- Proposed “Exit Premium” on Withdrawing From Underfunded Multiemployer Defined Benefit Plans Would Penalize Employers That Played by the Rules
- March 3, 2016 | Authors: Grace H Ristuccia; Thomas Vasiljevich
- Law Firm: Ogletree, Deakins, Nash, Smoak & Stewart, P.C. - Chicago Office
Employers withdrawing from an underfunded multiemployer defined benefit pension plan may soon face not only an assessment of withdrawal liability, but also an additional payment called an “exit premium.” The Obama administration’s fiscal year 2017 budget, released on February 9, 2016, proposes that the Pension Benefit Guaranty Corporation (PBGC) impose an exit premium on employers that withdraw from unfunded multiemployer plans. This exit premium, along with a proposed variable-rate premium for underfunded multiemployer plans, is part of the administration’s effort to increase revenue to the PBGC by $15 billion over the next decade. A variable-rate premium already exists for single-employer plans (for 2016, the rate is $30 per $1,000 of underfunded vested benefits up to $24 per participant) but not for multiemployer plans. In 2015, the PBGC predicted that the multiemployer plan insurance program it operates would likely be insolvent by 2025. No details regarding the amount or calculation of the proposed exit premium or variable-rate premium are apparent from the budget release.
The 2017 budget justifies the exit premium as compensation to the PBGC for the “additional risk imposed on it” when financially healthy employers leave a multiemployer plan. This concern about individual employers arranging their collective bargaining obligations so as to cease making contributions—and thereby leave behind severely underfunded plans—motivated the policy of withdrawal liability assessments mandated by the Multiemployer Pension Plan Amendments Act of 1980. The assessment of withdrawal liability requires employers that leave a plan to pay for their share of the plan’s costs (vested benefits) that have not been paid for through previous contributions and investment earnings. Many employers are surprised by withdrawal liability, which can be assessed even if an employer has made all contributions as required under its collective bargaining agreement; in fact, withdrawal liability is a point rarely mentioned or discussed in collective bargaining agreements or in negotiations. As the number of underfunded plans and the level of underfunding increases, the size of withdrawal liability assessments will also increase.
Notably, an exit premium—payable to the PBGC, not the plan—would be imposed in addition to any withdrawal liability. Ironically, therefore, the exit premium may be a further penalty to those employers that have made all required contributions to the plan and have paid their withdrawal liability.
Congress must approve the proposal before the PBGC can begin imposing exit premiums, and Congress has previously rejected proposals to give the PBGC discretion in setting its own premiums. As a result, it remains to be seen whether employers may be facing two payments upon withdrawal from an underfunded multiemployer plan: withdrawal liability, and soon perhaps, an exit premium.