Avoiding
“MASS"
Hysteria
Know Your Mass Withdrawal Rules
Trustees and employers that contribute to a multiemployer
pension plan need to understand what a mass withdrawal is,
its implications for the plan and what a plan sponsor must do,
including when the plan is insolvent.
40
benefits magazine october 2014
MAGAZINE
Reproduced with permission from Benefits Magazine, Volume 51, No. 10, October 2014, pages 40-45,
published by the International Foundation of Employee Benefit Plans (www.ifebp.org), Brookfield, Wis. All
rights reserved. Statements or opinions expressed in this article are those of the author and do not necessarily
represent the views or positions of the International Foundation, its officers, directors or staff. No further
transmission or electronic distribution of this material is permitted. Subscriptions are available
(www.ifebp.org/subscriptions).
PU148020
pdf/1014
by | Robert M. Projansky and Justin S. Alex
O
ver the last several years, a variety of market and other factors
have resulted in increased incidences of multiemployer pension plans experiencing mass withdrawals. A 2013 report to
Congress by the secretary of labor, the secretary of the Treasury and the director of the Pension Benefit Guaranty Corporation (PBGC) indicated that approximately 7.5% of the total withdrawal liability assessed in 2009 related to mass withdrawal terminations
of plans in 2008 and 2009.
Trustees of multiemployer pension plans and employers that contribute to such plans should understand mass withdrawals and their implications.
october 2014 benefits magazine
41
mass withdrawal
What Is a Mass Withdrawal?
A mass withdrawal is: (1) the withdrawal of every employer from the
plan, (2) the cessation of the obligation
of all employers to contribute under
the plan or (3) the withdrawal of substantially all employers pursuant to an
agreement or arrangements to withdraw from the plan.1
The first two events result in a statutory termination of the plan.2 The third
event may result in a termination if the
trustees amend the plan to eliminate
future benefit accruals.
However, the rules regarding the
assessment and collection of mass
withdrawal liability apply regardless of
whether the plan terminates.
For purposes of the third event, there
is no statutory or regulatory threshold
that constitutes “substantially all” employers, but the term has been interpreted in other instances to mean “at least
85%,” so some plans use that as a guide.3
In addition, the Employee Retirement
Income Security Act (ERISA) of 1974,
as amended, presumes that any withdrawal by an employer during a period
of three consecutive plan years within
which substantially all of the employers
that have an obligation to contribute to
the plan withdraw is a withdrawal due to
an agreement or arrangement, unless the
employer proves otherwise by a preponderance of the evidence.4
What Does a Mass Withdrawal
Do to Withdrawal Liability?
Generally, when an employer withdraws from a plan in a standard withdrawal, the plan sponsor must assess
and attempt to collect withdrawal liability, subject to two reductions.
The first reduction is the de minimis
reduction, which provides that an employer’s withdrawal liability is reduced
by the lesser of 0.75% of the plan’s unfunded vested benefits or $50,000.5
However, the de minimis reduction
is decreased dollar-for-dollar by any
amount of an employer’s withdrawal
liability over $100,000 (meaning that it
fully phases out for withdrawal liability
of $150,000 or more).
The second reduction is the 20-year
cap on withdrawal liability payments,
which provides that if an employer’s
period for paying withdrawal liability
exceeds 20 years, that employer’s withdrawal liability is limited to 20 annual
installments.6
Mass withdrawal liability consists
learn more >>
Education
Collection Procedures Institute
November 17-18, 2014, Santa Monica, California
Visit www.ifebp.org/collections for more information.
Trustees and Administrators Institutes
February 9-11, 2015, Lake Buena Vista (Orlando), Florida
Visit www.ifebp.org/trusteesadministrators for more information.
From the Bookstore
Trustee Handbook: A Guide to Labor-Management Employee Benefit Plans
Claude L. Kordus, editor. International Foundation. 2012.
Visit www.ifebp.org/books.asp?7068 for more details.
42
benefits magazine october 2014
of three parts. First, each employer is
subject to standard withdrawal liability
without regard to the mass withdrawal.
