PBGC Addresses Withdrawal Liability Assumptions For First Time In New Proposed Rule

By: Seong J. Kim, Alan Cabral, Ronald J. Kramer, and Ryan C. Tzeng

Seyfarth Synopsis: On October 14, 2022, the Pension Benefit Guaranty Corporation (“PBGC”) published its proposed rule under ERISA Section 4213 (the “Proposed Rule”), which sets forth for the first time the agency’s guidance on what interest rate assumptions may be used by a multiemployer plan actuary to calculate withdrawal liability.[1] This follows-up the PBGC’s interim final rule on Special Financial Assistance (SFA) published on July 12, 2021, in which the PBGC indicated its intent to propose a separate rule of general applicability under ERISA Section 4213. Comments to the Proposed Rule must be received by November 14, 2022 for agency consideration. Click here for our earlier Legal Updates titled “PBGC Finally Publishes Final Rule On Special Financial Assistance Program” and “PBGC Issues Much Anticipated Interim Final Rule On Special Financial Assistance Under American Rescue Plan Act.”

The following is a high level summary of the key developments from the Proposed Rule.

Calculation of Withdrawal Liability

Under ERISA Section 4201, when a contributing employer withdraws from an underfunded multiemployer plan, the employer may be assessed “withdrawal liability,” which represents its share of the plan’s unfunded vested benefits (“UVBs”). Withdrawal liability is calculated by the plan’s actuary as of the end of the plan year immediately preceding the plan year in which the employer withdraws (i.e., the valuation date), and the plan’s total UVBs are calculated as the amount by which the present value of the nonforfeitable benefits exceeds the value of plan assets (as of the applicable valuation date).[2]

The present value of nonforfeitable benefits is determined by the plan actuary using the appropriate actuarial assumptions and methods. These assumptions include the interest rate that is used to discount future benefit payments to their present value (also referred to as the “discount rate”) and the mortality table used to determine the probability that each benefit payment will actually be made.[3]

PBGC Guidance Under ERISA Section 4213(a)

Previously, guidance released by the PBGC regarding interest rate assumptions applied only to plans terminated by mass withdrawal. Those regulations prescribed the use of the average market price of a life annuity, determined by the PBGC from its quarterly survey of insurance companies, and which was used as the interest rate in terminations of single employer plans (“PBGC Plan Termination Rate”). This was true even though, since the adoption of the Multiemployer Pension Plan Amendments Act of 1980, Congress had provided the PBGC with the authority to establish actuarial assumptions for withdrawal liability purposes.

For ongoing (i.e., non-terminating) multiemployer plans, ERISA Section 4213(a) states, in relevant part:

“(a) Use by plan actuary in determining unfunded vested benefits of a plan for computing withdrawal liability of employer. The corporation [PBGC] may prescribe by regulation actuarial assumptions which may be used by a plan actuary in determining the unfunded vested benefits of a plan for purposes of determining an employer’s withdrawal liability under this part. Withdrawal liability under this party shall be determined by each plan on the basis of --

(1) actuarial assumptions and methods, which in the aggregate, are reasonable (taking into account the experience of the plan and reasonable expectations) and which, in combination, offer the actuary’s best estimate of anticipated experience under the plan, or

(2) actuarial assumptions and methods set forth in the [PBGC’s] regulations for purposes of determining an employer’s withdrawal liability.”

Importantly, ERISA Section 4213(a)(1) does not mandate the use of any specific rates or benchmarks, and instead, only requires that the plan actuary determine such assumptions, in the aggregate, to be “reasonable” based on plan experience, and offer his or her best estimate of anticipated experience in the future. Moreover, to the extent the PBGC exercises its authority under Section 4213(a)(2) to set assumptions, the use by an actuary of those assumptions appears to be optional. Generally, the use of a higher interest rate will result in a lower withdrawal liability calculation (and vice versa).

