Proposed Rule2022-22304
Actuarial Assumptions for Determining an Employer's Withdrawal Liability
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
October 14, 2022
Issuing agencies
Pension Benefit Guaranty Corporation
Abstract
The Pension Benefit Guaranty Corporation is proposing to provide interest rate assumptions that may be used by a plan actuary in determining a withdrawing employer's liability under a multiemployer plan.
Full Text
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<title>Federal Register, Volume 87 Issue 198 (Friday, October 14, 2022)</title>
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[Federal Register Volume 87, Number 198 (Friday, October 14, 2022)]
[Proposed Rules]
[Pages 62316-62322]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-22304]
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PENSION BENEFIT GUARANTY CORPORATION
29 CFR Part 4213
RIN 1212-AB54
Actuarial Assumptions for Determining an Employer's Withdrawal
Liability
AGENCY: Pension Benefit Guaranty Corporation.
ACTION: Proposed rule.
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SUMMARY: The Pension Benefit Guaranty Corporation is proposing to
provide interest rate assumptions that may be used by a plan actuary in
determining a withdrawing employer's liability under a multiemployer
plan.
DATES: Comments must be received by November 14, 2022 to be assured of
consideration.
ADDRESSES: Comments may be submitted by any of the following methods:
<bullet> Federal eRulemaking Portal: <a href="https://www.regulations.gov">https://www.regulations.gov</a>.
Follow the online instructions for submitting comments.
<bullet> Email: <a href="/cdn-cgi/l/email-protection#6c1e090b420f0301010902181f2c1c0e0b0f420b031a"><span class="__cf_email__" data-cfemail="d3a1b6b4fdb0bcbebeb6bda7a093a3b1b4b0fdb4bca5">[email protected]</span></a> with subject line ``4213
proposed rule.''
<bullet> Mail or Hand Delivery: Regulatory Affairs Division, Office
of the General Counsel, Pension Benefit Guaranty Corporation, 445 12th
Street SW, Washington, DC 20024-2101.
Commenters are strongly encouraged to submit comments
electronically. PBGC expects to have limited personnel available to
process comments submitted on paper by mail or hand delivery. Until
further notice, any comments submitted on paper will be considered to
the extent practicable.
All submissions received must include the agency's name (Pension
Benefit Guaranty Corporation, or PBGC) and refer to the 4213 proposed
rule. All comments received will be posted without change to PBGC's
website, <a href="http://www.pbgc.gov">www.pbgc.gov</a>, including any personal information provided. Do
not submit comments that include any personally identifiable
information or confidential business information.
Copies of comments may also be obtained by writing to Disclosure
Division, Office of the General Counsel, Pension Benefit Guaranty
Corporation, 445 12th Street SW, Washington, DC 20024-2101, or calling
202-326-4040 during normal business hours. If you are deaf or hard of
hearing, or have a speech disability, please dial 7-1-1 to access
telecommunications relay services.
FOR FURTHER INFORMATION CONTACT: John Ginsberg
(<a href="/cdn-cgi/l/email-protection#f2959b9c8190978095dc989d9a9cb282909591dc959d84"><span class="__cf_email__" data-cfemail="8deae4e3feefe8ffeaa3e7e2e5e3cdfdefeaeea3eae2fb">[email protected]</span></a>), Assistant General Counsel, Multiemployer Law
Division, Office of the General Counsel, at 202-229-3714, or Gregory
Katz (<a href="/cdn-cgi/l/email-protection#5833392c22763f2a3d3f372a2118283a3f3b763f372e"><span class="__cf_email__" data-cfemail="c6ada7b2bce8a1b4a3a1a9b4bf86b6a4a1a5e8a1a9b0">[email protected]</span></a>), Attorney, Regulatory Affairs Division,
Office of the General Counsel, at 202-227-8918. If you are deaf or hard
of hearing, or have a speech disability, please dial 7-1-1 to access
telecommunications relay services.
SUPPLEMENTARY INFORMATION:
Executive Summary
The Pension Benefit Guaranty Corporation (PBGC) is proposing to
provide interest rate assumptions that may be used by a plan actuary in
determining a withdrawing employer's liability under a multiemployer
plan.
PBGC's legal authority for this rulemaking comes from section 4213
of the Employee Retirement Income Security Act of 1974 (ERISA), which
authorizes PBGC to prescribe actuarial assumptions and methods for
purposes of determining an employer's withdrawal liability, and from
section 4002(b)(3) of ERISA, which authorizes PBGC to issue regulations
to carry out the purposes of title IV of ERISA.
Background
Withdrawal Liability
PBGC administers two independent insurance programs for private-
sector defined benefit pension plans under title IV of ERISA--one for
single-employer defined benefit pension plans and one for multiemployer
defined benefit pension plans (multiemployer plans). In general, a
multiemployer plan is a collectively bargained plan involving two or
more unrelated employers. The multiemployer program protects benefits
of approximately 10.9 million workers and retirees in approximately
1,360 plans.\1\ This proposed rule applies only to multiemployer plans.
