The Pension Benefit Guaranty Corporation (the PBGC) kicked off 2021 by releasing a final rule intended to streamline withdrawal liability calculations for multiemployer plans that are or were in “critical” or “endangered” status (the Final Rule). The Final Rule closely tracks the proposed rule issued in 2019and provides streamlined methods for calculating withdrawal liability for multiemployer plans that have adopted benefit reductions, benefit suspensions, surcharges or contribution increases, as many financially troubled multiemployer plans have.
Under the Employee Retirement Income Security Act of 1974 (ERISA), multiemployer plans assess withdrawal liability on employers that reduce or discontinue participation in an underfunded plan. When an employer leaves an underfunded multiemployer plan in a manner that triggers withdrawal liability, the plan determines that employer’s allocation of the plan’s unfunded vested benefits and assesses an annual withdrawal liability amount (typically a series of installment payments that sometimes can be negotiated into a lump sum settlement).
Provisions in the Pension Protection Act of 2006 and the Multiemployer Pension Reform Act of 2014 allow financially troubled multiemployer plans to adopt benefit reductions, impose benefit suspensions, assess surcharges and increase contributions. Depending on the circumstances, some of these adjustments are mandatory, while others are permissive. After implementing such adjustments, these laws further require a plan sponsor to disregard most of these adjustments when determining an employer’s withdrawal liability.
The Final Rule provides simplified, streamlined methods for a multiemployer plan sponsor to:
Disregard reductions and suspensions of nonforfeitable benefits in determining the plan’s unfunded vested benefits for purposes of calculating withdrawal liability.
Disregard certain contribution increases and surcharges for purposes of calculating withdrawal liability.
The Final Rule applies to assessments of withdrawal liability for employer withdrawals that occur in plan years beginning on or after February 8, 2021. Adherence with the Final Rule is optional. While the use of one of the streamlined methods set forth in the Final Rule ensures compliance, the use of another method may continue to be permissive. If plan sponsors are considering an alternative calculation method, the PBGC encourages informal consultations with its trustees and their advisors.
The PBGC expects that the Final Rule will reduce the actuarial fees (and occasional arbitration fees) historically paid by financially troubled multiemployer plans when calculating withdrawal liability. Unfortunately for employers that participate in such plans, the Final Rule will not likely result in material changes to the amount of withdrawal liability assessed on the employers that withdraw from these plans. The amount of withdrawal liability assessed by funds on participating employers continues to be a hotly contested issue in court and through proposed legislation.