Avoiding. Hysteria. Know Your Mass Withdrawal Rules

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Avoiding MASS" Hysteria Know Your Mass Withdrawal Rules Trustees and employers that contribute to a multiemployer pension plan need to understand what a

1 Avoiding MASS" Hysteria Know Your Mass Withdrawal Rules Trustees and employers that contribute to a multiemployer pension plan need to understand what a mass withdrawal is, its implications for the plan and what a plan sponsor must do, including when the plan is insolvent. 40 benefits magazine october 2014

MAGAZINE Reproduced with permission from Benefits Magazine, Volume 51, No. 10, October 2014, pages 40-45, published by the International Foundation of Employee Benefit Plans (www.ifebp.

2 MAGAZINE Reproduced with permission from Benefits Magazine, Volume 51, No. 10, October 2014, pages 40-45, published by the International Foundation of Employee Benefit Plans ( Brookfield, Wis. All rights reserved. Statements or opinions expressed in this article are those of the author and do not necessarily represent the views or positions of the International Foundation, its officers, directors or staff. No further transmission or electronic distribution of this material is permitted. Subscriptions are available ( PU pdf/1014 by Robert M. Projansky and Justin S. Alex Over the last several years, a variety of market and other factors have resulted in increased incidences of multiemployer pension plans experiencing mass withdrawals. A 2013 report to Congress by the secretary of labor, the secretary of the Treasury and the director of the Pension Benefit Guaranty Corporation (PBGC) indicated that approximately 7.5% of the total withdrawal liability assessed in 2009 related to mass withdrawal terminations of plans in 2008 and Trustees of multiemployer pension plans and employers that contribute to such plans should understand mass withdrawals and their implications. october 2014 benefits magazine 41

3 What Is a Mass Withdrawal? A mass withdrawal is: (1) the withdrawal of every employer from the plan, (2) the cessation of the obligation of all employers to contribute under the plan or (3) the withdrawal of substantially all employers pursuant to an agreement or arrangements to withdraw from the plan. 1 The first two events result in a statutory termination of the plan. 2 The third event may result in a termination if the trustees amend the plan to eliminate future benefit accruals. However, the rules regarding the assessment and collection of mass withdrawal liability apply regardless of whether the plan terminates. For purposes of the third event, there is no statutory or regulatory threshold that constitutes substantially all employers, but the term has been interpreted in other instances to mean at least 85%, so some plans use that as a guide. 3 In addition, the Employee Retirement Income Security Act (ERISA) of 1974, as amended, presumes that any withdrawal by an employer during a period of three consecutive plan years within which substantially all of the employers that have an obligation to contribute to learn more >> the plan withdraw is a withdrawal due to an agreement or arrangement, unless the employer proves otherwise by a preponderance of the evidence. 4 What Does a Mass Withdrawal Do to Withdrawal Liability? Generally, when an employer withdraws from a plan in a standard withdrawal, the plan sponsor must assess and attempt to collect withdrawal liability, subject to two reductions. The first reduction is the de minimis reduction, which provides that an employer s withdrawal liability is reduced by the lesser of 0.75% of the plan s unfunded vested benefits or $50, However, the de minimis reduction is decreased dollar-for-dollar by any amount of an employer s withdrawal liability over $100,000 (meaning that it fully phases out for withdrawal liability of $150,000 or more). The second reduction is the 20-year cap on withdrawal liability payments, which provides that if an employer s period for paying withdrawal liability exceeds 20 years, that employer s withdrawal liability is limited to 20 annual installments. 6 Mass withdrawal liability consists Education Collection Procedures Institute November 17-18, 2014, Santa Monica, California Visit for more information. Trustees and Administrators Institutes February 9-11, 2015, Lake Buena Vista (Orlando), Florida Visit for more information. From the Bookstore Trustee Handbook: A Guide to Labor-Management Employee Benefit Plans Claude L. Kordus, editor. International Foundation Visit for more details. of three parts. First, each employer is subject to standard withdrawal liability without regard to the mass withdrawal. Second, certain employers are subject to additional liability known as redetermination liability. 7 This is where, depending on the cause of the mass withdrawal, the employers may lose the benefit of the de minimis reduction and the 20-year cap. When a mass withdrawal occurs by the withdrawal of substantially all employers from a plan or arrangement to withdraw, only those employers withdrawing pursuant to the agreement or arrangement to withdraw lose the benefit of any reduction due to the 20-year cap. 8 However, it is important to bear in mind that there is a presumption that an employer withdrew pursuant to such an agreement or arrangement if the employer withdrew in a threeconsecutive-plan-year period within which substantially all contributing employers withdraw from the plan. In addition, every employer that withdraws in a plan year in which substantially all employers withdraw pursuant to an agreement or arrangement loses the benefit of the de minimis reduction, regardless of whether the employer withdraws pursuant to the agreement or arrangement. When a mass withdrawal occurs by the withdrawal of every employer from a plan, slightly different rules apply. All employers withdrawing from a plan that terminates by the withdrawal of every employer lose the benefit of any reduction due to the 20-year cap limitation, regardless of when the employer withdraws from the plan. In addition, every employer that withdraws in the plan s final plan year loses the benefit of the de minimis reduction. 42 benefits magazine october 2014

