Many multiemployer pension plans are struggling financially today, and, according to the PBGC, about 10 percent of the 1,400 plans are expected to become insolvent within the next 10-15 years. These looming insolvencies were in large measure the motivation behind the 2014 law that now allows plans in "critical and declining" status to cut vested benefits.

Some pension plans are taking a different tact to deter employer withdrawals and maximize the revenue from withdrawal liability assessments. They are changing the interest rate assumption used to determine the unfunded vested benefit liabilities of the plan which, in turn, is used to calculate withdrawal liability. The plans are setting up two sets of numbers and interest rate assumptions: (1) an extremely low rate using the PBGC long-term rate of about 3.30 percent, and (2) a higher assumed rate of return of 7 to 8 percent based on historical investment returns and future projections. This is the best of both worlds for the plans. It allows these plans to report a higher funding ratio of assets to plan liabilities, but also to maximize the withdrawal liability for the employers.

Federal law requires the plan actuary to make the decision on whether to change plan interest rate assumptions. That decision must be reasonable and be based on past plan experience and the actuary's best estimate of future plan experience. While some plans have used so-called composite rates, which average the assumed plan rate with the PBGC rates, to develop a specific rate for withdrawal liability calculations, there now appears to be a trend among plans to adopt the PBGC rate, which is about 4 percent below the assumed plan rates.

FordHarrison partner Keven Williams recently prevailed in an arbitration case involving the National Retirement Fund. In that case, the fund changed actuaries, and the new actuary adopted the PBGC rate of about 3.30 percent, but kept the 7.25 percent rate for funding purposes. That rate change in June of 2014 was made retroactive to all withdrawals in the 2014 plan year. The company represented by FordHarrison had withdrawn in May, 2014, but not received its withdrawal liability assessment when the rate change occurred. The effect of this reduced interest rate was to increase the company's liability from about $250,000 to nearly $1 million – a 400 percent increase. The arbitrator ruled that this rate change, which was made retroactive to the start of the plan year in January 1, 2014, was unlawful. The law requires the financial condition of the plan, in the year before the withdrawal, to be used, and that includes all the interest rate and other assumptions in place as of December, 31, 2013. The arbitrator also questioned the reasonableness of the rate change since plan meeting minutes, obtained in discovery, indicated that the motive of the change appeared to be to increase withdrawal liability rather than being an objective evaluation of plan past and future investment experience.

The Bottom Line:

It is extremely important for employers to monitor their withdrawal liability by submitting written requests to the plan for an estimate of withdrawal liability. The plans are not required to notify the employers prior to or even after interest rate changes are made. The changes can be monitored only through these written withdrawal liability estimates, or analysis of the Form 5500 filings of the plan or upon receipt of the withdrawal liability demand. In appropriate circumstances, the rate change should be contested since the increases in withdrawal liability can be staggering. In this case, the client saved $750,000 by contesting the withdrawal liability assessment.