Aid for Troubled Defined Benefit Pension Plans
More than one million workers and retirees were faced with the possibility of losing much of their pension benefits due to underfunded defined benefit plans, many still struggling to recover as a result of the 2008 recession and changes in their industries. Thankfully, the American Rescue Plan Act of 2021 (ARPA), just signed into law by President Biden, will provide eligible plans with the amount needed to sustain the plan until 2051.
A quick recap of retirement plans:
Defined Benefit Plan: A defined benefit plan promises a specified monthly benefit at retirement. The plan may state this promised benefit as an exact amount, or it may calculate a benefit through a plan formula that considers factors, such as salary and years of service with an employer. The benefits in most traditional defined benefit plans are protected, within certain limitations, by federal insurance provided through the Pension Benefit Guaranty Corporation (PBGC), an entity that helps backstop insolvent multiemployer pension plans.
Defined Contribution Plan: In contrast to defined benefit plans, a defined contribution plan does not promise a specific amount of benefits at retirement. The employee or employer (or both) contribute to the employee’s account under the plan. These contributions generally are invested. A 401(k) plan is a common example of a defined contribution plan. The employee will ultimately receive the balance in their account upon retirement, which will be equal to the amount of contributions plus or minus investment gains or losses.
Under the new ARPA, the U.S. Treasury will establish a special financial assistance program administered by the PBGC, which was itself heading toward insolvency. The Treasury will give PBGC $86 billion for the program, and the funds will be available to eligible (at-risk and insolvent) defined benefit pension plans as grants.
Eligible plans will receive a cash payment sufficient to pay all promised benefits through as far as 2051. Recipient plans will not have to pay the money back. Approximately 185 to 336 Taft Hartley Plans may benefit directly from this program, and many more plans will benefit indirectly through the continued solvency of the PBGC.
For more information on relief for pension plans under ARPA, please contact your trust fund counsel.
Author: Abel Rodriguez
