PBGC's Final Regulations Include Simplified Methods for Calculating Withdrawal Liability for Employers Leaving Multiemployer Pension Plans

Practical Law Legal Update w-029-1121 (Approx. 7 pages)

PBGC's Final Regulations Include Simplified Methods for Calculating Withdrawal Liability for Employers Leaving Multiemployer Pension Plans

by Practical Law Employee Benefits & Executive Compensation

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 contribution 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.

(29 U.S.C. § 1085(g).)

Congress also authorized the PBGC to create 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.

Final Regulations

The final regulations incorporate the statutory disregard rules and provide simplified methods for applying those rules. They are substantially similar to the proposed regulations issued in February 2019 (see Legal Update, PBGC's Proposed Regulations Include Simplified Methods for Calculating Withdrawal Liability for Employers Leaving Multiemployer Pension Plans).

Disregarding Adjustable Benefit Reductions and Benefit Suspensions

The final regulations 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 final regulations:

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 will have to include the value of the suspended benefits when determining the plan's UVBs allocable to an employer.

Simplified Methods for Disregarding Adjustable Benefit Reductions or Benefit Suspensions

The final regulations also provide simplified methods for disregarding adjustable benefit reductions or benefit suspensions. Under the simplified framework, if a plan has adjustable benefit reductions or benefit suspensions, the plan sponsor calculates the amount that would be 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 will 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 will use a single calculation date to determine the present value of suspended benefits for all withdrawals in the ten-year period; or
- adjusted value method, under which the plan sponsor, for withdrawals occurring after the first year of the ten-year period, will 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 will be the same as under the static value method.)

The plan sponsor then multiplies 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) to determine the employer's proportional share of the value of adjustable benefit reductions.
The value of any suspended benefits by the employer's allocation fraction to determine the employer's proportional share of the value of a benefit suspension.

The final regulations also provide for certain adjustments when determining the amount of all employers' required contributions (the denominator of the allocation fraction).

Disregarding Surcharges and Contribution Increases

The final regulations 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 final regulations 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.

(29 U.S.C. § 1085(g)(4).)

Simplified Methods for Disregarding Contribution Rate Increases

The final 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, plan sponsors have been able to apply the statutory requirements without the need for a simplified method.

Under the simplified methods for determining the allocation fraction, plan sponsors may:

Calculate the employer's contribution rate (the numerator) as of the "employer freeze date." The employer freeze date is the date that is the later of:
- the last day of the first plan year that ends on or after December 31, 2014 (December 31, 2014, for calendar year plans); or
- the last day of the plan year the employer first contributes to the plan.
Determine the denominator of the allocation fraction by using either:
- each employer's contribution rate as of the employer freeze date; 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 final 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 final regulations are effective on February 8, 2021, and they apply to employer withdrawals from multiemployer plans that occur in plan years beginning on or after the effective date. For certain changes regarding MPRA benefit suspensions and contribution rate increases, as well as certain surcharge obligations, the proposed regulations applied after December 31, 2014. In response to comments on the proposed regulations, the final regulations apply prospectively only.

Differences Between the Final and Proposed Regulations

Although the final regulations and the proposed regulations are substantially similar, practitioners should be aware that the final regulations include the following changes:

Minor adjustments to the simplified methods for calculating withdrawal liability, such as:
- the simplified framework for disregarding benefit reductions and benefit suspensions; and
- additional options for allocating the value of the adjustable benefit reductions.
Omitting the requirement that proxy group employers be named in the plan.
Providing an exception to the disregard rules for a contribution increase that increases benefits by adding a reference to ERISA Section 305(g)(3) (29 U.S.C. § 1085(g)(3)).
Additional examples illustrating the new regulations.

The final regulations do not adopt the requirement in the proposed rule that the portion of contribution increases that funds an increase in future benefit accruals be determined actuarially.

Practical Implications

According to 2016 data cited in the preamble to the final regulations, approximately 450 multiemployer plans in the US were in endangered or critical status. The PBGC estimates that the simplified withdrawal liability calculation methods will reduce annual costs for multiemployer plans by a total of $1.48 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 the regulations and how potential future withdrawal liability may be calculated if a plan is in endangered or critical status.

PBGC's Final Regulations Include Simplified Methods for Calculating Withdrawal Liability for Employers Leaving Multiemployer Pension Plans | Practical Law