The Pension Benefit Guaranty Corporation (PBGC) recently proposed amendments to the regulations that govern how multiemployer plans calculate withdrawal liability. The PBGC has invited comment on these proposed regulations through April 8, 2019.
By way of background, under sections 4201 through 4225 of ERISA, when a contributing employer withdrawals from an underfunded multiemployer plan, the plan sponsor assesses withdrawal liability against the employer. Withdrawal liability represents a withdrawing employer's proportionate share of the plan's unfunded benefit obligations.
In response to financial difficulties faced by many multiemployer plans, Congress amended ERISA in 2006 and 2014. These amendments permit financially weak 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.
Moreover, the 2014 amendments also required a plan sponsor to disregard benefit suspensions in determining the plan's unfunded vested benefits for a period of 10 years after the effective date of the benefit suspension and disregard certain contribution increases in determining the allocation of unfunded vested benefits. Finally, a plan sponsor must also disregard surcharges and those contribution increases in determining an employer's annual withdrawal liability payment under section 4219 of ERISA.
The PBGC's February 2019 proposed regulations simplify the manner in which plans that have implemented benefit reductions, benefit suspensions, contribution increases, or surcharges calculate withdrawal liability. Key provisions of the proposed regulations include:
- The requirement to disregard a benefit suspension in calculating the value of unfunded vested benefits would apply 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, the plan sponsor can adopt a simplified method to determine the value of those reductions. While under the simplified framework a plan sponsor must include liabilities for benefits that have been reduced or suspended, the proposed regulations do not require a plan sponsor to calculate what plan assets would have been if benefit payments had been higher.
- The proposed regulations provide simplified methods for disregarding certain contribution increases when determining the allocation of unfunded vested benefits attributed to an employer and the annual withdrawal liability payment amount.
- The proposed regulations also set forth three simplified methods for disregarding certain contribution increases in the allocation fraction.
- Finally, the proposed regulations propose simplified methods to address contribution increases when a plan is no longer in endangered or critical status.
The PBGC anticipates that the imposition of these simplified formulas will reduce costs for multiemployer plans due to a reduction in the time an actuary spends calculating withdrawal liability. The PBGC does not anticipate that employers would have any savings as the new "simple" method of calculating withdrawal liability is intended to produce the substantially same amount of withdrawal liability assessed on an employer.
Even though the PBGC has attempted to 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 who have received an assessment of withdrawal liability, should consult with counsel in determining the appropriate steps to take.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.