Pension & Benefits News Interest rate assumptions for withdrawal liability set as of last day of preceding year
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Wednesday, April 22, 2020

Interest rate assumptions for withdrawal liability set as of last day of preceding year

By Pension and Benefits Editorial Staff

Interest rate assumptions for withdrawal liability purposes must be determined as of the last day of the year preceding an employer’s withdrawal from a multiemployer pension plan, according to the U.S. Court of Appeals in New York City (CA-2), which vacated the judgment of a district court. The district court had ruled that interest rate assumptions may be determined after withdrawal and retroactively imposed. However, the appeals court concluded that the assumptions and methods used to calculate the interest rate assumptions for purposes of withdrawal liability must be those in effect as of the Measurement Date. Thus, the plan could not retroactively apply a revised interest rate assumption adopted after the date the employer effectuated a complete withdrawal from the plan.

Withdrawal liability. This case involved an employer’s withdrawal liability from a multiemployer pension plan under ERISA. Metz Culinary Management, a contributing employer to the National Retirement Fund, effectuated a complete withdrawal from the plan on May 16, 2014, under ERISA Sec. 4203(a). When a plan is underfunded, an employer seeking to withdraw must pay its share of the underfunded vested benefits (UVBs). ERISA, as amended by the Multiemployer Pension Plan Amendments Act (MPPAA), sets forth rules for calculating a withdrawing employer’s share of a plan’s underfunding.

Critical to this dispute, ERISA Sec. 4211 directs plans to calculate the withdrawal charge, not as of the date of withdrawal or sometime later, but as of the last day of the plan year preceding the year during which the employer withdrew—the “Measurement Date.” Because Metz withdrew from the plan on May 16, 2014, the applicable Measurement Date was December 31, 2013.

Interest rate assumption. To determine an employer’s withdrawal liability, a plan actuary must estimate the present value of the plan’s vested benefits and the interest rate necessary to discount the liability for future benefit payments. The interest rate assumption governs the estimate of a plan’s growth from investments apart from employers’ future contributions. Thus, increasing the interest rate assumption decreases an employer’s withdrawal liability, and vice versa. In this matter, the interest rate assumption was at issue.

According to the plan’s actuary, a 7.25% interest assumption to determine the fund’s UVBs was in place in 2013. At a 7.25% interest rate, Metz’s withdrawal liability would have been $254,644. However, in June 2014, the actuary informed the plan that the interest rate assumption for purposes of withdrawal liability was reduced to approximately 3.25%. At a 3.25% interest rate, the employer’s withdrawal liability was calculated to be $997,734. The plan applied the revised interest rate to calculate the employer’s withdrawal liability. The employer then commenced arbitration proceedings.

Arbitration proceeding. The arbitrator held that the plan’s retroactive application of the PBGC rate to calculate Metz’s withdrawal liability was improper. Accordingly, the recalculation of withdrawal liability reduced the employer’s liability to $254,644. Thereafter, the plan brought this action seeking to modify and/or vacate the arbitrator’s award. The district court vacated the arbitration award, holding that “ERISA does not require actuaries to make withdrawal liability assumptions by the measurement date.”

On appeal, the determinative issue was whether, under the MPPAA, a fund may select an interest rate assumption after the measurement date and retroactively apply that assumption to withdrawal liability calculations. Here, the employer’s withdrawal from the plan on May 16, 2014, caused December 31, 2013, to be the Measurement Date. As a factual matter, the interest rate assumption as of that date was 7.25%.

Measurement Date. ERISA and Congress’s guidelines for calculating an employer’s withdrawal liability are silent as to whether the interest rate assumption on the Measurement Date must be affirmatively adopted, or whether, absent an actuary’s affirmative selection of a new assumption rate, the rate in effect during the previous plan year rolls over automatically. Here, the Second Circuit disagreed with the district court’s determination that “Section 4213 does not allow stale assumptions from the preceding plan year to roll over automatically.” The Second Circuit observed that in the context of multiemployer pension plans, interest rate assumptions cannot be altered daily and must have a degree of stability. Moreover, the appeals court observed that interest rate assumptions do not remain open forever and subject to retroactive changes in later years.

Rather, ERISA Sec. 4213 imposes a notice requirement on multiemployer funds for any plan rule or amendment with respect to withdrawal liability. Moreover, certain provisions of ERISA allow employers to request and receive notice of their estimated withdrawal liability prior to actually withdrawing from a fund. Such provisions are of no value if retroactive changes in interest rate assumptions may be made at any time.

Thus, in considering the retroactive selection of interest rate assumptions, the Second Circuit concluded that the assumptions and methods used to calculate the interest rate assumption for purposes of withdrawal liability must be those in effect as of the Measurement Date. Absent a change by a fund’s actuary before the Measurement Date, the existing assumptions and methods remain in effect.

Accordingly, the judgment of the district court was vacated.

Source: The National Retirement Fund v. Metz Culinary Management, Inc. (CA-2).

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