The U.S. Treasury Department's rejection of a proposal by the Central States Pension Fund to slash benefits sets the stage for the collapse of the massively underfunded plan as well as the failure of the decades-old federal insurance program that protects benefits of more than 10 million participants in multiemployer plans.

Benefit experts and Central States Southeast and Southwest Areas Pension Fund executives say the national implications of last month's decision by Treasury cannot be overstated.

Such restructuring proposals are allowed under a 2014 federal law, with Treasury's approval. The department rejected the Central States proposal for several reasons, including the use of an investment return assumption that was too optimistic and failing to show that the proposed cuts would keep the plan solvent in the future.

“I view it as Armageddon,” said Jack Abraham, a principal with PricewaterhouseCoopers L.L.P. in Chicago.

Others concur. Thomas Nyhan, executive director of the Central States plan, warns of devastating consequences for not only the plan's more than 400,000 participants, but also the Pension Benefit Guaranty Corp.'s insurance program that guarantees benefits — up to certain limits — accrued by the more than 10 million people covered by the nation's 1,425 multiemployer plans.

“If the PBGC's multiemployer fund is not already insolvent itself at that time, the failure of Central States would, absent new funding for the PBGC, soon drain whatever money remains. There would no longer be any federal backstop for participants of any multiemployer plan. The retirement security of millions is at stake,” Mr. Nyhan said in an email.

Publicly available financial figures bring home Mr. Nyhan's warning. According to its most recent public financial statements, the Central States plan had at the end of 2014, $35 billion in liabilities and $17.8 billion in assets.

Its future is not promising. The plan has lost thousands of employer members due to industry deregulation and economic downturns among other things. In addition, Mr. Nyhan says, nearly 1,000 employers have gone broke or gone out of business without making required plan payments known as withdrawal liability.

The plan now pays out $3.46 each year in benefits for every $1 it collects from employer members, creating a $2 billion annual shortfall between employer contributions and benefit payouts. The plan projects going broke in about a decade.

And that could lead to the collapse of the PBGC's multiemployer insurance program, which would be liable for an undisclosed portion of the benefits Central States participants were promised.

Indeed, assets in the PBGC's multiemployer insurance program — about $1.9 billion at the end of 2015 — are dwarfed by its more than $54 billion in liabilities. The PBGC now collects just $270 million a year from the $27 per participant annual premium paid by the plans.

“The PBGC was in trouble already,” says Vince Sandusky, CEO of the Sheet Metal and Air Conditioning Contractors' National Association in Chantilly, Virginia, many of whose members contribute to a multiemployer plan. The collapse of the Central States plan would accelerate the decline of the PBGC's multiemployer insurance program, Mr. Sandusky added.

Last year the PBGC projected that the passage of the 2014 legislation allowing — with Treasury Department approval — financially troubled plans to cut benefits, will only delay by three years to 2025 from 2022 the insolvency of the agency's multiemployer insurance program.

While provisions in the 2014 multiemployer law that allow troubled plans to suspend benefits will “substantially reduce the magnitude of the PBGC deficits in 2024, they do not significantly change the projected insolvency of the fund,” the PBGC said in its report.

The Obama administration already has proposed several changes, all of which would require congressional approval, to prevent or at least delay the collapse of the PBGC's multiemployer insurance program.

They include requiring multiemployer plans to pay an additional premium to the PBGC based on their level of underfunding, much like single-employer plans do.

Some observers say the threat of a collapse of the Central States plan and its effect on the PBGC's insurance program could pique congressional interest.

“Congress is more likely to raise premiums now that there may be a deeper hole to fill,” said Randy DeFrehn, executive director the Washington-based National Coordinating Committee for Multiemployer Plans, which represents many of the nation's 1,400 multiemployer plans.

“Premiums were set too low to start,” said Karen Friedman, executive vice president and policy director of the Pension Rights Center in Washington.

Others worry that boosting premiums too much could lead more employers to exit the plans.

“Big premium hikes would have dramatic, negative implications for those remaining in the system,” Mr. DeFrehn said.

Other suggestions include offering employers a new plan design — one in which they no longer would be exposed to withdrawal liability or payment of PBGC premiums but still would have to pay premiums for current liabilities.

Some observers are confident that Congress will come up with a solution to preserve the agency's insurance program.

“We have time to come up with solutions. It is in everyone's interest,” Ms. Friedman said.

But it could be awhile for congressional action, others warn. “Congress tends not to act until a crisis is imminent,” Mr. DeFrehn pointed out.