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Actuarial Assumptions for Determining Eligibility for and Amount of SFA

Posted on by Megan England

The Pension Benefit Guaranty Corporation (PBGC) released an interim final rule on July 9, 2021 which offered guidance on the Special Financial Assistance (SFA) Program as established under the American Rescue Plan Act (ARPA). This article summarizes the requirements for the actuarial assumptions to be used in determining the eligibility for and the amount of SFA.

In an effort to prevent the use of biased actuarial assumptions that would maximize a plan’s entitlement to SFA money, the PBGC is encouraging the use of the actuarial assumptions that represent a “neutral view of circumstances, unbiased by the prospect of receiving a substantial sum of money based on those circumstances.”

For purposes of determining eligibility for SFA, the PBGC will accept actuarial assumptions incorporated in a plan’s certification of plan status completed before 2021 unless such assumptions are “clearly erroneous”.

The amount of SFA is based on the results of a single deterministic projection. The actuarial discount rate is prescribed as the lesser of A) the discount rate used for funding standard account purposes based on the most recently filed certification prior to January 1, 2021 and B) the discount rate that is 200 basis points higher than the 3rd segment rate, without regard to any segment rate stabilization.

For all other projection assumptions, the PBGC will evaluate reasonableness based on generally accepted actuarial principles and practices. If a plan actuary determines that any of the assumptions used in a plan’s certification of status before 2021 is no longer reasonable, such assumption may be changed for purposes of calculating the amount of SFA. The plan’s SFA application must describe why the assumption is no longer reasonable, disclose the modified assumption, and justify the modified assumption.

The PBGC has released guidance which describes generally acceptable actuarial assumption changes as well as actuarial assumption changes which would generally not be acceptable:

https://www.pbgc.gov/sites/default/files/sfa-assumptions-guidance.pdf.

Special Financial Assistance Program – Calculating Special Financial Assistance

Posted on by Megan England

The Pension Benefit Guaranty Corporation (PBGC) released an interim final rule on July 9, 2021 which offered guidance on the Special Financial Assistance (SFA) Program as established under the American Rescue Plan Act (ARPA).

This article will serve as the second in a series of articles summarizing different aspects of ARPA.

Eligibility for Assistance

A plan is generally eligible to receive SFA if it falls into any of the following groups:

  • A plan in critical and declining status in any plan year beginning in 2020, 2021, or 2022
  • A plan with a suspension of benefits approved under Section 305(e)(9) as of the date ARPA became law (3/11/21)
  • A plan which, in any plan year beginning in 2020, 2021, or 2022:
    • Is certified in critical status
    • Has a modified funded percentage of less than 40% as defined below:
      • Current value of assets (Market Value + the value of withdrawal liability payments due to be received by the plan on an accrual basis, reflecting a reasonable allowance for amounts considered uncollectible), divided by,
      • Current liability (line 2b(4) column (2) on the Schedule MB)
    • Has a ratio of active to inactive participants which is less than 2 to 3
      • Participant counts are as reported on lines 6a(2), 6b, 6c, and 6e of the Form 5500 for the applicable plan year
  • A plan that became insolvent for purposes of 418E of the Internal Revenue Code after December 16, 2014, has remained solvent, and has not terminated under section 4041A of ERISA as of March 11, 2021

Amount of Assistance

The SFA was defined under ARPA to be the amount required for the plan to pay all benefits due through the last day of the plan year ending in 2051. The PBGC has clarified this definition to mean it is the amount by which a plan’s resources fall short of its obligations during this period. Under this definition, plan resources include its assets as of the measurement date (the last day of the calendar quarter immediately preceding the SFA application filing date) as well as expected income through the end of the last plan year ending in 2051. The plan’s obligations include all benefits payments and all expenses necessary to keep the plan in operation through the end of the last plan year ending in 2051.

For purposes of determining the present value of future income and the present value of future obligations through the end of the last plan year ending in 2051, the discount rate is prescribed. This discount rate is the lesser of (1) the long-term discount rate used in the most recent actuarial certification of status before 1/1/21 and (2) the third segment rate from the 24-month average corporate bond yield curve for any month selected by the plan within the 4-month period ending with the month in which the SFA application is filed, plus 200 basis points.

Additional considerations for calculating SFA include:

  • Participant census data must be as of the first day of the plan year preceding the plan year in which the application is filed, if the application is filed less than 270 days after the beginning of the plan year. Otherwise, the census data must be as of the first day of the plan year in which the application is filed.
  • For plan mergers occurring on or after July 9, 2021, the SFA amount is calculated separately for all of the plans involved as if the merger never took place.
  • In the case of asset or liability transfers, the SFA amount is calculated as if such transfers never took place.
  • The PBGC is authorized to impose conditions relating to the diversion of contributions to, and allocation of expenses to, other benefit plans.

The SFA amount will also include the amount necessary to provide make-up payments to participants or beneficiaries whose benefits were reduced by way of benefit suspensions under the Multiemployer Pension Reform Act of 2014. Additionally, plans receiving SFA that have previously suspended benefits must reinstate those benefit suspensions effective immediately upon receipt of SFA.

Approved plans will receive the SFA as a lump sum payment within 90 days of the approval of its application. There is no repayment obligation with regard to these monies.

There are rules and requirements with regard to the assumptions used in determining the SFA that are beyond the scope of this summary. For more details regarding assumptions and the application process, please visit the PBGC’s https://www.pbgc.gov/arp-sfa.