Background

Milliman provides administration and actuarial services to Company A’s fully-frozen Pension Plan A that is in the process of a standard plan termination. Company B sponsors Pension Plan B, an ongoing union pension plan with a flat-dollar times service formula.

During the plan termination process of Pension Plan A, Company A and Company B enter into a joint venture (JV), with Company A having a 61% controlling-interest in the JV. The JV includes 100% of the active participants in Pension Plans A and B. The JV creates DC Plan A, a defined contribution (DC) plan for non-union participants, which includes a 5% non-elective employer contribution. The JV wishes to assess retirement benefit alternatives for Company B union employees moving into the JV.

Interim solution

The effective date of employees transferring into the JV is December 2019. As the plan design is being assessed as that time, the JV begins to make 5% employer contributions into DC Plan A to JV employees including former Company B union employees. In July 2020, the JV resumes discussions to implement a new DB plan effective January 1, 2021, to cover former Company B union employees.

Designs

As the JV refocuses on implementing a DB plan, the client wishes to include two key factors into the design: 1) incorporate the 5% non-elective contributions already made into DC Plan A to former Company B union employees, and 2) do not retroactively credit pension service to December 2019. The JV considers the following design alternatives:

1. Spin off union participants from DC Plan A into a new DC Plan B and immediately merge into a new Pension Plan C with Pension Plan B provisions:
• Legal counsel’s opinion is that a Private Letter Ruling (PLR) would be required to ensure compliance with various regulations of the Internal Revenue Service (IRS) and the Employee Retirement Income Security Act (ERISA). The client decides the cost of analyzing and implementing this option would be too expensive compared with other alternatives.
2. Create a Pension Plan D with a floor offset arrangement:
• This design would leave the 5% non-elective contribution in DC Plan A.
• Legal counsel’s opinion is that a floor offset arrangement is more common without the need for a PLR on the plan design. Milliman notes that as the IRS is not issuing determination letters on individually designed plans, the JV may have difficulty receiving assurance that Modified Pension Plan D is “perfectly” drafted. Milliman agrees with legal counsel’s opinion that many employers would accept this uncertainty as the floor offset design is fairly common.
3. Create a Pension Plan E with a “double offset” arrangement.
   • This design would leave the 5% non-elective contribution in DC Plan A.
   • Under this design, Pension Plan E would be disconnected from DC Plan A as compared with the floor offset design.
   • The plan formula would be:
   • [(Gross benefit of dollar multiplier) TIMES (Company B and JV service)] MINUS (Pension Plan B accrued benefit as of transfer to the JV) MINUS (the DB equivalent benefit of 5% of compensation from December 2019 to September 2020).
   • The offset representing DC Plan A contributions would be defined without reference to DC Plan A.

Final outcome

The client decided to create a Pension Plan E with a “double offset” arrangement, as the union agreed this design would meet the desired retirement benefits with respect to the collectively bargained agreement.