How far can a multiemployer plan go in deviating from the usual withdrawal liability playbook, and what is the Pension Benefit Guaranty Corporation’s tolerance level for such experimentation?
The PBGC took a stab at answering those questions in a policy statement published in the Federal Register on April 4. The PBGC is the federal agency that insures multiemployer plans, which are collectively bargained pension plans comprised of at least two employers.
Employer departures can put a strain on multiemployer plans and push them toward insolvency. As such, a plan's financial health and its ability to continue operating often hinge on the collection of withdrawal liability payments from employers that exit the plan.
Generally, an employer’s withdrawal liability under the Employee Retirement Income Security Act is its share of the plan’s unfunded pension liability. However, ERISA also gives plans the latitude to “adopt rules providing for other terms and conditions” for satisfying that liability.
In reviewing proposed alternatives, the PBGC is going to make sure departing employers will still end up paying their fair share. The PBGC said it will focus on “whether trustees have supported their conclusion that the proposed alternative terms and conditions would realistically maximize the collection of withdrawal liability and projected contributions, relative to the statutory rules.”
The proposal also must be in the interests of participants and beneficiaries and not create an unreasonable risk of loss to the insurance program, the statement said.
For added insights about withdrawal liability and the PBGC statement’s impact on multiemployer plans, Bloomberg Law reached out to William Daniels, a partner at Laner Muchin Ltd., who advises clients on withdrawal liability.
The interview has been edited for clarity and brevity.
Bloomberg Law: What is withdrawal liability and why is it important for a multiemployer plan?
William Daniels: Withdrawal liability is a legal mechanism used to ensure that a multiemployer plan has enough assets to pay its promised benefits to participants and beneficiaries. When a contributing employer withdraws from a multiemployer fund (and thereby completely ceases to have an obligation to make contributions to the plan on behalf of its employees), the plan calculates the present value of its benefit obligations and compares that number to its current assets. If the current assets do not meet or exceed the benefit obligations, the plan is considered to be underfunded. The withdrawing employer is assessed a portion of this underfunding based on its contribution history.
Contributing employers are responsible for all employees that benefit under the plan, not just their own employees. So, for example, if a large employer (e.g., Hostess) goes bankrupt and does not pay its fair share into the plan, then this causes the plan to become grossly underfunded and results in large withdrawal liability for all remaining contributing employers regardless of whether they have always made contributions to the plan on behalf of their own employees.
Bloomberg Law: How is withdrawal liability usually computed under ERISA?
Daniels: Typically, a multiemployer plan will determine whether it is underfunded (its current assets are less than its current liabilities). If this is true, then the plan will look at the past 10 years of contribution history of the withdrawing employer and divide that by the total contribution history of all employers for the same time period. The plan then multiplies this small fraction by the large underfunding number and this is the withdrawal liability of the employer.
Bloomberg Law: What is the importance of the policy statement for multiemployer plans?
Daniels: The policy statement sets forth procedures for a multiemployer plan to submit changes to the PBGC. Statutory law provides different ways in which withdrawal liability can be calculated, but it also allows the plan to petition the PBGC to approve an alternate method. This policy statement supplements the PBGC procedure for a plan to seek approval to alter and/or change its method for determining withdrawal liability. It outlines the key issues that should be addressed in applications for alternate methods.
Bloomberg Law: What are some alternative ideas for satisfying the payment of withdrawal liability?
Daniels: There are many ideas and options for approaching withdrawal liability. However, the PBGC is concerned currently with one specific method. The two-pool alternative withdrawal liability method (“Two-Pool Method”). Under the Two-Pool Method, a plan would bifurcate its unfunded liability into two pools of assets. For the first pool, it would calculate withdrawal liability under a method similar to what I have described above. For the second pool, it would calculate withdrawal liability using what is called the “Direct Attribution Method.”
Under this method, a contributing employer is only responsible for the underfunding of its own employees and NOT the underfunding related to all employees of all contributing employers. The issues the PBGC has with the Two-Pool Method are (i) how does a contributing employer move from one pool to the other, and (ii) what happens once there are no employers left in the original pool (i.e., only the Direct Attribution Method pool is left with contributing employers)? How a plan handles these issues will likely determine whether the PBGC approves its alternate method or not.
Bloomberg Law: What criteria will the PBGC apply when reviewing such proposals?
Daniels: The bottom line is financial exposure to the PBGC. The agency asks itself whether the alternate method is likely to increase or decrease the risk of financial exposure to the PBGC. This is a complex issue. On the one hand, the plan needs to attract new employers and new (hopefully young) employees to spread the costs of older employees retiring. Without an alternate method of calculating withdrawal liability, it is impossible for certain plans to attract new employers. The alternate method would ideally insulate the new employer from the large underfunded pool and allow such employer to execute a collective bargaining agreement that calls for contributions to the underfunded plan.
The problem is what to do with the large underfunded pool that still exists and whether the alternate method ever effectively insulates the new employer from liability related to this pool. How aggressively the plan deals with these issues in its alternate method will likely determine its chances of getting PBGC approval. The Central States Fund Plan, for example, requires a current employer contributing under the old pool to fully pay its withdrawal liability in order to move to the new pool. The Direct Attribution Method under the new pool effectively insulates the employer that moved from one pool to the other (at least as long as there are still contributing employers to the old pool).
Bloomberg Law: What supporting evidence should multiemployer plan trustees submit for their proposed alternatives?
Daniels: The trustees should consult with legal counsel and submit the information requested by the PBGC. The most important piece of information, though, will be the actuarial valuation and economic analysis. Once a plan becomes insolvent (i.e., has insufficient assets to pay benefits), the obligation of the PBGC commences and the PBGC will need to start paying guaranteed benefits.
At the end of the day, the PBGC wants to see how the alternative method is projected to improve the condition of the plan or at a minimum postpone the date of insolvency. The trustees and the plan’s legal counsel will work closely with the plan’s actuary to help prepare this analysis and demonstrate the financial benefit to the plan.
Bloomberg Law: In light of the policy statement, what steps should multiemployer plans take to effectively address withdrawal liability?
Daniels: For some plans, there are no steps to take. For example, if a plan is scheduled to become insolvent within the next 12 months, there is very little that can be done to save this plan (short of a merger with a healthier plan). If a plan has developed an alternate method that it believes will help its financial status, the key is to communicate with the PBGC as soon as possible. Even before the application is submitted, I recommend contacting the PBGC and communicating the plan’s proposal. The PBGC is extremely helpful and responsive in this regard. What may be a focus of the PBGC under one alternate method may not be as important under a different method. The PBGC will help focus the plan on what is crucial to address in its application. The policy provides good general information and helps to focus the initial discussions regarding an alternate method, but the information actually submitted to the PBGC should be tailored in accordance with what the PBGC wants to see specific to your plan’s proposal.
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