Assumptions for Withdrawal Liability Cannot Be Changed and Applied Retroactively

The 2nd U.S. Circuit Court of Appeals has vacated a lower court’s ruling that allowed for the change of the interest rate assumption used for calculating Metz Culinary Management, Inc.’s withdrawal liability for exiting The National Retirement Fund.

According to the court opinion, Buck Consultants utilized a 7.25% interest rate assumption to determine the retirement fund’s unfunded, vested benefits (UVBs). In October 2013, the multiemployer plan replaced Buck with Horizon Actuarial Services, LLC beginning in 2014. The plan’s 2013 Form 5500 Schedule MB, states that a 7.25% interest rate assumption remained in place in 2013 for purposes of determining UVBs. At a 7.25% interest rate, appellant’s withdrawal liability would have been $254,644

In June 2014, however, Horizon informed the plan’s trustees that the interest rate assumption for purposes of withdrawal liability was reduced from 7.25% to approximately 3.25%. At a 3.25% interest rate, appellant’s withdrawal liability was calculated to be $997,734.

The court first determined that because Metz’s withdrew from the plan on May 16, 2014, the applicable Measurement Date is December 31, 2013, per the Employee Retirement Income Security Act (ERISA).

The plan’s assertion that its actuary had not made any interest rate assumption determination as of December 31, 2013, for purposes of calculating the fund’s UVBs for withdrawal liability was rejected by the appellate court. And the court said that the Multiemployer Pension Plan Amendments Act of 1980 (MPPAA) requires that the assumptions and methods in effect on December 31, 2013, be used for calculating the employer’s withdrawal liability. Absent some change by the fund actuaries, the existing assumptions and methods remained in place as of December 31, 2013.

On May 4, 2016, Metz sought enforcement of the final award determined by an arbitrator. On March 27, 2017, the district court vacated the final award, holding that “ERISA does not require actuaries to make withdrawal liability assumptions by the Measurement Date.” According to the district court, “the withdrawal liability interest rate assumption in effect on the Measurement Date is not applicable to the upcoming plan year unless the actuary affirmatively determines that the assumption . . . is reasonable and her best estimate of anticipated experience under the plan as of the Measurement Date.”

The 2nd Circuit said factual findings made by an arbitrator enjoy a “presumption of correctness” under ERISA Section 4221(c). The arbitrator stated that the fund’s “decision to apply a changed assumption [rate] retroactively so as to increase the withdrawal liability assessed to [Metz] and other employers who withdrew from the fund after December 31, 2013, was violative of MPPAA.”

The appellate court stated that in the context of multiemployer pension plans, interest rate assumptions cannot be altered daily and must have a degree of stability. Nor, in that context, do interest rate assumptions remain open forever and subject to retroactive changes in later years. In addition, the court said, “certain provisions of ERISA allow employers to request and receive notice of their estimated withdrawal liability prior to actually withdrawing from a fund… Such provisions are of no value if retroactive changes in interest rates assumptions may be made at any time.”

In considering the retroactive selection of interest rate assumptions, the 2nd Circuit concluded that the assumptions and methods used to calculate the interest rate assumption for purposes of withdrawal liability must be those in effect as of the Measurement Date, and absent a change by a fund’s actuary before the Measurement Date, the existing assumptions and methods remain in effect. “Were it otherwise, the selection of an interest rate assumption after the Measurement Date would create significant opportunity for manipulation and bias. Nothing would prevent trustees from attempting to pressure actuaries to assess greater withdrawal liability on recently withdrawn employers than would have been the case if the prior assumptions and methods actually in place on the Measurement Date were used,” the appellate court concluded.

In addition to vacating the judgment of the district court, the 2nd Circuit remanded the case to the district court with directions to enter judgment for the appellant and to remand any remaining issues to the arbitrator.