Amortization Extensions for Multiemployer Plans

These days, many multiemployer plan trustees are walking a fine line between risking employers' future solvency to fund pension plans that were hard hit by the investment losses of 2008 and disappointing employees by reducing future pension benefits. In certain situations, an amortization extension may be an effective tool in delaying or eliminating the potential for an Endangered Status certification and would allow time for investment and economic recoveries to have a positive impact.

The Pension Protection Act allows sponsors of multiemployer plans to apply for an automatic 5-year extension of the amortization of any charges in the plan’s Funding Standard Account. Amortization charges are one component of a plan’s minimum required contribution, and to the extent that employer contributions exceed the required minimum a credit balance is created. It is the potential for the erosion of that credit balance that may cause a plan to be in Endangered Status. If the plan can create a lower minimum contribution, then the likelihood of being Endangered is reduced. For example, if a plan has a $1,000,000 outstanding charge that is amortized over 10 years at 7%, the annual payment is $142,378. Extending the amortization period to 15 years reduces the payment to $102,612, and the resulting minimum required contribution is reduced by $39,766.

To take advantage of the automatic extension, the plan sponsor must send a model notice regarding the filing to all plan participants, contributing employers, each employee organization representing employees covered under the plan, and the Pension Benefit Guaranty Corporation. Then, within 14 days of distributing the model notice, the sponsor files the automatic extension request with the Internal Revenue Service. The request includes a certification by the plan’s actuary that, without the extension, a negative credit balance (or "funding deficiency") would exist within the next ten years and that the plan sponsor has devised a strategy to improve the plan’s funding status. The filing must occur by the end of the plan year in order to be effective for that year.

The law also allows a plan sponsor to apply for an additional 5-year extension. The approval is not automatic, and the plan sponsor is required to furnish more detailed information about the plan, financial information about each participating employer, a description of the financial state of the particular industry in which the employers operate, and additional documents (such as actuarial valuations and Form 5500 filings) that are not required for the automatic extension filing.

Plans in Critical Status may not use an amortization extension to escape that status. However, an amortization extension may be incorporated into the Rehabilitation Plan in order to reduce the impact of additional employer contributions or potential employee benefit reductions. Also, single employer plans are not permitted to receive an amortization extension for any reason.

The window for automatic amortization extensions is open until December 31, 2014. For 2009, however, you should consult with your pension professionals as soon as possible if you want to take advantage of another weapon in your continuing battle against the forces that have conspired to make administering your pension plan a challenge.

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