4 A plan sponsor generally must continue to administer its plan after a mass withdrawal in accordance with certain special rules unless the plan terminates or PBGC assumes responsibility for the plan (which is unusual). The third part of mass withdrawal is that certain employers are subject to reallocation liability. Reallocation liability is where the amount required to allocate fully a plan s unfunded vested benefits is allocated among withdrawing employers. 9 This means that the unfunded vested benefits of the plan are recalculated based on certain assumptions required by PBGC, including interest rates that are often far lower than what is used by most plans in a standard withdrawal. 10 In addition, the liability of employers that, as of the reallocation record date established by the plan, have been liquidated or dissolved or are undergoing bankruptcy proceedings is allocated to the employers subject to reallocation liability. 11 However, employers are not liable for unfunded vested benefits allocated to other employers that, after demand for payment of reallocation liability, are subsequently deemed to be unassessable or uncollectible. 12 Reallocation liability is imposed against: Employers that withdrew pursuant to an agreement or arrangement to withdraw from a plan from which substantially all employers withdrew pursuant to an agreement or arrangement to withdraw Employers that withdrew after the beginning of the second full plan year preceding the termination date from a plan that terminated by the withdrawal of every employer. 13 It is important to note that reallocation liability can significantly increase the unfunded vested benefits allocable to an employer. However, the amount of each annual installment payment does not change as a result of redetermination or reallocation liability. Instead, the combination of the elimination of the 20-year cap and the reallocation liability can cause employers to have to pay installments for a significantly longer period. In fact, in some cases, an employer s annual payments are not high enough to amortize the full liability no matter how long it pays, resulting in the employer being considered an infinite payer. What Happens After a Mass Withdrawal? A plan sponsor generally must continue to administer its plan after a mass withdrawal in accordance with certain special rules unless the plan terminates or PBGC assumes responsibility for the plan (which is unusual). If a plan terminates by mass withdrawal, the plan sponsor must limit benefit payments to benefits that are nonforfeitable under the plan as of the date of the mass withdrawal. Benefits that are forfeitable include new disability benefit awards, benefits not vested on the date of the mass withdrawal and preretirement death benefits, including qualified preretirement survivor annuities for participants not yet deceased. However, PBGC permits the payment of qualified preretirement survivor annuity benefits when a plan s assets are sufficient to pay nonforfeitable benefits. 14 In addition, benefit payments after a termination by mass withdrawal must generally be in the form of an annuity unless the plan assets are distributed in full satisfaction of all nonforfeitable benefits under the plan. 15 Until a closeout of the plan, the plan sponsor generally must value the plan s benefits on each anniversary of the mass withdrawal date. 16 However, in May 2014 PBGC issued a new rule that requires valuations only every three years for plans terminated by mass withdrawal if the plans are not insolvent and have nonforfeitable benefits of $25 million or less. 17 If the plan sponsor determines that the value of nonfor- october 2014 benefits magazine 43

