New Withdrawal Liability Rules for Pension Bailout Recipients

July 13, 2021

On July 9, 2021, the Pension Benefit Guaranty Corporation (PBGC) issued an interim final rule implementing its new program providing special financial assistance (SFA) to certain underfunded multi-employer pension plans (MEPPs). The rule provides much-needed clarification on how the SFA payments will affect the calculation of withdrawal liability, though certain aspects of the impact remain unclear. Investors and employers contributing to underfunded MEPPs should understand the rule and its impact on future withdrawal liability calculations.


Under the Employee Retirement Income Security Act of 1974 (ERISA), an employer withdrawing from a MEPP is liable for the employer’s share of the MEPP’s unfunded liability. Upon that withdrawal, the MEPP determines the amount of the liability, notifies the employer of that amount and collects it from the employer. Under ERISA, all employees of “trades or businesses” under common control are treated as if they are employed by a single employer, and any such trades or businesses are treated as a single employer. Based on this provision, courts have long held that each “trade or business” under common control with an employer contributing to a MEPP is jointly and severally liable, along with that employer, for the employer’s withdrawal liability. This is the case even if the various trades or businesses have nothing in common except ownership.

When withdrawal liability is assessed, a MEPP will determine (i) the total withdrawal liability amount (the gross amount) and (ii) an annual payment amount based on the employer’s past contributions (the effective amount). The gross amount and effective amount are not actuarially equivalent. An employer may then either prepay the gross amount in one lump sum or commence monthly or quarterly periodic payments of the effective amount. In general, an employer’s obligation to make monthly or quarterly payments of the effective amount ceases after 20 years of payments and any remaining balance of the gross amount is waived. Importantly, this 20-year cap does not apply in the event of a mass withdrawal.

ARPA Provides Financial Assistance to MEPPs

The American Rescue Plan of 2021 (ARPA) amended ERISA to provide for a new program to furnish SFA to certain financially troubled MEPPs. Specifically, the program will provide eligible MEPPs an amount sufficient to pay all benefits due through the plan year ending in 2051. Overall, the PBGC expects the SFA program will provide $94 billion to more than 200 plans, which will assist over 3 million participants and beneficiaries. PBGC estimates more than 100 plans that would have otherwise become insolvent during the next 15 years will avoid that fate because of the SFA.

Notably, the final version of the bill adding the SFA program was silent about the effect SFA payments will have on withdrawal liability calculations. For instance, it was unclear whether a MEPP that receives SFA would be required to disregard those amounts when calculating withdrawal liability, or whether it would be required to treat the SFA as an “asset” when determining the MEPP’s unfunded liability for withdrawal liability purposes. The rule provides clarification on this point, as well as other guidance on the requirements for applications for SFA-eligible MEPPs, how the payments and earnings thereon are to be invested, and certain other conditions determined by PBGC in consultation with the secretary of the Department of the Treasury.

New Withdrawal Liability Rules

Impact on Calculation of Gross Amount Remains Unclear

The preamble to the rule states that PBGC considered requiring MEPPs to disregard the SFA payments for purposes of calculating withdrawal liability, but determined such a mandate would be administratively complex. Instead, the SFA payments will be included as an asset when calculating withdrawal liability. This will reduce the overall unfunded liability of a MEPP and, in turn, reduce the gross amount assessable to employers. However, to prevent SFA payments from indirectly subsidizing employer withdrawals, the rule requires MEPPs receiving SFA payments to use mass withdrawal interest assumptions in the calculations. These conservative assumptions, which approximate the market price insurance companies charge to assume pension-like liability, will increase the overall unfunded liability of a MEPP and, in turn, increase the gross amount assessable to employers. Overall, it remains to be seen how the rule will impact calculations of the gross amount of withdrawal liability for employers.

Reduced Risk of Mass Withdrawals and Insolvencies

Since SFA payments will cover benefits due through 2051, the risk of mass withdrawals and insolvencies for MEPPs receiving SFA is significantly reduced. In turn, this should preserve the ability of an employer to rely on the effective amount it is charged because it will have increased certainty that the 20-year payment cap will remain in place.

Material Settlements Need PBGC Approval

The rule requires PBGC preapproval of any settlement of withdrawal liability during the SFA coverage period if the present value of the liability settled is greater than $50 million. The purpose of this provision is to ensure that any negotiated settlements of a material size are in the best interest of participants and do not create an unreasonable risk of loss to the PBGC. Importantly, any request for approval must include a copy of the proposed settlement agreement, the employer’s most recent three years of audited financial statements and five-year cash flow projections.

Takeaway for Investors and Employers

Investors and employers contributing to poorly funded MEPPs should be alert to these new rules, evaluate whether their MEPPs are eligible for the SFA program, and understand how the new guidance influences any potential withdrawal liability. Employers participating in SFA-eligible MEPPs may want to understand what a pre- and post-SFA withdrawal would look like, and should consult with their legal and actuarial advisers, as appropriate.

For more information, please contact the author of this alert or any member of the employee benefits practice.