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PBGC's Proposed Regulations Include Simplified Methods for Calculating Withdrawal Liability for Employers Leaving Multiemployer Pension Plans
Practical Law Legal Update w-018-8835 (Approx. 7 pages)
PBGC's Proposed Regulations Include Simplified Methods for Calculating Withdrawal Liability for Employers Leaving Multiemployer Pension Plans
by Practical Law Employee Benefits & Executive Compensation
| Published on 08 Feb 2019 • USA (National/Federal) |
The Pension Benefit Guaranty Corporation (PBGC) has released proposed regulations that would amend the PBGC's regulations on determining the withdrawal liability and annual withdrawal liability payments of an employer withdrawing from a multiemployer pension plan. The proposed regulations incorporate statutory changes under the Multiemployer Pension Reform Act of 2014 (MPRA). The proposed regulations also provide simplified methods for calculating withdrawal liability.
On February 5, 2019, the Pension Benefit Guaranty Corporation (PBGC) released proposed regulations that would amend the PBGC's regulations on determining the withdrawal liability and annual withdrawal liability payments of an employer withdrawing from a multiemployer pension plan (84 Fed. Reg. 2075 (Feb. 6, 2019); see Practice Note, Multiemployer Pension Plans: Withdrawal Liability). The proposed regulations incorporate statutory changes under the Pension Protection Act of 2006 (PPA) and the Multiemployer Pension Reform Act of 2014 (MPRA), which require plan sponsors to disregard certain benefit reductions and contribution increases when calculating an employer's withdrawal liability and annual withdrawal liability payments. The proposed regulations also provide simplified methods for calculating withdrawal liability.
Withdrawal Liability
Under ERISA, employers that withdraw from a multiemployer plan are subject to withdrawal liability (29 U.S.C. § 1381). Withdrawal liability is liability for the employer's allocable portion of the plan's unfunded vested benefits (UVBs) (the value of nonforfeitable benefits minus the value of plan assets) and is payable over a period of years. ERISA provides four methods for allocating UVBs to employers that withdraw from a multiemployer plan:
- The presumptive method (ERISA § 4211(b) (29 U.S.C. § 1391(b))).
- The modified presumptive method (ERISA § 4211(c)(2) (29 U.S.C. § 1391(c)(2))).
- The rolling-5 year method (ERISA § 4211(c)(3) (29 U.S.C. § 1391(c)(3))).
- The direct attribution method (ERISA § 4211(c)(4) (29 U.S.C. § 1391(c)(4))).
ERISA, as amended by the PPA and MPRA, requires plan sponsors to disregard the following benefit adjustments when calculating withdrawal liability for multiemployer plans in endangered or critical status:
- In determining the plan's UVBs, plan sponsors must disregard adjustable benefit reductions or suspensions of nonforfeitable benefits.
- In determining the allocation of UVBs to a withdrawing employer, plan sponsors must disregard surcharges related to a rehabilitation plan.
- In determining the allocation of UVBs to a withdrawing employer and the highest contribution rate (for purposes of calculating annual withdrawal liability payments), plan sponsors must disregard increases in contribution rates that are made to help the plan meet a funding improvement plan or rehabilitation plan.
ERISA also requires the PBGC to provide simplified methods for plan sponsors to use when applying these "disregard rules" (29 U.S.C. § 1085(g)(5)).
For more information on withdrawal liability, see Practice Notes, Multiemployer Pension Plans: Withdrawal Liability and Responding to an Assessment of Withdrawal Liability from a Multiemployer Pension Plan.
Proposed Regulations
The proposed regulations would incorporate the statutory disregard rules and provide simplified methods for applying those rules.
Disregarding Adjustable Benefit Reductions and Benefit Suspensions
The proposed regulations would add a new section implementing the statutory requirements that plan sponsors disregard reductions or suspensions of nonforfeitable benefits when determining a plan's UVBs. The proposed regulations would:
- Remove the special definition of "nonforfeitable benefit" in the PBGC's withdrawal liability regulations (29 C.F.R. §§ 4211.2 and 4219.2).
- Apply the requirement to disregard benefit suspensions to the ten plan years following the plan year that includes the suspension's effective date. During the ten-year period, plan sponsors would have to include the value of the suspended benefits when determining the plan's UVBs.