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\1\ See PBGC FY 2021 Annual Report, page 3 at <a href="https://www.pbgc.gov/sites/default/files/documents/pbgc-annual-report-2021.pdf">https://www.pbgc.gov/sites/default/files/documents/pbgc-annual-report-2021.pdf</a>.
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Under ERISA, an employer that withdraws from a multiemployer plan
may be liable to the plan for withdrawal liability, which generally
represents the employer's share of any unfunded vested benefits (UVBs)
that the plan may have at the end of the plan year immediately
preceding the plan year in which the employer withdraws. UVBs are the
amount by which the present value of nonforfeitable benefits under the
plan as of the valuation date exceeds the value of plan assets as of
that date. The plan actuary determines the present value of all of the
plan's nonforfeitable benefits using actuarial assumptions and methods.
The assumptions include
[[Page 62317]]
the interest rate--sometimes called the ``discount rate''--that is used
to discount future benefit payments to their present value and the
mortality tables used to determine the probability that each benefit
payment will be made. Assuming a higher interest rate results in lower
UVBs, whereas a lower rate leads to higher UVBs. Disputes between plans
and employers about the value of UVBs are resolved through mandatory
arbitration, and then, if necessary, litigation.
For plans terminated by mass withdrawal, PBGC's regulation on
Duties of Plan Sponsor Following Mass Withdrawal (29 CFR part 4281)
specifies actuarial assumptions for valuing benefits, including
interest rates described in Appendix B to PBGC's regulation on
Allocation of Assets in Single-Employer Plans (29 CFR part 4044).\2\
These interest rates are based on the average market price of a life
annuity, which PBGC determines from a quarterly survey of insurance
companies and can be used to approximate the cost of purchasing
annuities to cover benefits. Annuity prices are derived in part from
yields on high-quality corporate bonds.
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\2\ See 29 CFR 4281.13.
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For ongoing plans, section 4213(a) of ERISA provides--
The corporation may prescribe by regulation actuarial
assumptions which may be used by a plan actuary in determining the
unfunded vested benefits of a plan for purposes of determining an
employer's withdrawal liability under this part. Withdrawal
liability under this part shall be determined by each plan on the
basis of--
(1) actuarial assumptions and methods which, in the aggregate,
are reasonable (taking into account the experience of the plan and
reasonable expectations) and which, in combination, offer the
actuary's best estimate of anticipated experience under the plan, or
(2) actuarial assumptions and methods set forth in the
corporation's regulations for purposes of determining an employer's
withdrawal liability.
Because PBGC has not issued regulations under section 4213(a)(2),
withdrawal liability determinations governed by section 4213(a) have
heretofore been made under section 4213(a)(1).
Actuarial Variety in Selection of Assumptions
Plans have used a variety of approaches to determine withdrawal
liability; three common approaches are described in the following
paragraphs.
One approach uses the same interest rate assumption that is used to
determine minimum funding requirements, based on the expected average
return on plan assets over the long term. This approach applies the
interest rate assumption used under section 431(b)(6) of the Internal
Revenue Code (Code) and section 304(b)(6) of ERISA (funding interest
rate assumption) to satisfy both standards under section 4213(a)(1)--
that the actuarial assumptions and methods used to determine withdrawal
liability are in the aggregate reasonable (taking into account the
experience of the plan and reasonable expectations) and in combination
offer the actuary's best estimate of anticipated experience.
Another approach focuses on the contrast between contributing
employers and withdrawing employers. This approach identifies
contributing employers as continuing to participate in the plan's
investment portfolio and share in future gains and losses, including
the risk of increased contributions if plan investments do not earn as
much as the assumed funding interest rate. This approach considers that
a withdrawing employer ceases to participate in the plan's investment
experience because the employer is settling its liabilities once and
for all and bears no risk of future losses. This approach therefore
considers the use of settlement interest rate assumptions prescribed by
PBGC under section 4044 of ERISA (4044 rates) to be appropriate to
determine the amount sufficient to release a withdrawing employer from
any future financial obligations to the plan. Those interest rate
assumptions can be used to approximate the market price of purchasing
annuities to cover the withdrawing employer's share of the plan's
benefit liabilities, which are generally paid in the form of life
annuities. From this perspective, the plan trustees' investment risk
appetite, asset allocation choices, or the actuary's best estimate of
the plan's future investment returns following the withdrawal are not
relevant to the withdrawal liability assessment.
A third approach uses an interest rate assumption that employs both
funding and settlement interest rate assumptions. For example, the
actuary might value unfunded benefits using the funding interest rate
assumption, and value funded benefits using a settlement interest rate
assumption like PBGC's 4044 rates.