Second, certain employers are subject to additional liability known as redetermination liability.7 This is where,
depending on the cause of the mass
withdrawal, the employers may lose the
benefit of the de minimis reduction and
the 20-year cap.
When a mass withdrawal occurs by
the withdrawal of substantially all employers from a plan or arrangement to
withdraw, only those employers withdrawing pursuant to the agreement or
arrangement to withdraw lose the benefit of any reduction due to the 20-year
cap.8 However, it is important to bear
in mind that there is a presumption
that an employer withdrew pursuant
to such an agreement or arrangement
if the employer withdrew in a threeconsecutive-plan-year period within
which substantially all contributing
employers withdraw from the plan. In
addition, every employer that withdraws in a plan year in which substantially all employers withdraw pursuant
to an agreement or arrangement loses
the benefit of the de minimis reduction,
regardless of whether the employer
withdraws pursuant to the agreement
or arrangement.
When a mass withdrawal occurs by
the withdrawal of every employer from
a plan, slightly different rules apply. All
employers withdrawing from a plan
that terminates by the withdrawal of
every employer lose the benefit of any
reduction due to the 20-year cap limitation, regardless of when the employer
withdraws from the plan. In addition,
every employer that withdraws in the
plan’s final plan year loses the benefit of
the de minimis reduction.
mass withdrawal
A plan sponsor generally must continue to administer its plan
after a mass withdrawal in accordance with certain special rules
unless the plan terminates or PBGC assumes responsibility
for the plan (which is unusual).
The third part of mass withdrawal is that certain employers are subject to reallocation liability. Reallocation liability is
where the amount required to allocate fully a plan’s unfunded vested benefits is allocated among withdrawing employers.9 This means that the unfunded vested benefits of the plan
are recalculated based on certain assumptions required by
PBGC, including interest rates that are often far lower than
what is used by most plans in a standard withdrawal.10 In
addition, the liability of employers that, as of the reallocation
record date established by the plan, have been liquidated or
dissolved or are undergoing bankruptcy proceedings is allocated to the employers subject to reallocation liability.11
However, employers are not liable for unfunded vested benefits allocated to other employers that, after demand for payment of reallocation liability, are subsequently deemed to be
unassessable or uncollectible.12
Reallocation liability is imposed against:
• Employers that withdrew pursuant to an agreement or
arrangement to withdraw from a plan from which substantially all employers withdrew pursuant to an agreement or arrangement to withdraw
• Employers that withdrew after the beginning of the second
full plan year preceding the termination date from a plan
that terminated by the withdrawal of every employer.13
It is important to note that reallocation liability can significantly increase the unfunded vested benefits allocable to
an employer. However, the amount of each annual installment payment does not change as a result of redetermination or reallocation liability. Instead, the combination of the
elimination of the 20-year cap and the reallocation liability
can cause employers to have to pay installments for a sig-
nificantly longer period. In fact, in some cases, an employer’s
annual payments are not high enough to amortize the full
liability no matter how long it pays, resulting in the employer
being considered an infinite payer.
What Happens After a Mass Withdrawal?
A plan sponsor generally must continue to administer
its plan after a mass withdrawal in accordance with certain
special rules unless the plan terminates or PBGC assumes
responsibility for the plan (which is unusual).
If a plan terminates by mass withdrawal, the plan sponsor
must limit benefit payments to benefits that are nonforfeitable
under the plan as of the date of the mass withdrawal. Benefits
that are forfeitable include new disability benefit awards, benefits not vested on the date of the mass withdrawal and preretirement death benefits, including qualified preretirement
survivor annuities for participants not yet deceased.
However, PBGC permits the payment of qualified preretirement survivor annuity benefits when a plan’s assets are
sufficient to pay nonforfeitable benefits.14
In addition, benefit payments after a termination by mass
withdrawal must generally be in the form of an annuity unless the plan assets are distributed in full satisfaction of all
nonforfeitable benefits under the plan.15
Until a closeout of the plan, the plan sponsor generally
must value the plan’s benefits on each anniversary of the mass
withdrawal date.16 However, in May 2014 PBGC issued a new
rule that requires valuations only every three years for plans
terminated by mass withdrawal if the plans are not insolvent
and have nonforfeitable benefits of $25 million or less.17
If the plan sponsor determines that the value of nonforoctober 2014 benefits magazine
43
mass withdrawal
takeaways >>
• Whenever substantially all employers withdraw from a plan during a three-year period,
plan fiduciaries often act as if there was a mass withdrawal unless they have specific
evidence showing the absence of an agreement or arrangement.
