On July 9, 2021, the Pension Benefit Guaranty Corporation (PBGC) issued an interim final rule regarding a new Special Financial Assistance (SFA) Program aimed at assisting multiemployer pension plans in “critical and declining status.” The SFA was created through the American Rescue Plan Act of 2021 (ARPA). The PBGC estimates that $94 billion will be disbursed to over 200 multiemployer plans to assist with the payment of benefits due through 2051. The PBGC has projected that at least 100 plans that would have otherwise become insolvent in the next 15 years will survive because of the SFA. Critical to employers participating in these underfunded plans is the question of how they will be affected by the plans’ receipt of these billions of dollars. In particular, what impact will the Special Financial Assistance have on the calculation of an employer’s withdrawal liability? Will the special financial assistance reduce a plan’s red ink and thereby reduce an employer’s withdrawal liability?
The rule does provide needed guidance, but many questions remain unanswered. The PBGC stated in comments accompanying the rule that while Special Financial Assistance funds constitute plan assets, the Program was not intended to reduce withdrawal liability or incentivize employers to cease plan participation. Accordingly, employers should be aware of the interim final rule’s potential impact on future withdrawal liability calculations.
In general, when a contributing employer withdraws from a multiemployer pension plan with “unfunded vested benefits,” withdrawal liability is assessed by: (i) calculating the total withdrawal liability assessment amount based on a formula allocating to the withdrawn employer its share of the plan’s unfunded vested benefits, and (ii) calculating periodic payments based on the employer’s past contributions. The withdrawing employer can either pay the assessment in a lump sum or make monthly or quarterly payments.
The new PBGC rule provides that the Special Financial Assistance funds should be included as plan assets when performing withdrawal liability calculations. This approach will reduce the overall unfunded liability of the plan and, if this were the only change, it would reduce the gross amount assessable to a withdrawing employer. However, in the rule, the PBGC has also changed the way withdrawal liability is calculated for plans that receive Special Financial Assistance funds.
Previously, a plan’s actuary could use the interest rate that the actuary determined was most appropriate to calculate the amount of the plan’s unfunded vested benefits. The interim final rule, however, requires the actuary to use the “mass withdrawal” interest rate for plans receiving Special Financial Assistance funds, which will likely be lower, making for a greater amount of unfunded vested benefits and greater withdrawal liability for employers. A mass withdrawal occurs when substantially all employers cease participating in the plan over a three-year period. The required interest rate assumptions in such events approximate what an insurance carrier would use in calculating the cost to provide annuities to fully fund the plan’s benefit payments. The PBGC took the position that it would be appropriate to use mass withdrawal assumptions because the plans receiving Special Financial Assistance funds are otherwise experiencing conditions shared by plans facing a mass withdrawal, and such a change will act to “avoid an indirect transfer of SFA to a withdrawing employer by reducing the employer’s withdrawal liability.”
In practical terms, the classification of Special Financial Assistance funds as plan assets and the utilization of mass withdrawal interest assumptions will likely offset, to some extent, the impact of each change on actual withdrawal liability assessment amounts. Even so, there is no guarantee that this will occur in all cases; and the rule introduces further uncertainty for employers regarding their potential withdrawal liability since it remains unclear how these adjustments will influence an individual employer’s assessment.
In addition, more generally, the PBGC indicated in its comments to the rule that it “intends to propose a separate rule ... to prescribe actuarial assumptions which may be used by a plan actuary in determining an employer's withdrawal liability.” Because any such rule is likely to further impact withdrawal liability assessments, it is difficult to make any assumptions regarding future withdrawal liability amounts based on the guidance in the interim final rule.
With so many variables and unanswered questions, how can employers best prepare themselves for the implementation of the Special Financial Assistance Program? It is important to understand the employer’s current exposure to withdrawal liability, determine if any multiemployer plans in which the employer participates will receive Special Financial Assistance, and finally understand the manner in which the employer’s risks may have changed. Based on other withdrawal liability rules, it is possible that the employer may have other options rather than being forced to pay a higher assessment due to the new PBGC rule.
Withdrawal liability was already a very complicated area of law before ARPA was enacted and the interim final rule was issued. Accordingly, it is important for employers to pay attention to the changing legal landscape and consult with legal counsel to understanding potential exposure to liability and the impact the SFA program may have on actual assessment amounts.