Recent Disputes
There has been increasing litigation over withdrawal liability
determinations, centered on the interest rate assumption used to
discount liabilities of ongoing plans. In five cases since 2018 (and an
unknown number of arbitrations), a withdrawing employer has challenged
its withdrawal liability assessment by arguing that the interest
assumption that the plan actuary used to value nonforfeitable benefits
failed to satisfy section 4213(a)(1) of ERISA because it was lower than
the actuary's best estimate of anticipated average returns on plan
investments. Court decisions have varied \3\ and some have noted PBGC's
unused authority to issue a regulation prescribing assumptions that may
be used under section 4213(a)(2).\4\
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\3\ See United Mine Workers of Am. 1974 Pension Plan v. Energy
W. Mining Co., No. 20-7054, 2022 WL 2568025 (D.C. Cir. July 8, 2022)
(re 4044 rates); Sofco Erectors, Inc. v. Trs. of Ohio, Operating
Eng'rs, Pension Fund, 15 F. 4th 407 (6th Cir. 2021) (re blend of
4044 rates and funding interest rate assumption); GCIU Employer
Retirement Fund v. MNG Enterprises, Inc., No. 2:21-cv-00061, 2021 WL
3260079 (C.D. Cal., July 8, 2021) (re 4044 rates), appeals filed,
Nos. 21-55864, 21-55923; Manhattan Ford Lincoln, Inc. v. UAW Local
259 Pension Fund, 331 F. Supp. 3d 365 (D.N.J. 2018) (re blended
rates), appeal voluntarily dismissed; New York Times Co. v.
Newspaper and Mail Deliverers'-Publishers' Pension Fund, 303 F.
Supp. 3d 236 (S.D.N.Y. 2018) (re blended rates), appeals voluntarily
dismissed. In the cross-appeals of the New York Times decision, PBGC
participated as amicus curiae.
\4\ See United Mine Workers, 2022 WL 2568025, at *2; Sofco
Erectors, 15 F. 4th at 420; Manhattan Ford Lincoln, 331 F. Supp. 3d
at 393.
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Special Financial Assistance Interim Final Rule
On July 12, 2021 (at 86 FR 36598), PBGC published an interim final
rule on special financial assistance (SFA) under new section 4262 of
ERISA.\5\ In footnote 18 of that rule's preamble, PBGC indicated that
it intends to propose a separate rule of general applicability under
section 4213(a) of ERISA to prescribe actuarial assumptions that may be
used by a plan actuary in determining an employer's withdrawal
liability. This proposed rule carries out PBGC's stated intention.
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\5\ The final rule on SFA was published July 8, 2022, at 87 FR
40968.
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Overview of Regulation
Section 4213(a)(2) of ERISA authorizes PBGC to set forth in its
regulations actuarial assumptions and methods that may be used by a
plan actuary for the purpose of determining an employer's withdrawal
liability as an alternative to the assumptions and methods used under
section 4213(a)(1). This rule is being proposed under section
4213(a)(2) to make clear that use of 4044 rates, either as a standalone
assumption or combined with funding interest assumptions represents a
valid approach to selecting an interest rate assumption to determine
withdrawal liability in all circumstances. Withdrawing employers will
not be
[[Page 62318]]
making future plan contributions, and ERISA accounts for this by
requiring an employer to settle its share of the plan's unfunded
liabilities. In the event of worse than expected investment performance
or other actuarial experience following an employer's withdrawal, the
plan cannot seek additional funds from that employer. Thus, a
withdrawing employer shifts its share of investment risk and other
risks to the plan and its remaining employers. If a party promising a
pension, as an employer participating in a multiemployer plan
indirectly does, were to shift all investment risk, mortality risk, and
other asset and liability risks to an annuity provider, that party must
pay the premium amount necessary to fund the promised pension
liability. Accordingly, it is reasonable to base the amount needed to
settle the employer's share of the liability on the market price of
settling pension liabilities by purchasing annuities from private
insurers.
The use of actuarial assumptions and methods prescribed by PBGC
under section 4213(a)(2) would not be subject to the requirements of
section 4213(a)(1), and accordingly, the plan's actuary would be
permitted to determine withdrawal liability under the proposed rule
without regard to section 4213(a)(1).
The proposed rule would specifically permit the use of an interest
rate anywhere in the spectrum from 4044 rates alone to funding rates
alone.\6\ In the case of an interest assumption that involves two or
more rates to value a plan's liabilities, such as a yield curve or the
use of separate interest rates for benefits expected to be covered by
current assets and for other benefits, this proposed rule would apply
to the single interest rate that would result in the same liability
measure as the multiple rates. PBGC requests comments on whether the
final rule should restrict the allowable options to a narrower range of
interest rates or to only specific methodologies for determining
interest rates. In particular, should the top of the range of permitted
interest rates under section 4213(a)(2) be lower than the typical
funding interest rate assumption (which represents the expected return
on a portfolio with a significant allocation to return-seeking assets)?
PBGC also requests comments on what should be the relationship, if any,
between (a) the estimated date of plan insolvency, expected investment
mix, and/or funded ratio, and (b) permitted withdrawal liability
assumptions.
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\6\ The proposed rule would not override other statutory or
regulatory provisions requiring the use of specific rates such as
PBGC's regulation on Duties of Plan Sponsor Following Mass
Withdrawal (29 CFR part 4281) which specifies actuarial assumptions
for valuing benefits.
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Under Sec. 4213.11(c) of the proposed rule, each assumption and
method used, other than the interest assumption, would have to be
reasonable (taking into account the experience of the plan and
reasonable expectations). Additionally, the assumptions and methods
other than the interest assumption would, in combination, have to offer
the actuary's best estimate of anticipated experience under the plan.
