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On February 9, 2024, the U.S. Court of Appeals for the D.C. Circuit issued the following decision: IAM National Pension Fund Trustees v. M&K Emp.Sols Corporation, No. 22-7157 (DC Cir. February 9, 2024) upholds a district court’s decision to vacate an arbitration award against an employer in a pension fund withdrawal liability case. The D.C. Circuit held that a plan actuary’s assumed interest rate may change retroactively after the measurement date, even if it is based on information received after the measurement date, as long as that information is “as of” the measurement date. It was recognized that there is a possibility that
This split decision from the Second Circuit raises the question of how, why, and when plan actuaries change such material assumptions, and whether the information was provided to plan actuaries after year-end. This could create uncertainty in future withdrawal liability disputes. The measurement date was influenced by knowledge available after the measurement date. The decision also divides circuit courts on this issue, which has national implications for employers contributing to multiemployer funds and the funds themselves.
Withdrawal liability under ERISA
The Employee Retirement Income Security Act of 1974 (ERISA), as amended by the Multiemployer Pension Plans Amendments Act of 1980 (MPPA), requires minimum funding for employer-sponsored benefit plans, including multiemployer defined benefit pension plans. and other standards. Under ERISA and the MPPA, an employer that terminates a multiemployer plan must pay a “withdrawal liability” to the fund. The formula used to calculate an employer’s withdrawal liability is set forth in ERISA. Generally, however, the employer’s withdrawal liability is “its share” of the plan’s unfunded vested liability.
The amount of a plan’s unfunded vested liability is determined by the plan’s actuary using actuarial assumptions that, in the aggregate, must be “reasonable (taking into account the plan’s experience and reasonable expectations).” Expected experience based on the plan determined by the Actuary and “should provide the actuary’s best estimate.” ”
Assumed interest rate and measurement date
The actuary’s interest rate assumption, or expected long-term growth rate of fund assets, is critical in determining the plan’s unfunded liability and, therefore, the employer’s withdrawal liability. This is because if a plan’s assets are expected to have a high growth rate, the plan’s unfunded liabilities will be predicted to be low. Therefore, the employer’s “share” and the dollar value of the withdrawal liability assessment will be lower. However, if the plan’s asset growth rate is expected to be low, the projected unfunded liability will increase, resulting in a higher valuation for the employer.
The employer’s withdrawal liability assessment is calculated based on the plan’s unfunded liability as of the Measurement Date. The measurement date is the last day of the plan year prior to the year in which the withdrawal liability is incurred.
M&K Employee Solutions Second Circuit Reasoning Decision and Rejection
in M&K Employee Solutions, the Board of Directors of the International Association of Machinists National Pension Fund assessed the liability of two employers for withdrawing from the scheme in 2018. As of December 31, 2017 (measurement date), the plan was using the 7.5% interest rate selected in November 2017. However, after a meeting of the fund board and the fund actuary in late January 2018, the actuary selected the interest rate. New interest rate assumption of 6.5% – applied retrospectively. This change in assumed interest rates resulted in significantly higher withdrawal liability for employers.
In arbitration, the employer argued that the plan violated ERISA by changing the interest rate assumption. rear The measurement date is December 31, 2017, and the new interest rate assumptions are applied retrospectively. The arbitrator found for the employer and concluded that “the Fund miscalculated by using assumptions and methodologies as of January 2018, rather than assumptions and methodologies valid as of December 31, 2017.” I attached it. However, the district court reversed the arbitrator and held that ERISA “permits subsequent adoption of actuarial assumptions so long as the assumptions are ‘as of’ the measurement date.” That is, the assumption must be based on the body of knowledge previously available. measuring date. ”
The D.C. Circuit agreed with the district court’s analysis and the rules above, and held that “the calculation of the plan’s experience, reasonable expectations, and best estimate of anticipated experience should be based on the measurement date, not the plan date.” We will make adjustments at this point.” Calculation. “
In reaching this conclusion, the D.C. Circuit rejected the Second Circuit’s reasoning. National Retirement Fund vs. Met Culinary Management, Inc., representing the Legacy Plan of the National Retirement Fund., 946 F.3d 146 (2d Cir. 2020).Second Circuit female View that ERISA requires actuaries to use interest rate assumptions in fact As of the measurement date, a Fund may not select an interest rate assumption after that date and apply that assumption retroactively to the calculation of the withdrawal liability. The D.C. Circuit concluded that the Second Circuit’s reasoning was “contrary to the provisions of the MPPA that protect MPPs and their beneficiaries.”
Findings and recommendations
With that decision, M&K, a circuit division was created by the DC circuit. This is sure to lead to further litigation in other circuits until the DC or 2nd Circuits become outliers or the issue is resolved by the Supreme Court.
retention of M&K Very fund-friendly. This calls into question all facts relating to retrospective changes in interest rate assumptions and failure to apply such assumptions retrospectively. This makes litigating withdrawal liability disputes more complex and expensive.
Now, more than ever, employers facing a withdrawal liability assessment or considering invoking a withdrawal should promptly consult an experienced attorney.
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