Understanding Mass Withdrawal Liability and Available Alternatives

March 11, 2020Articles

Withdrawal liability is not well understood by many employers who contribute to multiemployer defined benefit pension funds because it is both complex and daunting. Mass withdrawal liability is perhaps even less well understood and certainly more daunting. Understanding the basics of mass withdrawal liability – as well as the circumstances that give rise to a mass withdrawal – can be helpful in avoiding a sudden or unexpected mass withdrawal.

What is a mass withdrawal?

A mass withdrawal occurs where either all or substantially all of the employers withdraw from a defined benefit pension plan. Withdrawal of all employers is referred to as a plan termination mass withdrawal, whereas instances involving withdrawal of only substantially all of the employers is termed a non-termination mass withdrawal.

Withdrawing employers are allocated their share of the plan’s unfunded vested benefits, like in a regular complete withdrawal. This is referred to as initial withdrawal liability. In addition, amounts that would otherwise be excluded under the de minimis and 20-year limitations are assessed upon employers withdrawing in a mass withdrawal. This is referred as redetermination liability.

Finally, the unfunded vested benefits which remain after the initial withdrawal liability and redetermination liability have been assessed, effectively the uncollectible liability, are assessed. This is referred to as reallocation liability. Reallocation liability is allocated to employers based on their proportional share of the total employers’ contributions in the three years preceding the mass withdrawal.

Importantly, the unfunded vested benefits are calculated using interest rate assumptions prescribed by the PBGC, which are in today’s interest rate climate often much lower than those used by plans to value unfunded vested benefits in a regular withdrawal.

Further, employers who withdrew during the three years prior to the mass withdrawal are presumed to be part of the arrangement or agreement to withdraw and may also be liable for reallocation liability. This presumption can be rebutted.

Why is mass withdrawal liability so overwhelming?

In a mass withdrawal the remaining employers are basically the last ones standing. They bear responsibility for all of the plan’s unfunded vested benefits, a very undesirable position. Withdrawal liability amounts that were assessed in the past and not collected, for reasons such as the 20-year cap or an employer’s bankruptcy, are allocated to the employers who remain when a plan undergoes a mass withdrawal.

Another reason is that the unfunded vested benefits are required by the regulations to be valued using the PBGC’s rates. These lower rates produce higher present values of the unfunded vested benefits. The liability to be allocated is inflated and is far greater than if the plan’s funding rate were used.

Finally the 20-year cap on payments is not applicable to certain employers in a mass withdrawal. However, the annual payment formula is unchanged. As a result, amortization of the liability can extend for a very long time. This can create perpetual, or infinite, payers.

Not only are the last ones standing responsible for their initial withdrawal liability, but also redetermination liability and possibly reallocation liability. This can result in a considerable financial burden imposed on the remaining employers.

What can mitigate the risk of a mass withdrawal?

Employers can’t generally control what other employers do. Likewise an employer can’t always withdraw from a plan on a timetable they chose. Despite the inability to dictate decisions of others and timing of events, there are things employers can do. Mitigating the risk associated with a mass withdrawal involves keeping close watch on a plan and the other contributing employers, as well as having a strategy in place to respond if certain events unfold.

Mass withdrawals typically occur with funds that cover small geographic regions and have fewer contributing employers. For example, a plan that covers contributing employers within one city or just one state is far more likely to experience a significant decrease in the number of contributing employers than a regional or national plan that covers a broader network of employers. Therefore, as a general matter, the smaller the number of contributing employers, the more attention that should be paid to its status.

It is important for employers to keep a watchful eye on the status of other contributing employers. Questions to keep in mind include: Who are the largest contributing employers to the fund? How are those employers faring? Are they expanding operations covered by the plan or are they downsizing or shifting work to other areas? Have any employers recently withdrawn? What is the overall economic climate of the industry covered by the plan?

On an annual basis, employers should request and review the Form 5500, the annual funding notice, the actuarial valuation report, withdrawal liability valuation report and a withdrawal liability estimate.

Are there alternatives to a mass withdrawal?

The consequences of a mass withdrawal can be fiscally disastrous for employers. The unmet obligations of any employers who declare bankruptcy or otherwise default following a mass withdrawal will then be shifted to the remaining employers.

A better option, in certain circumstances, can be where a plan adopts alternative terms and conditions to satisfy withdrawal liability, known as a “managed mass withdrawal.”

The Multiemployer Pension Plan Amendments Act grants plans the authority to adopt “other terms and conditions for the satisfaction of an employer’s withdrawal liability” that satisfy, and are approved by, the Pension Benefit Guaranty Corporation (PBGC). Recently the PBGC has expressed an intent to be more proactive in its approach to these requests and engage with stakeholders in advance of a potential mass withdrawal, rather than wait until after the mass withdrawal has occurred and it is more challenging to work through alternative arrangements. The PBGC has not adopted regulations that set forth definitive criteria for adopting such rules, but issued guidance in 2018 on information it deems helpful in evaluating such proposals.

The overarching goal in a managed mass withdrawal is to maximize the recovery of withdrawal liability, as compared to the potential recovery under the statutory default method. Mass withdrawal liability, calculated under the statutory method, may pose a real threat that certain employers will be unable to meet their payment obligations. A managed mass withdrawal that offers different terms, but ensures that employers will be able to maintain their solvency and actually make those payments, may ultimately maximize the plan’s recovery.