On January 20, participants in the Iron Workers Local 17 Pension Fund became the first group of participants to vote and to approve benefit reductions under the Multiemployer Pension Reform Act of 2014 (MPRA). Prior to the vote, the Fund was projected to become insolvent by 2024. As reported in an earlier post, on December 16, 2016, this Cleveland-based Fund made headlines when the US Department of the Treasury surprisingly approved the Fund’s MPRA rescue plan and authorized the next step—a participant vote on the benefit reductions.

Once the Treasury Department approves a plan’s application to reduce benefits under MPRA, it conducts a vote of that plan’s eligible participants and beneficiaries. The proposed reductions become effective unless a majority of all participants and beneficiaries vote to reject them. In other words, not casting a vote is the same as voting to approve the reductions.

On December 16, the Iron Workers Local 17 Pension Fund (the Iron Workers Fund) became the first multiemployer pension plan to receive approval from the US Department of the Treasury (the Treasury Department) to cut benefits for participants as part of a proposed rescue plan under the Multiemployer Pension Reform Act of 2014 (MPRA). MPRA permits trustees of a significantly underfunded pension plan to apply to the Secretary of the Treasury Department to reduce participants’ benefits if (1) the plan is headed for insolvency within 15 years from the time the rescue plan would be implemented and (2) the trustees have exhausted all other means to avoid insolvency.

Join us in December for these upcoming programs on a variety of employee benefits and executive compensation topics:

Visit our events page for more of our latest programs.

An anti-assignment provision can be an effective tool for ERISA-governed health plans to fend off lawsuits from out-of network providers. ERISA has nothing within its statutory text that prohibits participants from assigning their rights under a health plan to a third party. Medical providers routinely require patients to assign their rights under a plan to the provider at the point of service, and courts have held that such assignments confer participant status on the provider. This allows the provider to avail itself of the plan’s claims and appeals procedures and gives the provider derivative standing to file suit under ERISA Section 502(a) if the provider’s claim is ultimately denied on appeal. Such suits are most often brought by out-of-network providers that believe the plan is underpaying the provider’s bills or wrongfully denying coverage.

Congratulations to Randall (Randy) C. McGeorge on his election to the Morgan Lewis partnership in our employee benefits and executive compensation practice! Effective October 1, 2016, Randy, who is resident in Pittsburgh, will join 32 other newly elected partners from 14 offices and 10 practices. For information about all of the firm’s newly elected partners, please see Morgan Lewis Elects 33 New Partners.

Please join us on June 8 for the 17th installment of our Hot Topics in Employee Benefits: What We’re Seeing webinar series. This session will update you on important developments regarding employee benefits and executive compensation in the following key areas:

  • Proposed rules relating to incentive compensation of financial institutions
  • The US Department of Labor’s new fiduciary rule
  • Claims and appeals requirements for qualified plans in light of Halo v. Yale Health Plan
  • HIPAA Phase 2 audits
  • Recent developments relating to controlled group liability
  • Issuance of final regulations and other developments relating to the Multiemployer Pension Reform Act of 2014

The same day that it rejected Central States Pension Fund’s benefit suspension application, the US Department of the Treasury explained to Congress its reasons for doing so. In a May 10 letter from Treasury Secretary Jacob J. Lew to congressional leaders with jurisdiction over the Multiemployer Pension Reform Act of 2014 (MPRA), the Treasury Department advised that Central States Pension Fund’s application failed to meet several of the MPRA’s technical requirements.

Summarizing the specific items outlined in rejection notice itself, Secretary Lew’s letter explains the application failed to demonstrate that the proposed benefit reductions would avoid plan insolvency and that the proposed suspensions were equitably distributed among certain participant groups. Additionally, the notices provided to plan participants were not understandable to the average person. Pointing out some of the specific criticism about the MPRA that the Treasury Department heard during the application period, the letter nevertheless advises Congress that the larger funding issues facing Central States Pension Fund and other multiemployer plans remain unsolved, especially as the Pension Benefit Guaranty Corporation simultaneously heads toward insolvency. Secretary Lew’s letter explains that the Treasury Department’s rejection of the application may provide participants with some short-term relief but points out that even larger cuts may be required in the future to meet the MPRA’s requirements.

The US Department of the Treasury today rejected Central States Pension Fund’s application for benefit suspensions under the Multiemployer Pension Reform Act of 2014 (MPRA). The rejection comes less than one day before the end of Treasury’s statutory 225-day application review period, after which an automatic approval would have kicked in. 

