October 2022 Compliance News Article

In response to recent questions, the Pension Benefit Guaranty Corporation (PBGC) is proposing to provide a set of interest rate assumptions that may be used by plan actuaries for multiemployer plans to determine a withdrawing employer’s liability under the plan.

Background

When an employer withdraws from a multiemployer plan, they are responsible for funding their share of any unfunded vested benefits (UVBs) under the plan as of the end of the plan year prior to the plan year in which the employer withdraws. UVBs are calculated by determining the amount by which the present value of nonforfeitable benefits under the plan exceeds the value of plan assets. Present values are calculated using a set of actuarial assumptions and methods, including an interest rate that is used to discount future benefit payments to their present value and mortality tables that are used to calculate the likelihood that each payment will be made. Using higher interest rates generally results in lower UVBs and vice versa.

Under ERISA, a reasonable set of assumptions and methods may be used to calculate the withdrawal liability. Plan actuaries have used a variety of approaches, including:

Using the same interest rate assumption used to determine minimum funding requirements, based on the expected average return on plan assets over the long term. These rates are prescribed in section 431(b)(6) of the Internal Revenue Code and section 304(b)(6) of ERISA.
Focusing on the contrast between contributing employers and withdrawing employers using PBGC settlement rates prescribed under section 4044 of ERISA.
An interest rate assumption that uses both funding and settlement rate assumptions.

Proposed Rates and Public Comments

The proposal does not specify a set of rates to be used. Instead, it allows a plan actuary to use an “interest rate anywhere in the spectrum from 4044 rates alone to funding rates alone.” In response to recent litigation, the proposed rule clarifies that 4044 rates, either on their own or in conjunction with another set of rates, are acceptable for the purposes of determining withdrawal liabilities. PBGC is seeking public comments regarding whether the final rule should give specific assumptions and methods other than interest assumptions.

Public comments may be submitted by November 14, 2022, using any of the following methods:

Federal eRulemaking Portal: https://www.regulations.gov.
Email: reg.comments@pbgc.gov with subject line “4213 proposed rule.”
Mail or Hand Delivery: Regulatory Affairs Division, Office of the General Counsel, Pension Benefit Guaranty Corporation, 445 12th Street SW, Washington, DC 20024- 2101.

The PBGC strongly encourages commenters to submit their comments electronically.

The subject matter in this communication is educational only and provided with the understanding that Principal^® is not rendering legal, accounting, investment or tax advice. You should consult with appropriate counsel, financial professionals or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

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