Variety In Actuarial Assumptions

Historically, multiemployer plan actuaries have used a variety of interest rate assumptions for calculating withdrawal liability. The PBGC highlighted the following three approaches used by multiemployer plan actuaries in the past:

Minimum Funding Rate. Use the same interest rate assumption that is used by the actuary to determine the plan’s minimum funding requirements under Internal Revenue Code Section 431(b)(6) and ERISA Section 304(b)(6) (i.e., the funding rate of return). These rates tend to be higher.
PBGC Plan Termination Rate. Use the rate prescribed by the PBGC to determine the present value of annuities in single employer plan terminations and to value non-forfeitable benefits in multiemployer plans following mass withdrawal (ERISA Section 4044). These rates tend to be low.
Blended Rate. Use some blend of the multiemployer plan’s Minimum Funding Rate and the PBGC Plan Termination Rate under ERISA Sections 304(b)(6) and 4044, respectively.

Recent Disputes

Given the commentary to the Proposed Rule, the increased litigation in recent years involving disputes over the interest rate assumptions used to discount future liabilities of ongoing plans for withdrawal liability purposes was a driving factor in the creation of the Proposed Rule. Since 2018, the PBGC noted five specific cases (and an unknown number or arbitrations) that have centered around challenges by withdrawing employers to the interest rate assumptions used by the plan actuary to calculate withdrawal liability.[4] Indeed, recent appellate court decisions have called into question the use of both the PBGC Plan Termination Rate and the Blended Rate. Moreover, some courts in these disputes have noted the PBGC’s unused authority to issue regulations on the assumptions that may be used by multiemployer plans to calculate withdrawal liability.

Overview Of New Proposed Rule

For the first time, the Proposed Rule explicitly permits a multiemployer plan actuary to use any of the three approaches described above (i.e., the Minimum Funding Rate, the PBGC Plan Termination Rate, or the Blended Rate) to calculate withdrawal liability under ERISA Section 4213(a)(2), without regard to the requirements of ERISA Section 4213(a)(1). It is also important to note that the Proposed Rule does not mandate the use of any particular interest rate assumption, and a plan actuary can still use his or her best estimate under ERISA Section 4213(a)(2).

Specifically, the PBGC in its commentary to the Proposed Rule sets forth its current position that the use of the PBGC Plan Termination Rate under ERISA 4044, either as a standalone assumption or combined with funding interest assumptions, represents: “a valid approach to selecting an interest rate assumption to determine withdrawal liability in all circumstances….”[5] In doing so, the PBGC asserts the position made by many proponents of PBGC Plan Termination and Blended Rates that a withdrawing employer is required under ERISA to fully “settle” its share of unfunded liability with the multiemployer plan, and that in the event of worse than expected investment performance or other actuarial experience following an employer’s withdrawal, the plan cannot seek additional funds from such employer. In other words, according to the PBGC (without commenting on a withdrawn employer’s risk of mass withdrawal liability), a withdrawn employer fully shifts its share of investment and other actuarial risks to the plan (and the other remaining employers) upon withdrawal. In addition, the Proposed Rule specifically permits the use of any interest rate assumption in the spectrum between the PBGC Plan Termination Rate under ERISA 4044 to the use of the Minimum Funding Rate alone.[6]

Other Assumptions

Under the Proposed Rule, each assumption and method used to calculate withdrawal liability, other than the interest rate assumption, would still have to be reasonable, taking into account the experience of the plan and reasonable expectations and, in combination, offer the actuary’s best estimate of anticipated experience under the plan.[7] In doing so, the Proposed Rule conforms, with the exception of the interest rate assumption, to the current standards that already apply to multiemployer plans under ERISA Section 304(c)(3) for selecting actuarial assumptions for minimum funding purposes.

Effective Date

The Proposed Rule would only apply to the determination of withdrawal liability for employer withdrawals from multiemployer plans that occur on or after the effective date of the final rule. The PBGC notes that the Proposed Rule does not preclude the use of the interest rate assumptions it describes before the effective date of the final rule. Presumably, prior to the final rule effective date, the use of the proposed assumptions, however, would be subject to the reasonableness and best estimate requirements of ERISA Section 4213(a)(1).