Note that the standards under proposed Sec. 4213.11(c) echo the
current standard for selecting actuarial assumptions for multiemployer
funding under section 431(c)(3) of the Code and section 304(c)(3) of
ERISA, which has been updated since the enactment of ERISA.\7\ As with
assumptions adopted under those sections, assumptions used under Sec.
4213.11(c) would reflect the actuary's judgment as an independent
professional generally bound by actuarial standards of practice. The
standards in proposed Sec. 4213.11(c) would apply to assumptions and
methods other than interest assumptions. As discussed earlier in this
preamble, consideration of the anticipated experience of the plan in
selecting withdrawal liability interest assumptions is not necessarily
appropriate in light of a withdrawing employer's lack of continued
shared investment experience.
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\7\ See section 9307(b) of the Omnibus Budget Reconciliation Act
of 1987 (OBRA '87) (Pub. L. 100-203).
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PBGC requests comments on whether the final rule should specify
assumptions or methods other than interest assumptions. Also, if PBGC
were to specify assumptions under section 4213(a) of ERISA that
included demographic assumptions, such as mortality assumptions, that
differed from plans' demographic assumptions, would plans be unlikely
to use the PBGC assumptions because of those differences? If so, why?
Although PBGC is specifically requesting comments on the issues
discussed earlier in this preamble, PBGC also invites comment on any
other issue relating to section 4213 withdrawal liability assumptions.
Applicability
The changes in this proposed rule would apply to the determination
of withdrawal liability for employer withdrawals from multiemployer
plans that occur on or after the effective date of the final rule. The
proposed rule does not preclude the use of an interest rate assumption
described in proposed Sec. 4213.11(b) to determine unfunded vested
benefits before the effective date of the final rule.
Regulatory Impact Analysis
(1) Relevant Executive Orders for Regulatory Impact Analysis
Under Executive Order (E.O.) 12866, Office of Management and Budget
(OMB) reviews any regulation determined to be a ``significant
regulatory action.'' Section 3(f) of E.O. 12866 defines a ``significant
regulatory action'' as an action that is likely to result in a rule
that: (1) has an annual effect on the economy of $100 million or more,
or adversely affects in a material way a sector of the economy,
productivity, competition, jobs, the environment, public health or
safety, or State, local, or tribal governments or communities (also
referred to as economically significant); (2) creates serious
inconsistency or otherwise interferes with an action taken or planned
by another agency; (3) materially alters the budgetary impacts of
entitlement grants, user fees, or loan programs, or the rights and
obligations of recipients thereof; or (4) raises novel legal or policy
issues arising out of legal mandates, the President's priorities, or
the principles set forth in the E.O.
OMB has determined that this proposed rule is economically
significant under section 3(f)(1) and has therefore reviewed this rule
under E.O. 12866.
E.O. 13563 supplements and reaffirms the principles, structures,
and definitions governing contemporary regulatory review that were
established in E.O. 12866, emphasizing the importance of quantifying
both costs and benefits, reducing costs, harmonizing rules, and
promoting flexibility. It directs agencies to assess the costs and
benefits of available regulatory alternatives and, if regulation is
necessary, to select regulatory approaches that maximize net benefits
(including potential economic, environmental, and public health and
safety effects, distributive impacts, and equity).
PBGC has provided an assessment of the potential benefits, costs,
and distributive impacts associated with this proposed rule.
(2) Introduction and Need for Regulation
Benefit levels in a multiemployer plan are typically set by
trustees representing contributing employers and unions. As discussed
earlier in this preamble, withdrawal liability generally represents an
employer's share of the plan's unfunded vested benefits (UVBs) that
[[Page 62319]]
the plan may have at the end of the plan year immediately preceding the
plan year in which the employer withdraws. Withdrawal liability is the
portion of the UVBs allocable to the withdrawing employer and
represents a plan's only opportunity to require a withdrawing employer
to pay its allocated share of the unfunded liabilities. When a plan
does not collect an adequate amount of withdrawal liability from a
withdrawing employer or collects an amount that is less than a
withdrawing employer's allocated share of the plan's UVBs, that burden
is shifted to the remaining contributing employers in the plan. There
is a higher likelihood that the plan will not be able to pay full
accrued benefits, and ultimately, there is an increased likelihood that
it would not have resources to pay basic (PBGC-guaranteed) benefits. In
that case, a plan may have to cut benefits to the PBGC guarantee level
and apply to PBGC for financial assistance, which shifts costs to plan
participants and to others in the multiemployer insurance system who
fund PBGC via annual premiums.
This proposed rule is needed to clarify that a plan actuary's use
of 4044 rates represents a valid approach to selecting an interest rate
assumption to determine withdrawal liability in all circumstances. The
proposed rule would thereby reduce or eliminate the cost-shifting
effects of impediments to actuaries' use of 4044 rates:
<bullet> As noted earlier in the preamble discussion, several
recent court decisions (and an unknown number of arbitration decisions)
have required plans to re-assess withdrawal liability using interest
assumptions based on anticipated investment returns rather than 4044
rates (or a blend using such rates), resulting in lower withdrawal
liability assessments.
