PBGC recently published an Interim Final Rule providing guidance for multiemployer plans under the American Rescue Plan Act of 2021 (ARPA). While the guidance focuses most of its length on issues for the funds themselves as compared to contributing employers, we are placing our focus on the issues for contributing employers and those who advise them. Specifically, how might this guidance affect the withdrawal liability owed by withdrawing employers or the potential withdrawal liability of buyers that acquire into a multiemployer pension plan?
Before diving headfirst into that pool, we need to recap some of the provisions in the law and which plans they affect. First and foremost, there are roughly 200 multiemployer plans (perhaps more) that are eligible for Special Financial Assistance (SFA) under ARPA. A plan is or will be eligible if it meets any of four tests:
- The plan is in critical and declining status (the most dire status) in any plan year beginning in 2020, 2021, and or 2022;
- The plan had a Multiemployer Pension Reform Act (MPRA) suspension in benefits in place as of March 11 of this year;
- The plan is in critical status as of any plan year beginning in 2020, 2021, and or 2022, it has a modified funded percentage of less than 40%, and fewer than 40% of its total participants are active; or
- The plan became insolvent after December 16, 2014, has not come out of insolvency, and has yet to be terminated as of March 11, 2021.
If the plan to which an employer contributes does not fall into any of those four buckets, SFA does not apply.
The amount of Special Financial Assistance is intended to be sufficient to pay all benefits due through the end of the plan year ending in 2051. When calculating that amount, the plan should consider all contributions projected to come in, all withdrawal liability payments expected, and any other inflow expected.
Before PBGC issued this Interim Final Rule, no one was sure how withdrawal liability would be calculated by plans that received SFA payments. ARPA left PBGC the freedom to provide guidance. There are two really key things to know here:
- When calculating a plan’s unfunded vested benefit liability (UVB) and the withdrawing employer’s share, the fund should include SFA assets as part of the total assets. This is good for withdrawing employers.
- To determine a plan’s vested benefit liability, the plan shall use the interest rates that would be used in a mass withdrawal (there is a potential end date for this requirement, but for most funds, this is pretty far out in the future). We frequently call those rates PBGC rates and they are currently in the vicinity of 2.2%. It varies depending on the circumstances we discuss below, but this will be bad for certain withdrawing employers.
How This Affects Contributing Employers
It’s time to get to the punch line. How does this affect you, the contributing employer? The answer is, it depends, but we’ll help you to get an idea. To do so, however, we need to give some background on the selection of interest rates for purposes of calculating withdrawal liability.
Prior to the passage of ARPA, multiemployer plans had exercised a fair amount of latitude in the selection of interest rates used to calculate vested benefit liability. Since withdrawal liability is intended to be the withdrawing employer’s share of unfunded vested benefit liability (UVB), that interest rate is a key component. The most common practices in our experience are these:
- The funding interest rate, which for multiemployer plans is supposed to be the expected long-term rate of return on plan assets. For most funds in 2019 (the most recent year for which we generally have Forms 5500), that rate fell within the range of 6.5% to 8% with 7.5% probably being the single most common.
- The “Segal Blend” which uses the funding interest rate for the unfunded portion of benefits and PBGC rates (plan termination basis) for the funded portion. So, poorly funded plans use a basis closer to the funding interest rate while better funded (but still not fully funded) plans use a basis closer to PBGC rates.
- The current liability interest rate (not very common in our experience).
- PBGC rates.
Generally speaking, the higher the interest rate currently being used for withdrawal liability calculations, the more likely that the new ARPA requirements will have a negative effect, i.e., higher withdrawal liability. When we combine this with the influx of SFA assets, however, there is no way to generalize the ultimate answer. Furthermore, most withdrawing or potentially withdrawing employers do not know the current practices of the plans to which they contribute or will be contributing.
Rules of Thumb
To the extent that you do know those current practices, here are some very rough rules of thumb that you can use to see how the new rules might affect you (using the numbering above):
Plans that use method 1 (funding interest rates) could see vested benefit liability double or triple. This increase might be more than the amount of SFA assets. If it is, we expect that their potential withdrawal liability will generally increase.
For those using method 2 (Segal Blend), because they were necessarily poorly funded pre-ARPA if they were eligible for SFA assistance, the detrimental effects on withdrawing employers will be similar to, but not as extreme as those using funding interest rates.
On the other hand, for those using method 3 (current liability rates which are far closer to PBGC rates than to typical funding interest rates) or method 4 (PBGC rates), vested benefit liability will change little, if at all. So, for employers withdrawing or considering withdrawing from these plans, it appears that the effect will be smaller withdrawal liability.
The 20-year Cap
In some situations, all of this will have no effect on withdrawal liability. Except in the case of mass withdrawal or for certain plans that are exempt from it, withdrawing employers benefit from a 20-year cap on withdrawal liability payments. That is, if they choose to pay withdrawal liability in quarterly installments rather than in a lump sum, the number of payments is limited to 80, i.e., 20 years. If a withdrawing employer would have been subject to the 20-year cap pre-SFA payment and remains subject to the 20-year cap post-SFA payment, there is no change.
Need to Understand Your Specific Situation
This has been a very general review of the issues presented for contributing sponsors by the ARPA changes. There will, however, be considerable variability from plan to plan and contributing employer to contributing employer, depending on each specific situation. If you need assistance in understanding your specific circumstance, your October Three consultant can help.