• Employers that withdrew well prior to a mass withdrawal can still be liable for redetermination liability and have their 20-year cap lifted.
• Solvent employers that remain in business after a mass withdrawal become responsible
for the mass withdrawal liability of employers that are currently insolvent or in bankruptcy but not those that become insolvent or bankrupt after an established date.
• A new PBGC rule eases the annual valuation burden for certain smaller plans that terminate by mass withdrawal.
• Contrary to the beliefs of many, it is atypical for PBGC to “take over” an insolvent plan
that has not been abandoned. More commonly, PBGC provides financial assistance.
feitable benefits exceeds the value of
plan assets (including claims for withdrawal liability owed to the plan), the
plan sponsor must amend the plan to
reduce benefits (on a prospective basis) within six months after the end of
the plan year in which the determination is made.18 However, only benefits
subject to reduction—benefits that are
not subject to PBGC’s guaranty—can
be reduced at this stage. Among other
things, PBGC’s guaranty does not cover plan provisions, including benefit
increases, that have been in effect for
less than 60 months. As a result, only
benefit increases adopted in the five
years preceding a mass withdrawal are
reduced at this stage.
However, additional reductions are
imposed if a plan becomes insolvent.
What Happens Upon
Insolvency?
A plan is insolvent if it is unable to
pay benefits when due in a given plan
year.19 If all benefits subject to reduction have been eliminated, the plan
sponsor must then determine in writing if the plan is insolvent for the first
plan year beginning after the effective
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benefits magazine october 2014
date of the amendment that results in
elimination of all benefits subject to reduction and each year thereafter.20
The plan sponsor must make a plan
solvency determination no later than
six months before the beginning of the
plan year to which it applies. A plan
sponsor must also make a determination of plan solvency if the plan sponsor has reason to believe that the plan
is or may be insolvent for the current or
next plan year.21
If, after a determination of solvency,
the plan sponsor determines that the
plan is or is expected to be insolvent
for a plan year, the plan sponsor must
suspend benefits to the extent necessary to reduce benefits to the greater
of the level of the PBGC guaranty or
the resource benefit level, defined in
ERISA as the highest level of monthly
benefits that can be paid out with the
plan’s available resources for a given
plan year.22
When Can a Plan Receive
PBGC Financial Assistance?
An insolvent plan may also be required to apply for financial assistance
from PBGC. If the plan sponsor deter-
mined that the plan’s benefit resource
level for an insolvency year is below
the level of PBGC-guaranteed benefits
or that the plan will not be able to pay
the level of PBGC-guaranteed benefits
when due for any month during the
year, the plan sponsor must apply to
PBGC for financial assistance.23
Financial assistance from PBGC is
in the form of a loan that allows the
plan to pay participants’ PBGC-guaranteed benefits and the plan’s reasonable administrative expenses.24
PBGC has broad discretion in setting the conditions on its financial assistance, but typical loan conditions are
that:
• The loan will be repaid if the
plan’s financial condition improves.
• Benefits may be paid only at the
PBGC guaranty level.
• The PBGC loan is collateralized
by employer contributions, withdrawal liability payments and
other plan assets.
• PBGC has broad audit authority
over the plan.
What Are the Required Notices
and Filings Related to Mass
Withdrawals?