Simplified Methods for Disregarding Adjustable Benefit Reductions or Benefit Suspensions
In addition, the proposed regulations provide simplified methods for disregarding adjustable benefit reductions or benefit suspensions. Under the proposed regulations, plan sponsors calculating withdrawal liability would add the withdrawing employer's allocable amount of UVBs and the employer's proportional share of the value of:
- Any adjustable benefit reductions. In determining this value, plan sponsors would use the unamortized balance of the adjustable benefit reduction's value.
- Any suspended benefits. In determining this value, plan sponsors could use either the:
- static value method, under which the plan sponsor would use a single calculation date to determine the present value of suspended benefits; or
- adjusted value method, under which the plan sponsor, for withdrawals occurring after the first year of the ten-year period, would use the last day of the plan year before the withdrawal (called the "revaluation date") to determine the present value of suspended benefits. (For the first plan year the value would be the same as under the static value method.)
The plan sponsor would then multiply the:
- Value of any adjustable benefit reduction by the employer's allocation fraction (the employer's required contributions over a five-year period divided by all employers' required contributions over the same period).
- The value of any suspended benefits by the employer's allocation fraction.
The proposed regulations also provide for certain adjustments when determining the amount of all employers' required contributions.
Disregarding Surcharges and Contribution Increases
The proposed regulations would modify the PBGC regulations to incorporate the statutory requirements that plan sponsors disregard:
- Surcharges when determining the allocation of UVBs to a withdrawing employer.
- Increases in contribution rates that are made to help the plan meet a funding improvement plan or rehabilitation plan, for purposes of determining the allocation of UVBs to a withdrawing employer and the highest contribution rate (for purposes of calculating annual withdrawal liability payments).
Regarding plans that are no longer in endangered or critical status, the proposed regulations would incorporate ERISA's requirements that plan sponsors:
- Include the previously disregarded contribution rate increases, as of the expiration date of the collective bargaining agreement (CBA) in effect when the plan emerges from endangered or critical status, for purposes of determining the allocation fraction.
- Keep disregarding contribution rate increases that applied during the plan years when then plan was endangered or in critical status when determining the highest contribution rate.
Simplified Methods for Disregarding Contribution Rate Increases
The proposed regulations provide simplified methods for disregarding contribution rate increases in determining the allocation fraction, but do not provide simplified methods for disregarding surcharges. According to the PBGC, a simplified method is not needed to help plan sponsors apply the requirement to disregard surcharges.
Under the simplified methods for determining the allocation fraction, plan sponsors may:
- Determine the employer's required contributions (the numerator) by using the employer's 2014 plan year contribution rate.
- Determine all employers' contributions (the denominator) by using either:
- the 2014 plan year contribution rate for each employer; or
- a proxy group model, under which plan sponsors may base the denominator on a proxy group of employers, rather than calculating each employer's contribution rate increases.
With respect to plans that emerge from endangered or critical status, the proposed regulations provide simplified methods for determining:
- When plan sponsors must include previously disregarded contribution rate increases, for purposes of determining the allocation fraction.
- The employer's highest contribution rate, for purposes of calculating the employer's annual withdrawal liability payments.
Applicability Dates
The proposed regulations would apply to:
- Withdrawals that occur on or after the final regulations' effective date, for the changes regarding the simplified methods for calculating an employer's share of UVBs and annual withdrawal liability payments.
- Plan years beginning after December 31, 2014, for the changes concerning MPRA benefit suspensions and contribution rate increases.
- Surcharge obligations that arise on or after December 31, 2014.
Request for Public Comments
The PBGC is requesting public comments on the proposed regulations. Comments must be submitted on or before April 8, 2019.
Practical Implications
As of 2015, approximately 450 multiemployer plans were in endangered or critical status, according to the preamble of the proposal. The PBGC estimates that the simplified withdrawal liability calculation methods would reduce annual costs for multiemployer plans by a total of $1.47 million, resulting from reduced actuarial expenses and withdrawal liability arbitration costs. Employers who participate in multiemployer plans and administrators of those plans should be aware of and monitor the progress of the proposed regulations.