Proposed Changes to Withdrawal Liability Calculations
The Pension Protection Act left open certain areas of pension plan administration to further amendment. We are beginning to see proposed regulations that would fill in the gaps created by the PPA. The first of these regulations are proposed by the Pension Benefit Guaranty Corporation (PBGC). These proposed regulations modify parts of the multiemployer pension plan withdrawal liability rules under ERISA. These new rules may alter the amount of withdrawal liability that would otherwise be assessed to an employer withdrawing from a multiemployer pension plan, depending on the adoptive options taken by the plan Trustees.
The proposed regulations, which are based on the statutory changes made by the Pension Protection Act of 2006 (PPA), present 4 key items:
* there is a mandated adjustment to the withdrawal liability calculation for multiemployer plans that are in “critical status”
* there is a “Fresh Start” rule that applies to calculations
* there is a limited exception that allows an employer to delay making withdrawal liability payments until a final decision is rendered by a court or arbitrator
* there is a change to the allocation of a plan’s total unfunded vested benefits (UVBs) among employers in a mass withdrawal.
Comments on the proposed regulations are due by May 19, 2008, and the regulations would be effective as of the approved date unless otherwise stated.
Withdrawal Liability Calculations for Critical Status Plans
As most employers participating in multiemployer funds have now become aware, the PPA introduced new rules for multiemployer plans whose funding is in “critical status.” Part of the relief provided under the PPA allows “critical” plans to reduce “adjustable benefits” and also requires contributing employers to pay a surcharge equal to 5% of contributions (10% after the first year the plan is in critical status). The PPA requires that such adjustments must be disregarded in determining a plan’s UVBs, and the employer surcharge is not taken into account in calculating an employer’s allocable portion of UVBs for purposes of determining withdrawal liability. The proposed rule expands the definition of “nonforfeitable benefits” and “unfunded vested benefits” to include adjustable benefits that have been reduced while the plan is in critical status. The proposed rule also provides that the employer surcharge would be subtracted from both the numerator and denominator of the allocation fraction used to determine an employer’s withdrawal liability. This change will impact how withdrawal liability is calculated, but it may not necessarily decrease overall withdrawal liability for plans. These changes are effective for withdrawals occurring during plan years beginning on or after January 1, 2008.
The “Fresh Start” Rule
Generally, a complete or partial withdrawal from a multiemployer pension plan results in an employer facing a payment of its share of unfunded vested benefits (VVBs). This liability can presently be calculated using one of two methods. The most common is the “presumptive method.” The alternative is the “modified presumptive method.” In both methods, plan’s UVBs prior to 1980 are calculated and then the plan allocates those UVBs to those employers contributing at that time. The employer’s allocable share of UVBs is generally determined by dividing the contributions paid by the employer over a set period of time by contributions paid by all employers over the same time period. Once the employer’s share of pre-1980 UVBs is determined, this amount is added to withdrawal liability incurred after 1980. Under the presumptive method, for years after 1980, an employer is allocated a share of the change in UVBs on a year-by-year basis. Under the modified presumptive method, an employer is allocated a share of total UVBs that exist in a year prior to the year of withdrawal.
The proposed regulations allow a plan to substitute any year for the previously prescribed 1980 cutoff, thus providing a year that is a “fresh start” for computation purposes. The intent of the new rule is (1) to relieve plans using the presumptive method from the burden of having to go back as far as 1980 to compute each employer’s allocable share of changes in UVBs, and (2) to provide relief to new employers from liability for past UVBs. Under the proposed regulation, if a plan was not fully funded for a designated year using the presumptive method, the UVBs calculated during the designated year would be allocated among the then-contributing employers. The plan would not have to go back to 1980, but would continue allocating UVBs on a year-by-year basis from the fresh-start year.
Whether a plan used the presumptive method or the modified presumptive method, if the plan designated a year where there were no unfunded benefits, employers withdrawing from the plan after such designation was made would not be liable for UVBs that developed in years prior to the designated year. The proposed rule clarifies that a plan’s UVBs, determined with respect to plan years ending after the newly designated plan year, are reduced by the value of the outstanding claims for withdrawal liability that can reasonably be expected to be collected from employers who withdrew from the plan in or before the designated plan year. The change would generally be effective January 1, 2007 (provided the new year is a year in which the plan is fully funded). The other changes generally are effective for employer withdrawals that occur on or after the effective date of the final rule.
Note that construction industry plans are required to use the presumptive method, but, under the regulations (due to certain other restrictions), may only designate a year in which the plan was fully funded as the new “fresh start” year.
Avoiding Interim Withdrawal Liability Payments
The PPA created a narrow exception to the rule that employers have to pay withdrawal liability interim payments even while disputing liability determination. The exception applies in cases where a plan sponsor makes a determination that the employer’s withdrawal liability was due to a transaction whose purpose was to evade or avoid withdrawal liability. The proposed regulation puts this exception into effect so that an employer will be relieved of its obligation to pay withdrawal liability until a final decision is reached by an arbitrator or a court. However, it applies only if (1) the alleged transaction occurred on or after December 31, 1998, and at least five years prior to the withdrawal (two years for small employers), and (2) the employer provides notice to the plan sponsor of its election not to make the withdrawal liability payments.
Under this proposed regulation, an employer is required to post a bond equal to the withdrawal liability payments that would otherwise be due if a court or arbitrator has not rendered a final decision within 12 months. This provision is effective for withdrawal liability assessments on or after August 17, 2006.
Calculation of Liability in Mass Withdrawals
Generally, the calculation of liability in a mass withdrawal is subject to two stages of computation. First, an employer incurs “initial withdrawal liability,” which is computed as the liability for the employer’s share of UVB determined at the time the employer withdrew. Second, the employer is subject to a computation of “reallocation liability.” “Reallocation liability” is the employers share of any remaining UVBs that are uncollectible from other employers. The amount of an employer’s reallocation liability is based on its proportion of initial withdrawal liability relative to the initial withdrawal liability of all the other employers who are part of the mass withdrawal.
The rule proposes to address the situation where an employer deemed to be part of a mass withdrawal who withdrew in a year where there the plan had little or no unfunded liability could be assessed a much lower portion of reallocation liability. The proposed adjustment provides for using the employer’s relative share of contributions for the three-year period preceding the mass withdrawal (rather than its share of withdrawal liability at the time it withdrew) to determine its reallocation liability. This provision will apply to mass withdrawals that occur after the effective date of the final rule.
Modifying the Definition of Multiemployer Plan
The PPA amended the definition of a “multiemployer plan” to allow certain collectively bargained plans maintained by tax exempt organizations to be treated as multiemployer plans. The election to be treated as multiemployer plans must be have been made by August 17, 2007. The proposed rule reflects this new definition of a “multiemployer plan.
The PPA requires multiemployer pension plans to provide to employers certain actuarial reports and other financial information if the employers request it. These plans are also required to provide employers with such information in the event the plan’s funding status is “endangered” or “critical.” These added disclosure requirements mean that employers will have a better ability to monitor the financial health of the plans in which they participate. If a multiemployer plan is poorly funded, a participating employer should inquire whether the plan has adopted a “fresh start” year. If it has, the employer should ask the effect that this change and the impact it will have on withdrawal liability calculations. Our recommendation, for employers who have withdrawn from multiemployer pension funds after the effective date of the PPA, or who are considering withdrawal, is that they request actuarial information from the plan to permit a careful review of the actuarial assumptions and methods used to compute the withdrawal liability. It is likely that many of the plans have changed actuarial assumptions in anticipation of PPA certifications and it is possible that those changes may present an opportunity for a challenge to a withdrawal liability assessment.