<bullet> The delay, expense, and risk of adverse judgment involved
with arbitration and litigation may provide an incentive for plans to
settle withdrawal liability claims for less than the amount of
withdrawal liability determined by the plan actuary, even in cases
where the withdrawal liability dispute is not arbitrated or litigated.
<bullet> Recent court decisions may deter actuaries from using 4044
rates (or a blend incorporating such rates) instead of interest rate
assumptions based solely on anticipated plan investment returns.
(3) Regulatory Action
Under this proposed rule, actuaries would be able to determine an
employer's withdrawal liability on the basis of interest rate
assumptions ranging from plan funding rates to 4044 rates, provided
that the other assumptions and methods selected meet certain specified
requirements.
Because PBGC expects the proposed rule will reduce the litigation
risk for plans associated with selection of the interest assumption,
PBGC believes that more plans will use 4044 rates, which would tend to
increase withdrawal liability and a plan's collection of withdrawal
liability assessments. PBGC also believes that increasing plans'
withdrawal liability income would have an overall positive effect on
the multiemployer system and PBGC's multiemployer program. It is also
consistent with PBGC's mission to enhance the retirement security of
workers and retirees.
(4) Estimated Impact of Regulatory Action
For the reasons discussed earlier, this proposed rule would tend to
increase the amount of withdrawal liability that multiemployer plans
assess and collect.
The aggregate economic impact of this proposed rule is best
measured by the amount of additional withdrawal liability that
multiemployer plans are expected to receive from withdrawing employers.
PBGC estimates that, in the 20 years following the final rule's
effective date, there will be a nominal increase in cumulative
withdrawal liability payments ranging between $804 million and $2.98
billion. A 20-year time horizon was chosen to show the impact on
withdrawal liability payments which, depending on the circumstances of
the withdrawal, can last as long as 20 years, and to capture the impact
on plans receiving SFA (which must calculate withdrawal liability using
4044 rates for at least 10 years). However, because the assumptions
underlying this analysis become more speculative as projections reach
further into the future, PBGC cannot reasonably estimate the impact
after 20 years. While PBGC expects that the proposed rule will deter
employer withdrawals, it will do so only at the margin, and this impact
is difficult to estimate. Accordingly, this analysis does not model any
change to the rate of employer withdrawals or decrease in contributions
due to improved plan funding attributable to these changes because
doing so would be too speculative.
Currently, the aggregate amount of withdrawal liability paid into
the multiemployer plan system each year (taking into account the result
of any dispute resolution process) is approximately $1.3 billion, based
on a PBGC analysis of attachments to 2018 and 2019 Form 5500 Schedules
MB.\8\ As discussed later in this Regulatory Impact Analysis, because
the increase in withdrawal liability paid to a plan (and the mechanics
of how such increase would come about) would depend on how it currently
calculates withdrawal liability, PBGC makes assumptions in this
analysis about how plans currently calculate withdrawal liability. For
the purpose of this analysis, in the absence of reliable data, current
withdrawal liability calculations are assumed as follows: (a) plans for
which the Schedule MB was signed by an actuary from the firm associated
with the largest number of plans use a blend of funding interest rates
and 4044 rates and (b) for remaining plans, 80 percent use funding
interest rates and 20 percent use 4044 rates. Further, to simplify the
analysis, 4044 rates are assumed to be 3 percent, an approximation of
current 4044 rates.
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\8\ The 2019 Form 5500 instructions provide that all employer
and employee contributions for the plan year must be shown on line 3
of the Schedule MB. If any of the contributions reported include
amounts owed for withdrawal liability, a list of withdrawal
liability payments and the dates such amounts were contributed must
be attached.
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PBGC's measurement of the increase in annual withdrawal liability
paid attributable to this proposed rule depends on two primary
assumptions: (1) the number and size of plans that change withdrawal
liability assumptions because of this rulemaking (switching
assumption), and (2) the value of reductions in withdrawal liability
either directly resulting from the order of an arbitrator or judge
interpreting section 4213(a)(1) of ERISA or agreed to by plans in
recognition of the risk of similar arbitration and litigation outcomes
that would occur if this proposed rule is not finalized (dispute
resolution assumption). Due to a lack of reliable data upon which to
base these assumptions and because the effect of the proposed rule
could vary widely because it allows for a range of approaches, this
analysis shows impacts when these assumptions are set at three
different levels.
Because the impact is expected to be substantially lower in the
first 10 years after the effective date of the final rule than in the
period thereafter, PBGC is separating the impact into two separate time
periods: the first 10 years after the effective date of the final rule
and the time period thereafter. The reasons for this are as follows:
(1) after the final rule's effective date, the number of withdrawal
liability payments that would be affected would start at zero and
increase over time (before leveling off when substantially all
withdrawal liability payments are for withdrawals
[[Page 62320]]
occurring after the final rule's effective date) and (2) plans
receiving SFA under section 4262 of ERISA are required to use 4044
rates for withdrawal liability calculations for at least the first 10
years after receiving SFA, and as a result, this rule would have no
impact on withdrawal liability received by such plans in connection
with approximately 10 years of withdrawals.
