2) preserves, to the extent possible, collectively bargained solutions to multiemployer pension plan funding problems adopted and implemented in advance of the PPA. A final regulation that required actuaries to disregard § 412(e) extensions in determining whether a plan is subject to the requirements and restrictions of a plan in critical status -- in addition to the requirements of its own collectively bargained and IRS-approved § 412(e) conditions -- would not give full effect to the PPA's "administered and applied" requirement.

In limiting this "grandfathering" language to § 412(e) extensions granted in respect of applications submitted before June 30, 2005, the PPA did not bar the IRS from granting requests for § 412(e) extensions in respect of later applications.⁸ Multiemployer plan funding solutions collectively bargained after plan trustees, bargaining parties, and advisers had knowledge of the PPA's funding requirements may, however, be held to the standards of the PPA, including § 432 of the Code.

The decision not to include § 412(e) amortization extensions alongside those granted under § 431(d) represents legislative choice: Congress was aware that plans were diligently pursuing § 412(e) extensions with the IRS while the PPA was under active consideration.⁹ A compelling reason to allow § 412(e) extensions to be considered in funding status certifications is the fact that many § 431(d) extensions will be automatic, in contrast to the broad scrutiny of their funding plans and IRS-imposed conditions that were a prerequisite to obtaining § 412(e) extensions. The IRS conditioned § 412(e) relief on a plan's acceptance of conditions, including annual improvements in its funded ratio and maintenance of an increasing funding standard account credit balance. A plan's failure to meet the ongoing conditions of its § 412(e) extension may result in retroactive revocation of the extension. Plans that addressed their funding position before the PPA may still enter critical status in the event the measures they adopted, including amortization extensions, are insufficient to prevent critical certification. Thus §§ 432(e)-(f) act as a backstop in the event that such a plan's privately negotiated and IRS-approved funding measures are not sufficient to assure the plan's future.

The PPA does not make an exception to the § 431(b)(4) savings clause for amortization bases extended under § 412(e) for the purpose of an actuary's projection of accumulated funding deficiencies as required by § 432(b)(2), any more than for an actuary's determination of current-year accumulated funding deficiencies. A requirement that actuaries disregard amortization extensions granted under § 412(e) in certifying a plan's funded status appears to extend potential liability for excise taxes under § 4971(a)-(b) and § 4971(g) beyond the scope explicitly contemplated by the PPA. In addition, such a requirement may also result in application of rehabilitation plan requirements in circumstances other than or in addition to those which the PPA provides.

II. The Final Regulations Should Clarify that the Emergence criteria are not being modified or otherwise addressed.

It is also our understanding that § 1.432(b)-1(c)(6), providing the actuary must certify as in critical status a plan that was in critical status the prior year and fails to emerge from critical status during the current year, states only that plans that enter critical status remain in critical status until they emerge from critical status. This provision regarding a plan's failure to emerge from critical status does not control what would have happened had the plan in fact emerged from critical status.

The statutory consequence of emergence from critical status is that the emerged plan is no longer in critical status: if a plan in critical status is able to emerge before the end of its ten-year rehabilitation period, § 432(e)(4)(A) provides that the plan's "rehabilitation period shall end with the plan year preceding the plan year" in which the actuary certifies that the plan emerged from critical status. The PPA does not contemplate that a plan may remain in critical status after the end of its rehabilitation period.¹² Thus the early termination of the rehabilitation period must constitute the end of such a plan's time in critical status. Moreover, the sunset provisions of PPA § 221(c) preclude the entry or re-entry of any plan into critical status in respect of plan years that begin after December 31, 2014. Therefore, a critical plan which meets the criteria for emergence from critical status in the tenth year of its rehabilitation period or thereafter will never re-enter critical status because § 432(b)(2) of the Code will no longer be in effect at the time of the plan's emergence. As of that time, § 221(c)(2) of the PPA limits the legacy application of § 432 to critical plans whose rehabilitation period has not ended.

III. Additional Clarification Regarding The Timing of Emergence.

In addition to clarification regarding the scope of these proposed regulations, we take this opportunity to request regulatory clarification with respect to the timing of a plan's emergence from critical status. Specifically, we believe that immediate applicability of the emergence criteria of § 432(e)(4) is appropriate where multiemployer plan sponsors and bargaining parties have adopted rehabilitation plans and collectively bargained the implementation of such rehabilitation plans. If a pension plan is able, through its bargained measures, to pass the emergence test of § 432(e)(4) in the same year as the actuary makes an initial critical certification, the plan should emerge from critical status as of the same date its critical status was initially certified.

Even though such a plan would not be subject to the rehabilitation plan and critical status rules of § 432(e)-(f) at the time of its emergence from critical status, the PPA's objective would be achieved in full. A pension plan able: to emerge immediately on the basis of the bargained implementation of its rehabilitation plan will have made changes that improve its financial condition to the extent that the PPA requires, if not more.

