SCOTUS Clarifies Timing of Withdrawal Liability Assumptions

What is withdrawal liability?

Withdrawal liability is the amount a contributing employer may owe when it leaves an underfunded multiemployer pension plan. It represents the employer’s share of unfunded vested benefits (UVBs), which are benefits that have already been earned but are not fully covered by plan assets. The calculation depends in part on actuarial assumptions, including discount rates.

A lower discount rate generally increases the present value of liabilities, which can materially increase withdrawal liability. In this case, one employer’s assessment increased from about $1.8 million to about $6.2 million.

Withdrawal liability is based on UVBs determined “as of” the end of the plan year before the year of withdrawal (often December 31 for calendar-year plans). This “as of” date is commonly referred to as the measurement date.

What the Supreme Court held

In the decision involving M & K and other employers, the Court held that ERISA does not require actuarial assumptions used for withdrawal liability to be adopted on or before the plan’s measurement date. Instead, a plan may adopt assumptions after that date, so long as the assumptions are reasonable and reflect the actuary’s best estimate of anticipated plan experience.

The case arose after the IAM National Pension Fund used a lower discount rate that it adopted in January 2018 for withdrawals measured as of December 31, 2017. The change in discount rate materially increased M & K’s and other employers’ withdrawal liability. The contributing employers argued the plan should have been limited to assumptions already in effect on the measurement date. The Supreme Court rejected that argument.

The Supreme Court held that actuarial assumptions are not facts but “predictive judgments about the plan’s anticipated future performance” and therefore are not “observable facts about the plan that are ‘in effect’ on a particular date.”

The Supreme Court recognized the employers’ concern that plans could choose assumptions that increase withdrawal liability. It explained, however, that ERISA addresses that risk by requiring assumptions to be reasonable and reflect the actuary’s best estimate, and remain subject to challenge in arbitration.

Key takeaways for plan sponsors

The Court’s decision clarifies that:

• Assumptions may be updated after the measurement date. A plan may change assumptions, such as the discount rate, after the measurement date if the assumptions are reasonable and represent the actuary’s best estimate of anticipated plan experience under ERISA’s actuarial standards and are in accordance with Actuarial Standards of Practice.
• There is no special anti-retroactive rule for assumptions. ERISA has limits on retroactive application of new plan rules or amendments. The Supreme Court declined to treat actuarial assumptions as plan rules or amendments subject to that separate limitation.
• Governance and documentation matter. The decision gives plans timing flexibility, but not unlimited discretion. Plan sponsors should understand who approves assumption changes, what actuarial support is required, and how the rationale is documented.