5 takeaways >> Whenever substantially all employers withdraw from a plan during a three-year period, plan fiduciaries often act as if there was a mass withdrawal unless they have specific evidence showing the absence of an agreement or arrangement. Employers that withdrew well prior to a mass withdrawal can still be liable for redetermination liability and have their 20-year cap lifted. Solvent employers that remain in business after a mass withdrawal become responsible for the mass withdrawal liability of employers that are currently insolvent or in bankruptcy but not those that become insolvent or bankrupt after an established date. A new PBGC rule eases the annual valuation burden for certain smaller plans that terminate by mass withdrawal. Contrary to the beliefs of many, it is atypical for PBGC to take over an insolvent plan that has not been abandoned. More commonly, PBGC provides financial assistance. feitable benefits exceeds the value of plan assets (including claims for withdrawal liability owed to the plan), the plan sponsor must amend the plan to reduce benefits (on a prospective basis) within six months after the end of the plan year in which the determination is made. 18 However, only benefits subject to reduction benefits that are not subject to PBGC s guaranty can be reduced at this stage. Among other things, PBGC s guaranty does not cover plan provisions, including benefit increases, that have been in effect for less than 60 months. As a result, only benefit increases adopted in the five years preceding a mass withdrawal are reduced at this stage. However, additional reductions are imposed if a plan becomes insolvent. What Happens Upon Insolvency? A plan is insolvent if it is unable to pay benefits when due in a given plan year. 19 If all benefits subject to reduction have been eliminated, the plan sponsor must then determine in writing if the plan is insolvent for the first plan year beginning after the effective date of the amendment that results in elimination of all benefits subject to reduction and each year thereafter. 20 The plan sponsor must make a plan solvency determination no later than six months before the beginning of the plan year to which it applies. A plan sponsor must also make a determination of plan solvency if the plan sponsor has reason to believe that the plan is or may be insolvent for the current or next plan year. 21 If, after a determination of solvency, the plan sponsor determines that the plan is or is expected to be insolvent for a plan year, the plan sponsor must suspend benefits to the extent necessary to reduce benefits to the greater of the level of the PBGC guaranty or the resource benefit level, defined in ERISA as the highest level of monthly benefits that can be paid out with the plan s available resources for a given plan year. 22 When Can a Plan Receive PBGC Financial Assistance? An insolvent plan may also be required to apply for financial assistance from PBGC. If the plan sponsor determined that the plan s benefit resource level for an insolvency year is below the level of PBGC-guaranteed benefits or that the plan will not be able to pay the level of PBGC-guaranteed benefits when due for any month during the year, the plan sponsor must apply to PBGC for financial assistance. 23 Financial assistance from PBGC is in the form of a loan that allows the plan to pay participants PBGC-guaranteed benefits and the plan s reasonable administrative expenses. 24 PBGC has broad discretion in setting the conditions on its financial assistance, but typical loan conditions are that: The loan will be repaid if the plan s financial condition improves. Benefits may be paid only at the PBGC guaranty level. The PBGC loan is collateralized by employer contributions, withdrawal liability payments and other plan assets. PBGC has broad audit authority over the plan. What Are the Required Notices and Filings Related to Mass Withdrawals? Mass withdrawals (and related plan terminations) require a number of notices and PBGC filings. When a plan terminates through a mass withdrawal, the plan sponsor is required to provide a Notice and Certification of Mass Withdrawal to PBGC. 25 In addition, the plan sponsor must issue a Notice of Mass Withdrawal to each employer that the plan sponsor reasonably expects may be a liable employer as a result of the mass withdrawal benefits magazine october 2014

