A federal court upheld the Pension Benefit Guaranty Corporation’s decision to deny a multiemployer plan’s application for special financial assistance.
The PBGC had denied the application because the Bakery Drivers Local 550 and Industry Pension Fund had terminated by mass withdrawal in 2016, then attempted to restore itself in 2022 with the intent to apply for an SFA grant. Local 550 challenged the PBGC’s decision in March in the U.S. District Court for the Eastern District of New York. The court ruled against the pension fund on October 26 in Board of Trustees of the Bakery Drivers Local 550 and Industry Pension Fund v. PBGC.
In 2011, approximately 60% of Local 550’s contributions came from Hostess Brands Inc., which declared bankruptcy in 2012 and was not required to pay withdrawal liability to the plan. In 2016, the remaining largest employers in the multiemployer plan transferred liability to the International Brotherhood of Teamsters and terminated the plan by mass withdrawal. The pension fund’s complaint noted that the PBGC approved this transaction and that it was done in the best interests of the plan.
According to the plan’s Form 5500 from 2016, the last year of its existence, it had 122 active participants at the beginning of 2016 and 0 at year’s end. It had 711 retired participants, 303 participants entitled to benefits in the future and 246 deceased participants with beneficiaries receiving benefits. The plan was 21.84% funded at the end of that year.
The Floral Park, New York-based plan argued that it restored itself in September 2022 and met the criteria for a grant under the Special Financial Assistance program. Specifically, according to the PBGC’s final rule, a plan in critical and declining status in plan years 2020, 2021 or 2022 is eligible for a grant, in addition to other criteria. Since Local 550 was in critical and declining status in 2022, the year it was reconstituted, it asserted that denying the plan’s application was unlawful.
When the plan restored itself in 2022, it anticipated its insolvency by August 2023. The plan applied for a $132 million grant in January 2023. The PBGC denied the application because plans terminated by mass withdrawal are ineligible for a grant, and there is no process for self-restoration under the Employee Retirement Income Security Act. Only the PBGC can restore a multiemployer plan.
The district court ruled that a terminated plan cannot have status under the PBGC’s system for rating plan solvency and therefore cannot claim to have been in critical and declining status for the purposes of applying for an SFA grant. Further, ERISA does not permit plans to unilaterally restore themselves. Therefore, the PBGC acted reasonably within the statute in denying the application, according to the court decision.
John Lowell, a partner with October Three, explains that, “While the statute makes provision for PBGC to restore a plan that has been terminated via mass withdrawal, the statute neither specifically allows nor precludes a fund from doing that itself. The court found that PBGC was acting within the powers afforded it by Congress in saying that the fund in question could not restore itself and thereby make itself eligible for the taxpayer-funded Special Financial Assistance.”
Lowell adds that this is unlikely to be a recurrent problem, because this is “an unusual case in which the fund tried to avail itself of a novel legal theory. I do not see where this will have any effect on other pending or future applications for SFA money of which I am aware.”
Attorneys for the plan did not respond to a request for comment about whether they intend to appeal the court’s decision.
Tags: critical and declining, fiduciary duties, PBGC, SFA