PBGC Rule on Multiemployer Pension Assistance Has Mixed Results for Employers

Provisions could either increase or decrease an employer’s withdrawal liability

By Paul A. Friedman, Robert R. Perry and David M. Pixley © Jackson Lewis July 14, 2021
PBGC Rule on Multiemployer Pension Assistance Has Mixed Results for Employers

On July 9, the Pension Benefit Guaranty Corp. (PBGC) issued an interim final rule on the process for eligible troubled multiemployer pension plans (MEPPs) to apply for and obtain special financial assistance (SFA) under the American Rescue Plan Act (ARPA). The rule was posted on PBGC's website and immediately became effective as guidance.

The PBGC expects the SFA to directly (via the restoration of previously reduced benefits) and indirectly (by providing enhanced retirement security) help more than 3 million MEPP participants and beneficiaries. PBGC's multiemployer insurance program is also expected to prosper; more than 100 plans that would have otherwise become insolvent during the next 15 years will instead forestall insolvency as a direct result of receiving SFA.

Much of the rule focuses on the SFA eligibility, application and calculation processes. Exercising authority granted to PBGC under the statute, however, the rule imposes several restrictions and conditions on MEPPs receiving SFA. The impact of these provisions on employers remains unclear.

[Related SHRM article: Stimulus Bill Provides Extensive Pension Funding Relief]

Employers' Withdrawal Liability

After noting that "payment of SFA was not intended to reduce withdrawal liability or to make it easier for employers to withdraw," the rule requires a MEPP to use the "mass withdrawal interest assumptions" for a minimum of 10 years after receiving SFA. The interest rates prescribed for a mass withdrawal are often lower (in many instances significantly lower) than the withdrawal liability interest rate currently used by many MEPPs. As a result, this requirement (which is effective for withdrawals after the plan year in which the plan receives SFA) would increase the amount of many employers' withdrawal liability.

Other provisions in the rule could potentially decrease the amount of an employer's withdrawal liability, however. Prior to the rule's issuance, many believed that the amount of SFA would be disregarded for withdrawal liability purposes. The rule's preamble, however, indicates that this approach was considered and rejected. The rule appears to include SFA as a plan asset in the withdrawal liability calculation.

Since withdrawal liability represents the excess of liabilities over assets, this would tend to reduce an employer's withdrawal liability (subject to other conditions and limitations applicable to determining an employer's payment obligations.) We anticipate that this provision will generate vigorous comment and discussion.

A second condition placed on a MEPP receiving SFA is that any settlement of withdrawal liability in excess of $50 million requires PBGC approval. It is unclear how trustees' fiduciary duty will be impacted if they and the PBGC cannot agree on a resolution. At minimum, this condition will provide additional hurdles for large withdrawal liability settlements.

[Want to learn more about retirement benefits and financial well-being? Join us at the SHRM Annual Conference & Expo 2021, taking place Sept. 9-12 in Las Vegas and virtually.]

Employers' Contribution Obligations

The rule also addressed PBGC's mandate that SFA be used for its intended purpose and not diverted to other purposes by "reducing sources of plan income, such as employer contributions or withdrawal liability."

Further, the rule generally prohibits contribution rate decreases to ensure that SFA is not effectively transferred to contributing employers through decreased contribution obligations. This is done by mandating (with limited exception) that contribution rates cannot be less than those provided through the end of any collective bargaining agreements in effect on March 11, 2021.

In this regard, the rule seemingly ignores the existing and ongoing burden imposed on contributing employers, specifically as it relates to contribution rates.

Several provisions in the rule seem intended to foreclose nefarious conduct by MEPPs in the application process. For example, the rule generally requires a MEPP to use an interest rate based on the fund's most recently completed certification of plan funding status when calculating the amount of SFA for which it is eligible.

While this rate may be changed on the SFA application, PBGC warned MEPPs that it would perform a "searching analysis of any changed assumptions," highlighting that this "presents many opportunities for judgment calls that may be influenced by the goal of maximizing SFA."

This analysis will be of interest to employers (and their counsel) that have argued for decades that MEPPs have intentionally manipulated interest rate assumptions to artificially overstate employer withdrawal liability, an issue currently on appeal to United States Court of Appeals.

Under ARPA, the SFA received by each MEPP must be invested in investment-grade bonds or other investments permitted by PBGC. These conservative investments have historically produced modest yet consistent returns. These lower anticipated rates of return, however, likely will operate to increase employer withdrawal liability for MEPPs receiving SFA.

Mixed Implications

In sum, the overall impact of the rule on employers remains unclear. Employers that contribute to MEPPs receiving SFA can expect no contribution rate relief. While the mandated use of lower interest rates to calculate withdrawal liability would increase the amount of liabilities and therefore the amount of withdrawal liability, the inclusion of SFA as a MEPP asset would tend to reduce employer withdrawal liability.

Paul A. Friedman is a principal in the White Plains, N.Y. office of law firm Jackson Lewis P.C. Robert R. Perry is a principal in the firm's New York City office. David M. Pixley is of counsel in the firm's Cleveland office. This article was originally published, in a slightly different form, on the firm's website. © 2021 Jackson Lewis P.C. All rights reserved. Reposted with permission.



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