Treasury says it rejected the application because Central States failed to satisfy three of MPRA’s criteria: 

(1) The Plan’s investment and entry age return assumptions were not reasonable.

(2) The proposed suspensions were not equitably distributed across the UPS participant and beneficiary populations.

(3) The suspension notices were drafted in an overly complicated manner (i.e., not easily understood by the average plan participant).

Treasury did not state whether it was allowing the Plan an opportunity to resubmit an application, or on what timeframe. Stay tuned for more updates and analysis.

The US District Court for the District of Massachusetts recently ruled that two private equity funds were trades or businesses and in common control with a bankrupt company, and thereby liable for the multiemployer pension plan withdrawal liability obligations of the bankrupt company. The case, Sun Capital Partners III LP v. New England Teamsters & Trucking Industry Pension Fund, was heard on remand from the prior appeal to the US Court of Appeals for the First Circuit. The district court rejected the company’s choice of organizational structures based on state law, holding that such choice and state law should not determine whether investment funds that are trades or businesses may be part of the same controlled group of businesses.

Under ERISA and the Internal Revenue Code (the Code), members of the same controlled group have joint and several liability for certain employee benefit liabilities of each group member, including single employer defined benefit plan funding and Pension Benefit Guaranty Corporation (PBGC) premiums, medical plan COBRA obligations, and multiemployer pension plan contribution, withdrawal, and termination liability. The Sun Capital cases involve multiemployer pension plan withdrawal liability. For ERISA and the Code, a controlled group requires an ownership/control threshold (at least 80% for a parent-subsidiary relationship or, for a brother-sister relationship, five or fewer individuals with 80% overall ownership and 50% identical ownership) among trades or business.

Prior to 2007, based on a few IRS rulings, an investment fund was not treated as a trade or business. In 2007, the PBGC issued an opinion letter taking a contrary position, concluding that a private equity fund was a trade or business jointly and severally liable for the unfunded benefit liabilities of one of its portfolio companies. This PBGC opinion letter was judicially endorsed in Sheet Metal Workers National Pension Fund v. Palladium Equity Partners, LLC. Other cases have also held passive investors to be engaged in a trade or business. 

The Sun Capital decisions involve certain private equity funds referred to as “Sun Fund III” and “Sun Fund IV.” The funds owned 30% and 70%, respectively, of an LLC, which owned through a holding company 100% of Scott Brass, Inc. (SBI). SBI was the entity that, upon its bankruptcy, incurred withdrawal liability regarding a multiemployer pension plan. The pension fund demanded withdrawal liability from SBI and also from the Sun Funds, claiming the funds were part of a joint venture under common control. In 2010, the Sun Funds sued in district court, asserting that it was not part of a joint venture and not under common control. The district court’s 2012 decision ruled that the Sun Funds were not trades or businesses and did not address the common control issue. Upon appeal by the pension fund, the First Circuit held that a private equity fund (Sun Fund IV) might be held jointly and severally liable as a “trade or business” for the unfunded pension obligations of its portfolio companies and remanded to the district court for further proceedings to determine (1) whether Sun Fund III LP and Sun Fund III QP, LP are engaged in a “trade or business” and (2) whether Sun Fund III and Sun Fund IV were under “common control.” Upon remand, the district court held that the Sun Fund III was engaged in a trade or business and that the funds were under common control. 

Regarding whether the funds were under common control, the district court also addressed the separate issue of whether to ignore the structure chosen by the private equity fund (i.e., a less than 80% investment by its Fund III and a greater than 20% investment by its related, although not parallel, Fund IV) and to deem a partnership/joint venture to exist among the related funds rather than the entity formed below them. On this issue, the court held that the investments by the related funds in an LLC that owned the operating company subject to pension liabilities were disregarded and instead deemed the funds to have formed a partnership-in-fact with joint and several liability for the portfolio company’s liability. The determination about whether a partnership-in-fact exists is made under principles of federal tax law.

Although it is unclear whether the district court’s holdings will be upheld on appeal and/or in other circuits, the decision raises many questions about organization and liability for private equity funds and other investors.

On March 31, the Pension Benefit Guaranty Corporation (PBGC) released a report showing that the current assets of its multiemployer insurance program are a small fraction of the amount needed to cover the guaranteed benefits for more than 1 million people whose plans are expected to become insolvent in the next decade. The PBGC director explained, “[t]his report offers vital information for Congress as it considers how to stabilize the program and put it on sound financial footing.” Read the PBGC’s press release and full report—PBGC Insurance of Multiemployer Plans: A Five Year Report.