D.C. Circuit: Multiemployer Defined Benefit Pension Plans’ Withdrawal Liability Calculations Reviewed

APPLIES TO

All Employers with Employees in the District of Columbia

EFFECTIVE

July 8, 2022

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In United Mine Workers of America 1974 Pension Plan v. Energy West Mining Company, the D.C. Circuit Court of Appeals said exiting employers from a multiemployer defined benefit pension plan must use the actual and projected experience of the plan when calculating the withdrawal liability owed to the plan. In this case, the pension plan used a lower risk-free discount rate instead of a higher interest rate assumption based on the plan’s historical investment performance to calculate the withdrawal liability. This resulted in a liability that was $75 million more than what the employer would have paid if the plan had used the higher interest rate. For the purpose of withdrawal liability calculations, the higher the rate, the lower the total liability for the exiting employer.

The Employee Retirement Income Security Act of 1974 (ERISA), as amended by the Multiemployer Pension Plan Amendments Act of 1980 (MPPA), requires exiting employers in a multiemployer defined benefit pension plan to pay a withdrawal liability. According to the ruling, the plan actuary must use methods that take into account the historical experience of the plan and reasonable expectations. Interest rate assumptions must also meet the minimum funding standards required by ERISA.

The statute requires the withdrawal liability calculation to “offer the actuary’s best estimate of anticipated experience under the plan.” A risk-free rate calculation is not appropriate if the plan’s actual and projected investment policy is to continue to be invested in riskier assets. Employers exiting from multiemployer defined benefit pension plans should now be able to rely on a withdrawal liability being calculated similar to the minimum funding rate and based on the plan’s current and projected investment policy.

Action Items

Consult with legal counsel to ensure compliance with ERISA when exiting a pension plan.
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