Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.
On January 8, 2021, the Pension Benefit Guaranty Corporation (PBGC) issued its final rule modifying the calculation of withdrawal liability by multiemployer pension plans. This final rule amends the agency’s regulations on allocating unfunded vested benefits to withdrawing employers (29 C.F.R. § 4211) and notice, collection, and redetermination of withdrawal liability (29 C.F.R. § 4219).
Under sections 4201 through 4225 of ERISA, when a contributing employer withdraws from an underfunded multiemployer pension plan, the plan trustees assesses withdrawal liability against the employer. Such liability represents the withdrawing employer’s proportionate share of the plan’s underfunded benefit obligations. Congress’s 2006 and 2014 amendments to ERISA permitted financially troubled plans to reduce adjustable benefits (e.g., post-retirement death benefits and early retirement benefits), suspend (either temporarily or permanently) current or future benefits to participants or beneficiaries, impose surcharges on contributing employers, and impose contribution increases pursuant to a funding improvement or rehabilitation plan.
Additionally, Congress’s 2014 amendments to ERISA also require the trustees to disregard benefit suspensions when determining the plan’s unfunded vested benefits for 10 years after the effective date of the benefit suspension, and to disregard certain contribution increases in determining the allocation of unfunded vested benefits. Finally, a plan must also disregard surcharges and those same contribution increases in determining an employer’s annual withdrawal liability payment under section 4219 of ERISA. The final rule offers plans a simplified method for calculating this withdrawal liability.
The finalization of this rule has been expected since the agency issued its proposed regulations in February 2019. While the final rule largely follows the proposed rule, it also provides additional clarifications to the simplified withdrawal liability calculation methods and includes certain examples illustrating the simplified calculations. Key provisions clarify that:
- The simplified framework for determining withdrawal liability applies prospectively only and is applicable for withdrawals that occur in plan years beginning after February 8, 2021 if they are adopted by the plan.
- The requirement to disregard a benefit suspension applies only for withdrawals that occur within the 10 plan years after the end of the plan year that includes the effective date of the benefit suspension.
- If a plan has adjustable benefit reductions and/or benefit suspensions, the plan has the ability to adopt the simplified framework set forth in the final rule when determining withdrawal liability, or to use an alternative approach that still satisfies the statutory and regulatory requirements.
- In the case of a plan that primarily covers employees in the building and construction industry, the plan year designated by a plan amendment to implement a fresh start must be a plan year for which the plan has no unfunded vested benefits.
- Plan sponsors may allocate the value of adjustable benefit reductions for plans by using the presumptive method based on the five consecutive plan years ending before the plan year in which the adjustable benefit reduction takes effect.
- If a plan has certain contribution increases that must be disregarded under Sections 305(g)(2) and (3) of ERISA, the plan sponsor has the ability to adopt one of the simplified methods set forth in the final rule.
- For plans that are no longer in endangered or critical status, the final rule provides simplified methods for addressing contribution increases, including how to determine the highest contribution rate.
The PBGC estimates that these amendments will reduce certain multiemployer plans’ actuarial costs by approximately $1,476,000 annually.
Note, however, that, on January 20, 2021, the Biden Administration requested that agencies postpone for 60 days the effective dates of rules that have been issued, but have not yet taken effect to allow the new administration to review them. Accordingly, and pursuant to that guidance, the PBGC may still postpone the effective date of this Rule.
Although PBGC appropriately believes that this final rule will simplify the calculation of withdrawal liability in this specific context, this area remains very technical and complex. Employers contemplating withdrawing from a multiemployer pension fund or those who have received an assessment of withdrawal liability from a multiemployer pension fund should consult with counsel in determining the appropriate steps to take.