Within each time period, three sets of assumptions are shown in
three tables under the ``Estimated Impact of Increase in Withdrawal
Liability Received'' heading with respect to the switching assumption
and the dispute resolution assumption. Row (a), the switching
assumption, represents the assumed percentage of plans for which the
plan is assumed to change from using funding interest rate assumptions
to 4044 rates as a result of this proposed rule. The percentages
represent what PBGC believes to be a reasonable range of the percentage
of plans assumed to be using funding interest rates for withdrawal
liability purposes that would switch to 4044 rates. Row (b), the
dispute resolution assumption, represents, for plans currently using
4044 rates or a blend using such rates, in the absence of this rule,
the assumed reduction in withdrawal liability payments received by
plans due to litigation outcomes, or similar reductions done
voluntarily as a result of the threat of litigation. This reduction is
measured as the percent reduction in the difference between the
expected value of withdrawal liability payments calculated using 4044
rates and the expected value of withdrawal liability payments
calculated using funding rates. In calculating the estimated annual
increase in withdrawal liability payments, it is assumed that after the
rule is effective, plans using 4044 rates or a blend using such rates
will receive the expected value of withdrawal liability payments for a
given assessment without a reduction due to settlements. The dispute
resolution assumption assumes that no plans currently using 4044 rates
would, in the absence of this proposed rule, switch from using 4044
rates to funding rates. Assuming that some plans would switch would
increase the annual economic impact to some extent.
The following tables summarize the estimated annual increases to
withdrawal liability payments received by multiemployer pension plans
and the present value of those increases at 3 percent and 7 percent
discount rates:
Estimated Impact of Increase in Withdrawal Liability Received
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Estimated Impact Years 1-10 ($ Millions)
----------------------------------------------------------------------------------------------------------------
(a) % of Plans Switching to 4044 Rates.......................... 5% 10% 20%
(b) % of Dispute Resolutions for Plans Using 4044 Rates......... 2% 5% 10%
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Year Impact Impact Impact
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1............................................................... $22 $44 $89
2............................................................... 23 46 92
3............................................................... 25 48 96
4............................................................... 26 50 99
5............................................................... 27 52 103
6............................................................... 28 54 106
7............................................................... 29 55 109
8............................................................... 30 57 113
9............................................................... 31 59 117
10.............................................................. 32 61 120
PV of Impact in First 10 Years (3% Interest).................... 233 451 898
PV of Impact in First 10 Years (7% Interest).................... 193 374 746
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Estimated Impact Years 11-20 ($ Millions)
----------------------------------------------------------------------------------------------------------------
(a) % of Plans Switching to 4044 Rates.......................... 5% 10% 20%
(b) % of Dispute Resolutions for Plans Using 4044 Rates......... 2% 5% 10%
----------------------------------------------------------------------------------------------------------------
Year Impact Impact Impact
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11.............................................................. $47 $89 $174
12.............................................................. 48 91 178
13.............................................................. 49 93 183
14.............................................................. 51 96 187
15.............................................................. 52 99 191
16.............................................................. 54 101 195
17.............................................................. 56 104 200
18.............................................................. 57 107 205
19.............................................................. 59 109 209
20.............................................................. 60 112 214
PV of Impact in Years 11-20 (3% Interest)....................... 340 640 1,240
PV of Impact in Years 11-20 (7% Interest)....................... 193 364 706
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Estimated Present Value Impact Years 1-20 ($ Millions)
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(a) % of Plans Switching to 4044 Rates.......................... 5% 10% 20%
(b) % of Dispute Resolutions for Plans Using 4044 Rates......... 2% 5% 10%
Nominal Value of Impact in Years 1-20........................... $804 $1,526 $2,981
PV of Impact in Years 1-20 (3% Interest)........................ $573 $1,091 $2,138
PV of Impact in Years 1-20 (7% Interest)........................ $386 $738 $1,452
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[[Page 62321]]
Separate from the distributive impacts, because this rule would
provide increased certainty in withdrawal liability determinations,
plans and withdrawing employers would see substantial cost savings in
the form of reduced arbitration and litigation costs.
The major expenses associated with a withdrawal liability dispute
are attorney fees, arbitration fees (including fees to initiate
arbitration and fees charged by an arbitrator), and fees charged by
expert witnesses. Though costs will vary greatly from plan to plan
based on the plan's benefit formula, size of the plan, attorney and
expert witness rates, and other factors, PBGC estimates that a
withdrawal liability arbitration, measuring from a request for plan
sponsor review of a withdrawal liability determination through the end
of arbitration would range from $82,500 to $222,000. For lengthy
litigation, costs can be over $1 million. Assuming some arbitrations
and litigation would be avoided entirely, and others would be less
complex because they would not include disputes over interest
assumptions, PBGC estimates that this proposed rule would result in an
annual savings of $500,000 to $1 million, split evenly between plans
and employers.
(5) Regulatory Alternatives Considered
PBGC considered a number of alternatives before deciding to issue
this proposed rule. None of the alternatives were as cost-effective as
the proposed rule.