6 Separately, the plan sponsor must also issue a Notice and Demand for Payment of Initial Withdrawal Liability to every employer for which withdrawal liability has not previously been determined when a plan was terminated under a mass withdrawal scenario. 27 The plan sponsor must also provide a Notice of Redetermination Liability to each employer liable for redetermination liability (although this notice can be combined with the Notice and Demand for Payment of Initial Withdrawal Liability for applicable employers). 28 Finally, the plan sponsor should provide a Notice of Reallocation Liability to each employer liable for the reallocation liability when a plan has terminated in a mass withdrawal scenario. 29 There are a host of other notices that are required in the event of insolvency. Conclusion Mass withdrawals require trustees of multiemployer pension plans to take special action and can result in additional liabilities for employers that contribute to such plans. As a result, all involved parties should understand the circumstances that give rise to a mass withdrawal and its potential implications. In addition, advance planning may allow plans to avoid sudden and unexpected mass withdrawals. In recent years, plans have begun to obtain PBGC approval to settle mass withdrawals under alternative rules, which can help ease the financial burden of mass withdrawals for withdrawing employers and also provide affected plans with potentially greater financial recoveries than in standard mass withdrawals. Endnotes C.F.R ERISA 4041A(a)(2). 3. See, e.g., Continental Can Co. v. Chicago Truck Drivers, Helpers and Warehouse Workers (Independent) Pension Fund, 916 F.2d 1154 (7th Cir. 1990). However, PBGC has declined to provide a clearly defined rule. PBGC Opinion Letter 94-3 (Aug. 2, 1994) (stating that if Congress had intended a strict numerical test, it could easily have included a percentage test in the statute ). 4. ERISA 4219(c)(1)(D). 5. ERISA ERISA 4219(c)(1)(B) C.F.R PBGC Opinion Letter 94-3 provides a detailed analysis of when employers are subject to the different types of mass withdrawal liability C.F.R C.F.R (defining unfunded vested benefits) and C.F.R (b). << bios Robert M. Projansky is a partner in Proskauer Rose LLP s employee benefits and executive compensation law group in New York, New York. His practice covers the full spectrum of employee benefit issues, including advising clients regarding all aspects of pension and welfare plan administration, investment management, fiduciary responsibility matters and prohibited transactions, mergers and terminations, government audits and participant communications. Projansky is a member of the International Foundation s Professionals Committee. He received a B.A. degree from Binghamton University and a J.D. degree from New York University School of Law. Justin S. Alex is an associate in the Washington, D.C. office of Proskauer Rose LLP and a member of the Employee Benefits, Executive Compensation and ERISA Litigation Practice Center. His practice covers all aspects of employee benefits and executive compensation. Alex previously was a lawyer in the Office of Chief Counsel at the Pension Benefit Guaranty Corporation, which he represented in corporate bankruptcies and federal court litigation. He holds B.S.B.A. and M.S. degrees from the University of Florida and a J.D. degree from the University of Florida Levin College of Law C.F.R (c)(2) C.F.R (c) C.F.R. 4041A.22(c). 15. ERISA 4041A(c)(2). 16. ERISA C.F.R. 4041A.24(a)(1) C.F.R C.F.R C.F.R. 4041A C.F.R. 4041A.25(b) C.F.R and C.F.R. 4041A ERISA 4261(a) C.F.R C.F.R (a) C.F.R (a) C.F.R (b) C.F.R (c). october 2014 benefits magazine 45

Methods for Computing Withdrawal Liability, Multiemployer Pension Reform Act of 2014

Methods for Computing Withdrawal Liability, Multiemployer Pension Reform Act of 2014 This document is scheduled to be published in the Federal Register on 02/06/2019 and available online at https://federalregister.gov/d/2019-00491, and on govinfo.gov [Billing Code 7709-02-P] PENSION BENEFIT