Mass withdrawals (and related plan
terminations) require a number of notices and PBGC filings. When a plan
terminates through a mass withdrawal,
the plan sponsor is required to provide a Notice and Certification of Mass
Withdrawal to PBGC.25
In addition, the plan sponsor must
issue a Notice of Mass Withdrawal
to each employer that the plan sponsor reasonably expects may be a liable
employer as a result of the mass withdrawal.26
Separately, the plan sponsor must also issue a Notice and
Demand for Payment of Initial Withdrawal Liability to every
employer for which withdrawal liability has not previously
been determined when a plan was terminated under a mass
withdrawal scenario.27
The plan sponsor must also provide a Notice of Redetermination Liability to each employer liable for redetermination liability (although this notice can be combined with the
Notice and Demand for Payment of Initial Withdrawal Liability for applicable employers).28
Finally, the plan sponsor should provide a Notice of Reallocation Liability to each employer liable for the reallocation
liability when a plan has terminated in a mass withdrawal
scenario.29 There are a host of other notices that are required
in the event of insolvency.
<< bios
mass withdrawal
Conclusion
Robert M. Projansky is a partner in
Proskauer Rose LLP’s employee
benefits and executive compensation
law group in New York, New York.
His practice covers the full spectrum
of employee benefit issues, including advising
clients regarding all aspects of pension and welfare
plan administration, investment management,
fiduciary responsibility matters and prohibited
transactions, mergers and terminations, government audits and participant communications.
Projansky is a member of the International
Foundation’s Professionals Committee. He
received a B.A. degree from Binghamton University and a J.D. degree from New York University
School of Law.
Justin S. Alex is an associate in the
Washington, D.C. office of Proskauer Rose LLP and a member of
the Employee Benefits, Executive
Compensation and ERISA Litigation
Practice Center. His practice covers all aspects of
employee benefits and executive compensation.
Alex previously was a lawyer in the Office of Chief
Counsel at the Pension Benefit Guaranty Corporation, which he represented in corporate bankruptcies and federal court litigation. He holds B.S.B.A.
and M.S. degrees from the University of Florida
and a J.D. degree from the University of Florida
Levin College of Law.
Mass withdrawals require trustees of multiemployer pension plans to take special action and can result in additional
liabilities for employers that contribute to such plans. As a
result, all involved parties should understand the circumstances that give rise to a mass withdrawal and its potential
implications.
In addition, advance planning may allow plans to avoid
sudden and unexpected mass withdrawals. In recent years,
plans have begun to obtain PBGC approval to settle mass
withdrawals under alternative rules, which can help ease
the financial burden of mass withdrawals for withdrawing
employers and also provide affected plans with potentially
greater financial recoveries than in standard mass withdrawals. Endnotes
1. 29 C.F.R. §4001.2.
2. ERISA §4041A(a)(2).
3. See, e.g., Continental Can Co. v. Chicago Truck Drivers, Helpers and
Warehouse Workers (Independent) Pension Fund, 916 F.2d 1154 (7th Cir.
1990). However, PBGC has declined to provide a clearly defined rule. PBGC
Opinion Letter 94-3 (Aug. 2, 1994) (stating that “if Congress had intended a
strict numerical test, it could easily have included a percentage test in the
statute”).
4. ERISA §4219(c)(1)(D).
5. ERISA §4209.
6. ERISA §4219(c)(1)(B).
7. 29 C.F.R. §4219.2.
8. PBGC Opinion Letter 94-3 provides a detailed analysis of when employers are subject to the different types of mass withdrawal liability.
9. 29 C.F.R. §4219.15.
10. 29 C.F.R. §4219.2 (defining unfunded vested benefits) and §4219.15.
11. 29 C.F.R. §4219.15(b).
12. 29 C.F.R. §4219.15(c)(2).
13. 29 C.F.R. §4219.12(c).
14. 29 C.F.R. §4041A.22(c).
15. ERISA §4041A(c)(2).
16. ERISA §4281.
17. 29 C.F.R. §4041A.24(a)(1).
18. 29 C.F.R. §4281.31.
19. 29 C.F.R. §4281.2.
20. 29 C.F.R. §4041A.25.
21. 29 C.F.R. §4041A.25(b).
22. 29 C.F.R. §4281.2 and §4281.41.
23. 29 C.F.R. §4041A.26.
24. ERISA §4261(a).
25. 29 C.F.R. §4219.17.
26. 29 C.F.R. §4219.16(a).
27. 29 C.F.R. §4219.11(a).
28. 29 C.F.R. §4219.16(b).
29. 29 C.F.R. §4219.16(c).
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