Open Issues And Comments

We have yet to see how employers and plans will react to the Proposed Rule and what its potential impact would be for any on-going litigation. Below are some immediate thoughts and open questions:

At a minimum, once it becomes final, the Proposed Rule would validate a plan actuary’s use of the Minimum Funding Rate, PBGC Plan Termination Rate or Blended Rate for calculating withdrawal liability post implementation. There may well be legal challenges to the rule, however, that may need to be resolved before the issue truly is settled.
In its commentary, the PBGC basically argues for the reasonableness of the use of the PBGC Plan Termination Rate and Blended Rate assumptions, no doubt in an effort to sway arbitrators and courts currently hearing such cases. The extent to which the Proposed Rule or the PBGC’s commentary impacts ongoing litigation regarding an actuary’s obligations under ERISA Section 4213(a)(1) remains to be seen.
Will the Proposed Rule encourage more plan actuaries to move away from the Minimum Funding Rate and use either a Blended Rate or the PBGC Plan Termination Rate? Will this encourage current participating employers in plans using the Minimum Funding Rate to exit, and discourage new employers from participating?
Will the Proposed Rule encourage plan actuaries of plans receiving SFA to adopt the PBGC Plan Termination Rate even after the SFA is spent?
How accurate is the PBGC’s estimate that the Proposed Rule will cost withdrawing employers (and benefit multiemployer plans) anywhere from $804 million to $2.298 billion over the next 20 years?

The PBGC is also specifically requesting comments on the following questions from plans and other stake holders:

Should the top range of permitted interest rates under ERISA Section 4312(a)(2) be lower than the typical minimum funding rate?
What should the relationship be, if any, between: (a) the estimated date of plan insolvency, expected investment mix, and/or funded ratio; and (b) permitted withdrawal liability assumptions?
Should the final rule specify assumptions or methods other than interest rate assumptions.

The PBGC does not appear to be finished issuing guidance yet on the actuarial assumptions that multiemployer plan actuaries may use to calculate withdrawal liability, and we expect more to be coming soon.

Comments to the Proposed Rule must be received by November 14, 2022 for agency consideration. We anticipate comments from plans, unions, and participating employers. We will continue to keep you apprised of material updates. Stay tuned.

[1] 87 Fed. Reg. 62316 (Oct. 14, 2022); available at https://www.govinfo.gov/content/pkg/FR-2022-10-14/pdf/2022-22304.pdf.

[2] Id.

[3] Id.

[4] As quoted from Proposed Rule: “See United Mine Workers of Am. 1974 Pension Plan v. Energy W. Mining Co., No. 20-7054, 2022 WL 2568025 (D.C. Cir. July 8, 2022) (re 4044 rates); Sofco Erectors, Inc. vs. Trs. of Ohio, Operating Eng’rs, Pension Fund, 15 F. 4th 407 (6th Cir. 2021) (re blend of 4044 rates and funding interest rate assumption); GCIU Employer Retirement Fund v. MNG Enterprises, Inc., No. 2:21-cv-00061, 2021 WL 3260079 (C.D. Cal., July 8, 2021) (re 2044 rates), appeals filed, Nos. 21-55864, 21-55923; Manhattan Ford Lincoln, Inc. v. UAW Local 259 Pension Fund, 331 F. Supp. 3d 365 (D.N.J. 2018) (re blended rates), appeal voluntarily dismissed; New York Times Co. V. Newspaper and Mail Deliverers;-Publishers’ Pension Fund, 303 F. Supp. 3d 236 (S.D.N.Y. 2018) (re blended rates), appeals voluntarily dismissed. In the cross-appeals for the New York Times decision, PBGC participated as amicus curiae.” 87 Fed. Reg. at 62317.

[5] 87 Fed. Reg. at 62317.

[6] 87 Fed. Reg. at 62318.

[7] 87 Fed. Reg. at 62318