Multiemployer Plan Update: PBGC Aims to Clarify Withdrawal Liability Rules

Determining the cost of exiting a multiemployer plan (MEP) has long been a complicated process fraught with ambiguity and, sometimes, protracted litigation affecting plan sponsors. Now, the Pension Benefit Guaranty Corporation (PBGC) is stepping in with a proposal to clarify withdrawal liability rules. 

Here, we describe what plan sponsors need to know about the PBGC’s proposed rule change to help them update withdrawal assumptions and prepare for discussions with actuaries and plan participants.

Why Employers Withdraw From MEPs

Employers leave multiemployer plans for various reasons – sometimes due to insolvency or bankruptcy, which renders them unable to fund the cost of participating in the plan. MEPs tend to be specific to industries or service sectors, such as building trades, sanitation workers, or firefighters. These plans, commonly referred to as Taft-Hartley plans, are typically used by labor unions, which are governed by collective bargaining agreements. In these cases, employers may leave a MEP to establish a separate plan to provide more tailored retirement benefits negotiated for workers through the collective bargaining process. 

Regardless of the circumstances, when employers leave a MEP, current participants and retirees still have vested balances in the plan that require funding. In this way, withdrawal liability payments help to ensure the plan continues to pay these benefits.

How Withdrawal Calculations Currently Work

As set forth by the Employee Retirement Income Security Act (ERISA), when withdrawing from a multiemployer plan, an employer may owe a calculable share that represents the amount by which the current value of participant benefits exceeds the current plan assets. It is up to the plan actuary to determine this sum.

For its part, the PBGC currently offers two general approaches for plan actuaries to use when calculating an employer’s withdrawal liability: 

  • The first such option suggests that the liability rate must be “reasonable” based on prevailing conditions and the specific characteristics of the plan in question. 
  • The second option states that employers do not have to consider the specific features of the plan when calculating a rate but instead can use a rate that falls within a specified range.

This general lack of clarity can render the process subjective, open to interpretation and ultimately lead to arbitration and litigation. “Without clearly delineated rules, actuaries’ calculations can be all over the map depending on the assumptions they make regarding current market conditions and the demographics of the plan,” commented Michael Belonio, Audit Director at BDO. 

What’s New About the PBGC Proposal

For the first time, the PBGC has stepped forward with clear rules for setting liability rates that affect an ongoing plan. Specifically, the proposal states that it is acceptable in all instances for plan actuaries to base their withdrawal liability calculations on ERISA 4044 rates. The PBGC’s proposed rule specifically instructs plans to use the settlement interest rate — equivalent to the market price of purchasing annuities from private insurers — either alone or combined with other interest rate assumptions. The PBGC’s rule changes will apply to all MEP withdrawals that commence on or after the final rule is published.

In a press release, PBGC Director Gordon Hartogensis said, "This proposed rule provides the clarity that many multiemployer plans need to determine an employer’s withdrawal liability and protect the retirement security of the workers and retirees covered by the plan.”

Potential Implications of the PBGC’s Proposed Rule

The PBGC’s formal proposal outlined predictions for an increase in future withdrawal liability payments and reduced legal expenses. For instance, in the 20 years following the rule’s effective date, the PBGC says that with more employers using ERISA 4044 rates, withdrawal liability payments will grow between $804 million and $3 billion. Additionally, because the rule would offer greater clarity around determining liability amounts, the industry should see savings of between $500,000 and $1 million annually in reduced arbitration/litigation costs.

Reflecting on how the MEP community may receive the proposal, BDO’s Belonio stated, “I imagine this will be a welcome change, because greater clarity is better for everyone. As a practical matter, the proposed rule can also be viewed as a future planning tool that plan sponsors can use to calculate in advance what they may need to fund going forward.”  

BDO Insight: Start Preparing for the Change Now

The PBGC’s bid to streamline the MEP withdrawal process is something plan sponsors and the entire MEP community have been anticipating for years. Even though the PBGC’s change is still in the proposal stage, plan sponsors should keep close watch over developments — specifically, the rate language included in the final guidance — as it can serve as a planning tool to calculate a potential liability payment in the future or to facilitate a litigation or negotiation happening today.

Please contact your BDO representative for further information.