March 26, 2008
PBGC Proposed Amendments to Withdrawal Liability Regulations
The Pension Benefit Guaranty Corporation (PBGC) recently published a series of proposed amendments to various regulations,1 primarily related to withdrawal liability.2 The package is mainly aimed at updating the agency’s regulations to reflect changes made by the Pension Protection Act of 2006 (PPA’06), but it would also revise the withdrawal liability regulations in a couple of other ways.
This Compliance Alert summarizes the highlights of the proposed amendments, which would generally be effective for withdrawals occurring after these proposed regulations are adopted in final form, except where they implement a PPA’06 change for which the law prescribes a different effective date.
WITHDRAWAL LIABILITY “FRESH-START”
New General Rule
Withdrawal liability is designed to charge a share of a plan’s unfunded vested benefits to an employer that is pulling out of the plan. However, under the formulas for allocating liability, even after the plan as a whole becomes fully funded, a given withdrawing employer can still have liability. PPA’06 gives plans an option to eliminate those leftover pieces of liability: the trustees can amend the plan to start the withdrawal liability calculation as of a year in which the plan had no unfunded vested benefits, so every contributing employer would start out fresh. This is allowed without PBGC approval, even for construction industry funds that otherwise cannot modify their withdrawal liability allocation methods.3
The proposal would add a provision for this to the PBGC’s withdrawal-liability allocation regulation, effective for withdrawals occurring on and after January 1, 2007, as required by PPA’06.
Broader “Fresh-Start” Option for Non-Construction Funds
Many plans had withdrawal liability when it was first introduced by the Multiemployer Pension Plan Amendments Act of 1980 (MPPAA). The investment gains of the 1990s wiped it out for most of them. Then, after the investment losses in the early 2000s, underfunding reappeared and with it, withdrawal liability.4 Because few plans kept track of employers’ contribution requirements during the prosperous years when there was no liability to assess, reconstructing that history in order to determine current allocations was a daunting task and, in some cases, impossible. To avoid that, a number of plans adopted revised formulas, starting the calculation with the current year. These adjustments required and routinely received PBGC approval.
The proposed amendments would grant blanket approval for plans to restart the withdrawal liability allocation pools as of any year, even if the plan was not fully funded in that year. However, because ERISA only permits construction industry plans to change their allocation formulas in very narrow circumstances, this option would not be available to those plans.
WITHDRAWAL LIABILITY ADJUSTMENTS FOR RED-ZONE PLANS
PPA’06 provides that two possible consequences of a plan’s going into critical status (i.e., the red zone) are to be disregarded in determining withdrawal liability: (1) reductions in otherwise-protected adjustable benefits; and (2) contribution surcharges imposed on employers.
The PBGC’s proposal would amend the existing regulations to provide for these modifications. The definition of “nonforfeitable benefits” — the basis for withdrawal liability — would be expanded to include otherwise-nonforfeitable benefits that are reduced while the plan is in the red zone. Moreover, employer surcharges would be subtracted from both the numerator and the denominator of the fraction used to allocate liability among the employers. These changes would be applicable to withdrawals, including mass withdrawals, occurring after the 2008 plan year, as required by PPA’06.
After a few years, keeping track of the “phantom benefits” that would have been liabilities of the plan in the absence of the red-zone benefit reductions will be a challenge because the plans’ funding and participant-benefit data will not include those amounts. PPA’06 calls on the PBGC to issue regulations to simplify those calculations. The PBGC has not attempted to do that at this stage.
EXCEPTION FROM INTERIM PAYMENTS REQUIREMENT
PPA’06 includes a narrowly targeted exception from the general requirement that a withdrawn employer make withdrawal liability payments as assessed by the plan while contesting the plan’s claim. The exemption applies to a company that is billed for withdrawal liability based solely on the plan’s determination that it was part of, or engaged in, a transaction aimed at evading or avoiding that liability. Among other requirements, the exemption is only available if the transaction occurred after 1998 and at least five years before the withdrawal (two years, for small employers).
The proposal would amend the notice and payment regulation to add this carve-out, effective for withdrawal liability assessed on and after August 17, 2006, as required by PPA’06.
UPDATED DEFINITION OF “MULTIEMPLOYER PLAN”
PPA’06 gave certain collectively bargained plans maintained by tax-exempt organizations the right to elect multiemployer status, if they filed notice of that election by August 17, 2007. The law amended the statutory definitions of “multiemployer plan” in the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code to include these plans. The proposed regulation would add this category to the PBGC’s definition of “multiemployer plan,” as well.
REVISED FORMULA FOR REALLOCATING LIABILITY AFTER A MASS WITHDRAWAL
Under ERISA, a plan’s unfunded vested benefits are to be redetermined and reallocated following a mass withdrawal, pursuant to PBGC regulations. Since there will be no more negotiated employer contributions, the law gives the PBGC this opportunity to make sure that as much of the underfunding as possible is allocated to employers that are in a position to pay it, before the plan has to draw on PBGC funds.
Under current regulations, the last step in this process is a reallocation of liability from those that have gone out of business to employers that are still operational, based on the amount of their initial withdrawal liability. This has the effect of excluding employers that had little or no withdrawal liability, perhaps because they left prior to the mass withdrawal when the plan had little or no unfunded liability. The PBGC is now proposing that the residual amounts be reallocated to employers based on the hours (or days, weeks or other contribution base units) for which they were required to contribute for the three plan years before they withdrew. This would apply to mass withdrawals that occur after the effective date of the regulation.
The PBGC welcomes comments on the proposed amendments. The comment period ends on May 19, 2008. Comments may be submitted online via http://www.regulations.gov, by e-mail to email@example.com, by fax to (202) 326-4224 or by mail or hand delivery to:
Legislative and Regulatory Department
Pension Benefit Guaranty Corporation
1200 K Street, NW
Washington, DC 20005-4026
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As with all issues involving the interpretation or application of laws, multiemployer pension plan sponsors should rely on their fund counsel for authoritative advice on the PBGC’s proposed amendments. The Segal Company can be retained to work with plan sponsors and fund counsel on withdrawal liability issues.
- To see the proposed amendments, which were published in the Federal Register on March 19, 2008, click here. (To return to the Compliance Alert text, click here.)
- For background on withdrawal liability, see The Segal Company’s November 2002 In Depth, “Multiemployer Pension Plan Withdrawal Liability: An Overview”. (To return to the Compliance Alert text, click here.)
- The construction industry was one of the industries for which special rules were established when withdrawal liability was created. (To return to the Compliance Alert text, click here.)
- Segal’s 2007 Survey of Withdrawal Liability Funded Ratios includes data on the percentage of plans that assessed withdrawal liability. (To return to the Compliance Alert text, click here.)
Compliance Alert, The Segal Company’s periodic electronic newsletter summarizing important developments affecting benefit plan compliance, is for informational purposes only. It is not intended to provide authoritative guidance. On all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for legal advice.