On Friday January 8, the Pension Benefit Guaranty Corporation (PBGC) published a final rule that provides multiemployer pension plans with additional methods to help calculate employer withdrawal liability. The rule includes relatively simplified approaches to calculating withdrawal liability that multiemployer plans may choose to use. The rule comes into effect on Friday, January 7, 2022, 30 days after its publication in the Federal Register. The final rule reflects changes based on several comments made to the proposed rule that was published on February 6, 2019.
The Employee Retirement Income Security Act (ERISA) charges the PBGC with oversight of multiemployer pension plans, including employer withdrawal liability. Multiemployer plans and their actuaries do not have free reign to calculate withdrawal liability as they see fit. Rather, they must follow the provisions and approved methods set forth in ERISA and as published by the PBGC. The new rule stems from amendments to the ERISA funding rules implemented by Congress in 2006 under the Pension Protection Act (“PPA”) and in 2014 under the Multiemployer Pension Reform Act (“MPRA”). The funding rules permitted financially distressed multiemployer plans to reduce adjustable benefits, suspend a portion of nonforfeitable benefits, and impose contribution increases and surcharges for underfunded plans. These funding rules clarified whether plans could take these changes into account when determining withdrawal liability and instructed the PBGC to draft simplified methods to do so.
The final rule amends the current regulations regarding the proper allocation of unfunded vested benefits to withdrawing employers and the withdrawing employer’s annual payment amount owed. Specifically, the methods are simpler ways for plans to:
- Disregard reductions of adjustable benefits and suspensions of nonforfeitable benefits in determining the plan’s unfunded vested benefits for purposes of calculating withdrawal liability;
- Disregard certain contribution increases if the plan is using the presumptive, modified presumptive, or rolling-5 method for purposes of determining the allocation of unfunded vested benefits to an employer; and
- Disregard certain contribution increases for purposes of determining an employer’s annual withdrawal liability payment.
None of the methods in the new rule are mandatory. Plans are free to employ alternative methods that satisfy the requirements of ERISA; however, the PBGC predicts that the methods prescribed by the new rule will allow plans to save money on actuary fees. The PBGC will informally discuss alternative approaches but will not approve them on a plan-by-plan basis.
The simplified methods should lead to fewer disputes with withdrawing employers for the plans that adopt them. One notable exception is the provision that contribution increases required by the PPA that are effective for plan years beginning after December 31, 2014 are excluded from the withdrawal liability calculation unless that increase is used to provide an increase in benefits as permitted by the applicable statute. While the proposed rule addressed and expanded the narrow window to the limitation on using the post-2014 plan year contribution increases, the final rule does not provide any interpretation of this exception. The greatest impact of this exception effects withdrawing employers whose liability is subject to the 20-year cap. A higher contribution rate means a larger annual payment and greater withdrawal liability as measured by the present value of the twenty years of payments. So the issue of whether a post-2014 plan year contribution rate provides an increase in benefits will continue to be a disputed issue.