One alternative PBGC considered is to not regulate under section
4213 of ERISA. Without a regulation, PBGC would expect a continuation
of the recent trend in withdrawal liability dispute resolution toward
requiring that withdrawal liability be based on funding rates (or rates
closer to funding rates than to 4044 rates). PBGC believes that the
adverse effect of employer withdrawals generally contributes to
financial stress for plans (and their remaining employers and
participants) that the use of 4044 rates in determining withdrawal
liability would help alleviate. Inaction would constitute choice of the
status quo, which could contribute to plan underfunding, benefit losses
for participants, cost-shifting to remaining employers, and higher
claims on PBGC's insurance system.
PBGC also considered issuing a proposed rule that would only
authorize use of 4044 rates, without addressing the popular practice of
using 4044 rates for benefits expected to be covered by existing assets
and funding rates for other benefits. This limited approach would
address the issue of comparatively low withdrawal liability assessments
for plans that choose to use 4044 rates but by not providing
flexibility for other plans, it would limit the effectiveness of the
regulation.
Regulatory Flexibility Act
The Regulatory Flexibility Act \9\ imposes certain requirements
respecting rules that are subject to the notice-and-comment
requirements of section 553(b) of the Administrative Procedure Act, or
any other law,\10\ and that are likely to have a significant economic
impact on a substantial number of small entities. Unless an agency
certifies that a proposed rule will not, if promulgated, have a
significant economic impact on a substantial number of small entities,
section 603 of the Regulatory Flexibility Act requires that the agency
present an initial regulatory flexibility analysis at the time of the
publication of the proposed rule describing the impact of the rule on
small entities and seek public comment on such impact. Small entities
include small businesses, organizations, and governmental
jurisdictions.\11\
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\9\ 5 U.S.C. 601 et seq.
\10\ The applicable definition of ``rule'' is found in section
601 of the Regulatory Flexibility Act. See 5 U.S.C. 601(2).
\11\ The applicable definitions of ``small business,'' ``small
organization,'' and ``small governmental jurisdiction'' are found in
section 601 of the Regulatory Flexibility Act. See 5 U.S.C. 601.
---------------------------------------------------------------------------
Small Entities
This proposed rule would directly regulate plans by prescribing
interest assumptions for their use in calculating withdrawal liability.
For purposes of the Regulatory Flexibility Act requirements with
respect to this proposed rule, PBGC considers a small entity to be a
plan with fewer than 100 participants.\12\ This is substantially the
same criterion PBGC uses in other regulations \13\ and is consistent
with certain requirements in title I of ERISA \14\ and the Code,\15\ as
well as the definition of a small entity that PBGC and DOL have used
for purposes of the Regulatory Flexibility Act.\16\
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\12\ PBGC consulted with the Small Business Administration's
Office of Advocacy before making this determination. Memorandum
received from the U.S. Small Business Administration, Office of
Advocacy on March 9, 2021.
\13\ See, e.g., special rules for small plans under part 4007
(Payment of Premiums).
\14\ See, e.g., section 104(a)(2) of ERISA, which permits the
Secretary of Labor to prescribe simplified annual reports for
pension plans that cover fewer than 100 participants.
\15\ See, e.g., section 430(g)(2)(B) of the Code, which permits
plans with 100 or fewer participants to use valuation dates other
than the first day of the plan year.
\16\ See, e.g., PBGC's proposed rule on Reportable Events and
Certain Other Notification Requirements, 78 FR 20039, 20057 (April
3, 2013) and DOL's final rule on Prohibited Transaction Exemption
Procedures, 76 FR 66637, 66644 (Oct. 27, 2011).
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Thus, PBGC believes that assessing the impact of the proposed rule
on small plans is an appropriate substitute for evaluating the effect
on small entities. The definition of small entity considered
appropriate for this purpose differs, however, from a definition of
small business based on size standards promulgated by the Small
Business Administration \17\ under the Small Business Act. PBGC
therefore requests comments on the appropriateness of the size standard
used in evaluating the impact of its proposed rule on small entities.
---------------------------------------------------------------------------
\17\ See, 13 CFR 121.201.
---------------------------------------------------------------------------
Based on its definition of small entity, PBGC certifies under
section 605(b) of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.)
that the amendments in this proposed rule will not, if promulgated,
have a significant economic impact on a substantial number of small
entities. Based on data for recent premium filings, PBGC estimates that
only 38 of the approximately 1,360 plans covered by PBGC's
multiemployer program are small plans. Plans would be able, but not
required, to set assumptions to determine withdrawal liability under
this proposed rule. As discussed in the Regulatory Impact Analysis,
because this proposed rule would authorize a wide range of commonly
used interest assumptions, few plans would switch assumptions. In that
analysis, PBGC estimated that, for plans currently using funding
assumptions (which are assumed to be less than 80 percent of all
plans), from 5 to 20 percent would switch to 4044 rates. Consequently,
of the 38 small multiemployer plans, PBGC estimates that no more than 6
would switch assumptions.
