July 6, 2009: More than two-thirds (68 percent) of calendar year multiemployer plans with funding problems severe enough to warrant their being in critical status—the red zone—elected to take advantage of a “status freeze” that Congress provided in 2008 to help plans stay out of the red zone in 2009, officials at the Segal Co. told BNA July 2.

Those numbers are based on client data that Segal collected at the end of April, the original deadline for multiemployer plans to decide whether to freeze their 2008 funding status to avoid being bumped into red or yellow zone status because of worsening funding problems. IRS announced in Notice 2009-42 that it would extend the deadline for multiemployer plans to decide whether to freeze their plans' funding status (82 PBD, 5/1/09; 36 BPR 1057, 5/5/09).

Red, Yellow, Green Zones

The Pension Protection Act of 2006 (Pub. L. No. 109-280) defined three funding status zones for multiemployer plans, each with their own funding rules. The green zone is for plans that are 80 percent funded or higher. The yellow zone, or endangered status, is for plans that are 65 percent to 79 percent funded. The red zone, or critical status, is for plans that are less than 65 percent funded.

Segal reported that 74 percent (102 out of 138) plans that were eligible to freeze their zone status for 2009 at the 2008 level elected to do so. In particular, 68 percent of red zone plans (50 out of 73) opted to freeze their zone status for 2009 at the 2008 level. Segal also reported that 80 percent of yellow zone plans (52 out of 65) elected to freeze their zone status for 2009 at the 2008 level.

Some fiduciaries whose plans were bumped into the red zone elected to stay there because red zone status would provide them with greater flexibility, such as a three-year extension for rehabilitating their plans' funding, said Eli Greenblum, senior vice president and actuary at Segal.

Shrinking Green Zone

The current fiscal and economic crisis has had significant consequences for the zone status of multiemployer defined benefit pension plans, Segal said. Among the company's 400 multiemployer plan clients, the percentage of calendar year plans in the yellow zone tripled between 2008 and 2009, it said. Only 39 percent of calendar year plans remain in the green zone, a 44 percentage point drop since 2008 when 83 percent of calendar year plans were in the green zone, they said.

A freeze does not give plan fiduciaries an excuse not to improve a plan's funding, said David Blumenstein, senior vice president and national multiemployer market leader at Segal. The Pension Protection Act of 2006 “created consequences for plans that did not otherwise do the right thing,” Blumenstein said. “But the decision to freeze or not freeze is less important than what clients are doing to respond to funding problems,” he added. Each zone has its own rules concerning benefit restrictions and amortization periods allowed for adequately funding the plan.