The recently published final regulation implementing last year’s massive multiemployer pension plan bailout contains a very thin silver lining, but overall, more bad news for already overburdened employers.

Last year, the Pension Benefit Guaranty Corporation (PBGC) issued its interim final rule on the process for eligible troubled Multiemployer Pension Plans (MEPPs) to apply for and obtain Special Financial Assistance (SFA) under the American Rescue Plan Act of 2021 (ARPA).  On July 8, 2022, the PBGC published its final rule, which takes effect on August 8, 2022.  The PBGC also published a fact sheet highlighting the rule’s key provisions and impact.

The PBGC still expects approximately 100 of the most critically underfunded plans (plans that would have otherwise become insolvent during the next 15 years) will instead forestall insolvency as a direct result of receiving SFA.  The PBGC’s updates decreased the projected total nominal SFA estimate from $93.98 billion to about $86.15 billion (about a $17.3 billion decrease).

As with the interim rule, the final rule details the eligibility criteria, the application process, and the restrictions and conditions associated with the MEPPs’ use of the SFA.  Similar to the interim rule, the final rule reiterates the PBGC’s view that “payment of an SFA was not intended to reduce withdrawal liability or to make it easier for employers to withdraw.”

Like the interim rule, the final rule requires a MEPP to use the “mass withdrawal interest assumptions” for a minimum of 10 years after receiving SFA.  The interest rates prescribed for a mass withdrawal often are lower (in many instances, significantly lower) than the withdrawal liability interest rate currently being used by many MEPPs.  As a result, this requirement (which is effective for withdrawals occurring after the plan year in which the plan receives SFA) is expected to increase the amount of many employers’ withdrawal liability.

However, in the final rule, the PBGC expressed concern that even these low interest assumptions may spike because of current economic conditions.  In response to its concerns about rising interest rates, the PBGC changed the rule concerning the status of SFA as a plan asset in the calculation of withdrawal liability.  Under the interim rule, the entire amount of SFA was included as a plan asset for all recipients.  The final rule changes this by including a “phase-in” approach for certain SFA recipients.  These calculations can be complex, even more so now, but the concept is fairly simple.  For a period of ten years, the amount of the SFA will be phased in as a plan asset.  This modification of the interim rule is expected to substantially increase the nominal amount of employer withdrawal liability assessed by some SFA recipients but does not change the application of the 20-year cap on payments.  This phase-in approach applies to withdrawals occurring after the plan year in which the MEPP receives SFA.  The phase-in does not apply to MEPPs that received SFA under the terms of the interim rule (e.g., before August 8, 2022) unless the plan files a supplemented application for SFA.  The final rule includes a 30-day request for additional public comments related to the phase-in withdrawal liability condition.  We anticipate that this will stimulate heated discussion and comment, especially in the employer community.

The sole silver lining for employers is the PBGC’s stance regarding the interest rate used for the withdrawal liability payment amortization schedule.  Currently, many MEPPs charge a significantly higher rate of interest on the balance of withdrawal liability due than is used to calculate the amount of withdrawal liability.  After acknowledging that this area of law is “unclear,” the PBGC concluded in the final rule that SFA recipients must use the same interest rate to determine the amortization period as they use to calculate withdrawal liability (the mass withdrawal interest assumptions.) It is expected that using these lower amortization rates will reduce the payment period for some employers.

Another noteworthy provision in the final rule includes the PBGC’s condition that MEPPs receiving an SFA over $50 million obtain PBGC approval.  At a minimum, this condition creates an additional and significant hurdle for large withdrawal liability settlements.  It remains unclear how trustees’ fiduciary duty will be affected if they and the PBGC cannot agree on a resolution.

The final rule, like the interim rule, seemingly ignores the existing and ongoing burden imposed on contributing employers, specifically as it relates to contribution rates.

In the final rule, the PBGC did not expand its previous footnote that seemed to infer a rule of general application (not just applicable to SFA recipients) was in the works.  Specifically, the PBGC previously announced it “intends to propose a separate rule of general applicability under section 4213(a) of ERISA to prescribe actuarial assumptions which a plan actuary may use in determining an employer’s withdrawal liability.” As Judge Joan Larsen acknowledged in Sofco Erectors, Inc. v. Trustees Ohio Operating Engineers Pension Fund, the PBGC has not taken up its own invitation to address withdrawal liability calculations under the Segal Blend and other manipulative funding assumptions.  The issue will remain with the Courts (at least for now.)

We will continue to monitor this dynamic situation as it develops.