For a plan that does move to 4044 rates as permitted under the
proposed rule, this proposed rule would tend to have a positive
economic impact because it would increase the amount of withdrawal
liability collected, which could improve the plan's ability to remain
solvent and to continue paying participants' benefits. For the few
small plans expected to switch assumptions, PBGC estimates that, in the
20 years following the final rule's effective date, the nominal
increase in cumulative withdrawal liability payments would not exceed
$1 million. It could also deter employer withdrawals, however, as
discussed in the Regulatory Impact Analysis, it will do so only at the
margin, and this impact is difficult to estimate. There would be a
higher
[[Page 62322]]
likelihood that plans that do not use 4044 rates provided by this
proposed rule would eventually be unable to pay full benefits at
current accrual rates. Plans would also see administrative savings in
the form of reduced arbitration and litigation costs because some
arbitrations and litigation would be avoided entirely, and others would
be less complex because they would not include disputes over interest
assumptions. As discussed in the Regulatory Impact Analysis, these
savings could be as much as $82,500 to $222,000 for reduced arbitration
costs and $1 million in reduced litigation costs for a plan when an
arbitration or litigation is avoided. This proposed rule would not have
negative impacts or costs on small plans because plans could choose
whether to use interest assumptions prescribed by the regulation. PBGC
expects the administrative costs, if any, associated with the proposed
rule would be de minimis. Accordingly, as provided in section 605 of
the Regulatory Flexibility Act (5 U.S.C. 601 et seq.), sections 603 and
604 do not apply.
Though this proposed rule would directly regulate plans, as
discussed in the Regulatory Impact Analysis, it would indirectly impact
employers, including small employers. This is because, for plans that
switch assumptions, it would tend to increase the amount of withdrawal
liability assessed by plans and withdrawing employers would pay the
increases if they were to withdraw. The statutory process for
allocating unfunded vested benefits to a withdrawing employer takes
into account the employer's contribution history; employers with a
history of higher contributions are allocated a larger share of UVBs
while employers with a history of lower contributions are allocated a
smaller share. Because small employers have small contribution levels,
they would see smaller dollar increases in withdrawal liability than
employers with large contribution levels. In addition, as discussed, if
plans adopt the prescribed assumptions, employers in those plans may be
less likely to withdraw. This effect, in combination with the higher
withdrawal liability payments for employers who do withdraw, could
contribute to the long-term solvency of multiemployer plans. Extended
plan solvency would help ensure that participants and beneficiaries
would receive promised benefits, which would enhance their income
security and benefit the communities, including small businesses within
those communities, in which they live.
PBGC considered declining to prescribe assumptions under section
4213, an alternative that would have less impact on small employers,
but as discussed in the Regulatory Impact Analysis, doing so would
contribute to plan underfunding. PBGC also considered issuing a
proposed rule that would only authorize the use of 4044 rates, an
alternative that would have resulted in higher withdrawal liability
under section 4213(a)(2) of ERISA in comparison to the proposed rule,
and thereby a larger impact on small employers who participate in plans
that adopt that approach (but would likely have a smaller adoption rate
than the section 4213(a)(2) assumptions in the proposed rule).
List of Subjects in 29 CFR 4213
Employee benefit plans, Pension insurance, Pensions.
0
For the reasons set forth in the preamble, PBGC proposes to amend 29
CFR chapter XL by adding part 4213 to read as follows:
PART 4213--ACTUARIAL ASSUMPTIONS
Sec.
4213.1 Purpose and organization.
4213.2 Definitions.
4213.11 Section 4213(a)(2) assumptions.
Authority: 29 U.S.C. 1302(b)(3), 1393.
Sec. 4213.1 Purpose and organization.
This part sets forth actuarial assumptions and methods under
section 4213(a)(2) of ERISA as an alternative to the assumptions and
methods under section 4213(a)(1) of ERISA for determining withdrawal
liability.
Sec. 4213.2 Definitions.
For the purposes of this part:
Single effective interest rate means for a given interest
assumption, the single rate of interest which, if used to determine the
present value of the plan's liabilities, would result in an amount
equal to the present value of the plan's liabilities determined using
the given assumption, holding all other assumptions and methods
constant.
Sec. 4213.11 Section 4213(a)(2) assumptions.
(a) In general. Withdrawal liability may be determined using
actuarial assumptions and methods that satisfy the requirements of this
section. Such actuarial assumptions and methods need not satisfy any
other requirement under title IV of ERISA.
(b) Interest assumption (1) General rule. To satisfy the
requirements of this section, the single effective interest rate for
the interest assumption used to determine the present value of the
plan's liabilities must be the rate in paragraph (b)(2) of this
section, the rate in paragraph (b)(3) of this section, or a rate
between those two rates.
(2) The rate in this paragraph (b)(2) is the single effective
interest rate for the interest assumption prescribed in Sec. 4044.52
of this chapter for the date as of which withdrawal liability is
determined.
(3) The rate in this paragraph (b)(3) is the single effective
interest rate for the interest assumption under section 304(b)(6) of
ERISA for the plan year within which the date in paragraph (b)(2) of
this section falls.
(c) Other assumptions. The assumptions and methods (other than the
interest assumption) satisfy the requirements of this section if--
(1) Each is reasonable (taking into account the experience of the
plan and reasonable expectations), and
(2) In combination, they offer the actuary's best estimate of
anticipated experience under the plan.
Signed in Washington, DC.
Gordon Hartogensis,
Director, Pension Benefit Guaranty Corporation.
[FR Doc. 2022-22304 Filed 10-13-22; 8:45 am]
BILLING CODE 7709-02-P
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