Seyfarth Synopsis: On July 9, 2021, the PBGC issued its interim final rule on ARPA’s Special Financial Assistance Program for troubled multiemployer pension plans. This rule governs the application and administration of SFA, and includes special rules regarding employer withdrawals and withdrawal liability settlements for plans receiving SFA. Please see our companion Legal Update on the Pension and Executive Compensation Provisions in the American Rescue Plan Act here.
On July 9, 2021, the Pension Benefit Guaranty Corporation (PBGC) announced its interim final rule implementing the American Recue Plan Act’s Special Financial Assistance (SFA) Program for financially troubled multiemployer defined benefit pension plans. The rule provides guidance to plan sponsors on the SFA application process, including what plans need to file to demonstrate eligibility for relief; calculating the amount of SFA; actuarial assumption requirements; the PBGC’s review of SFA applications; and other restrictions and conditions. The PBGC also sets forth in the regulations the order of priority in which applications will be reviewed. Among other things, the regulations provide much anticipated clarification on the calculation of withdrawal liability, and the assumptions to be used for SFA. There will be a thirty day public comment period from the rule’s publication in the Federal Register on July 12, 2021.
Seyfarth has issued a detailed Legal Update summarizing the interim final rule which can be accessed here. It is recommended reading. (Our earlier Legal Update on the Pension and Executive Compensation Provisions in the American Rescue Plan Act can be accessed here.) In addition, Seyfarth will hold a webinar on Friday, July 30, 2021, at 1:00 central to review the regulations in more detail, as well as any considerations for plan sponsors and contributing employers. Stay tuned to this site for more details.
For those that have been solely concerned about the possible impact SFA may have on withdrawal liability, below are the four key takeaways from the final interim rule as to withdrawal liability.
1. The PBGC Rejected Disregarding SFA in the Withdrawal Liability Calculation
Given that earlier drafts of ARPA provided that SFA would not be counted when calculating withdrawal liability, many interested parties expected that restriction to be included in the regulation. Nevertheless, the PBGC considered and then apparently rejected a requirement that SFA assets be disregarded in the determination of unfunded vested benefits for the assessment of withdrawal liability. Despite acknowledging the benefits of such a restriction, the PBGC simply stated: “This alternative was determined to be more administratively complex and therefore less desirable.” Instead, at least for now, it adopted two other conditions: a restriction on withdrawal liability interest assumptions, and a requirement for PBGC approval of certain withdrawal liability settlements.
2. Withdrawal Liability Interest Assumptions
The interest assumptions used to determine unfunded vested benefits and calculate withdrawal liability must be the PBGC’s mass withdrawal interest assumptions that approximate the market price that insurance companies charge to assume a similar pension-benefit like liability. Plans receiving SFA must use those interest assumptions for withdrawal liability calculations until the later of 10 years after the end of the plan year in which the plan receives payment of SFA or the last day of the plan year in which the plan no longer holds SFA or any earnings thereon in a segregated account. Given plan termination interest rates are generally much lower than rates most plans use to calculate withdrawal liability, this will likely increase a withdrawing employer’s liability — although whether that increase will necessarily offset the impact of the SFA may depend upon the employer and the plan.
The PBGC determined that without the interest assumption change “the receipt of SFA could substantially reduce withdrawal liability owed by a withdrawing employer,” and “could cause more withdrawals in the near future than if the plan did not receive SFA.” Payment of SFA “was not intended to reduce withdrawal liability or to make it easier for employers to withdraw.”
3. PBGC Approval of Certain Withdrawal Liability Settlements
Any settlement of withdrawal liability during the SFA coverage period (generally, the date of application through 2051) is subject to PBGC approval if the present value of the liability settled is greater than $50 million. The PBGC will only approve such a settlement if it determines that: (1) it is in the best interests of the participants in the plan; and (2) does not create an unreasonable risk of loss to PBGC. The information the PBGC will require in order to review a proposed settlement includes: the proposed settlement agreement; the facts leading to the settlement; the withdrawn employer’s most recent 3 years of audited financials and a 5-year cash flow projection; a copy of the plan’s most recent actuarial evaluation; and a statement certifying the trustees have determined that the proposed settlement is in the best interest of the plan, its participants and beneficiaries.
4. Promise of Additional PBGC Regulations as to Assumptions for All Plans
Last but not least, in its explanation of the final interim rule the PBGC noted that it plans to use its authority under Section 4213(a) of ERISA to propose a separate rule of general applicability setting forth actuarial assumptions which “may” be used to determine an employer’s withdrawal liability. Presumably, this general rule would be applicable to all plans, not simply those that receive SFA. This could have a significant impact on how withdrawal liability is calculated in the future.
Mark your calendars for the webinar on Friday, July 30, 2021, at 1:00 central, and stay tuned to this site for more details about the webinar.