We believe this approach to the effect of emergence from critical status is consistent with statutory language. It also recognizes the realities of collective bargaining: the Southern California Fund's current collective bargaining agreement was negotiated in 2007, after the guidelines of the PPA were clear. Given the tradition of three-year agreements, the bargaining parties decided to address the prospect of changes to the pension plan in negotiating the 2007-2011 contract, rather than conclude an infirm agreement that disregarded foreseeable issues with the pension plan. To the extent that the measures this plan adopted are successful in addressing its funding status, nothing is gained by the declaration that the pension plan is in critical status for one year because of an assumed latency period between certification of critical status and emergence from critical status.

^1a The Trustees of the Steelworkers Western Independent Shops Pension Trust Fund, also join in these comments. Please refer to the comment submitted by Robert F. Schwartz of Trucker Huss APC.

² All references to the Internal Revenue Code in these comments include reference to the related sections of ERISA. Except as otherwise noted, references to IRC § 412 are to the version in effect for plan years beginning before 2008.

³ Amortization extension grants are announced in IRS Private Letter Rulings 96-32022, 2002-25043, 2006-18031, 2006-20024, 2006-36101, 2006-41007, 2006-44024, 2006-44027, 2006-46024, 2006-48035, 2007-01034, 2007-24037, 2007-43037, and 2007-46017. Of these, all but 2007-24037 were granted in respect of applications submitted before June 30, 2005. See Exhibit A to this comment for a summary.

⁴ 73 Fed. Reg. 53, at 14420.

⁵ Amendment 2581 to S.B. 1783 Congressional Record, S. 12960 (Nov. 16, 2005).

⁶ H. Res. 206, House Report 109-346, at § 211: "in the case of any . . . extension under section 412(e) (as so in effect) with respect to which application has been made before June 30, 2005, the interest rate under . . . or section 412(e) (as so in effect), as the case may be, shall apply."

⁷ PLR 2006-36101.

⁸See, e.g., PLR 2007-24037 (granting extension for plan applying after June 30, 2005).

⁹ See testimony of Randy G. DeFrehn, S. Hrg. 109-165 ("[T]he Internal Revenue Service in particular has been deficient in terms of its ability to respond to requests from plans that are facing funding deficiencies through the existing remedies under Section 412(e) of the code. There are at the present time about 30 applications, some of which have been sitting there for as long as 2 years. . . . Those are applications that would permit the plans to have an extended amortization period for their liabilities."); C.R. S 8750, August 3, 2006 (remarks of Senator Enzi) ("In 2003 the multiemployer plans came up to Capitol Hill and asked for a blanket extension of amortization of their plan gains and losses. Congress pared back that request in the provisions applicable to multiemployer plans that appear in the 2004 Pension Funding Equity Act, PFEA. Since then, the unions and management agreed upon changes to ease the multiemployer pension funding standards for financially distressed plans."); testimony of Judy Mazo, House Committee on Education & the Workforce Hearing 109-22 ("Trustees of most plans faced with the prospects of an impending funding deficiency have already taken action to address the problem to the extent possible. . . . the modest recovery of the investment markets experienced in 2004 is only marginally helpful. For example, a $1 billion fund in 2000 that suffered a 20% decline in assets through 2003 would have to realize an annualized rated of return of 15% every year for the remainder of the decade to get to the financial position by 2010 it would have had it achieved a steady rate of 7.5% for the full ten year period. Other relief, including funding amortization extensions under IRC Section 412(e) or the use of the Shortfall Funding Method, have been effectively precluded as options by the IRS.").

¹⁰ 73 Fed. Reg. 53, at 14420.

¹¹ The preamble (at 14421), but not the proposed regulation itself (at § 1.432(b)-1(d)(6)), states that plan actuaries may include amortization extensions granted under § 412(e) as well as under § 431(d) in determining whether a critical plan meets the emergence test of § 432(e)(4) or the non-emergence test of § 1.432(b)1-(c)(6). We take this difference between the preamble and the proposed regulations to indicate not that § 412(e) extensions cannot be used in testing for emergence but, rather, that the proposed regulations are not intended to provide guidance regarding certifications of emergence. Appropriate regulation should confirm that plan actuaries may use § 412(e) extensions in certifying that a plan has emerged from critical status.

¹² The definition of "initial critical year" at § 1.432(a)-1(t)(11) of the proposed regulations is consistent with the statute. By providing that plans which emerge from critical status but are again certified as critical are, upon their re-entry to critical status, in their initial critical year, said definition indicates that a plan's satisfaction of the emergence test of § 432(e)(4)(B) removes it from critical status. Otherwise, such a plan's year of critical status would carry over from the earlier, pre-emergence certification of its critical status.

¹³ See House Committee on Education and Labor, Subcommittee on Health, Employment, Labor and Pensions, Hearing on Retirement Security: Strengthening Pension Protections (May 3, 2007) (Testimony of Judy Mazo) (available at http.7/www.nccmp.org/submissions/pdfs/employer/5_3_07Written.pdf).