Withdrawal liability - lump sum payment

[Guest mcfeldman]

Is it common for a multiemployer pension fund to have a written procedure for determining a discounted single sum payment an employer can make to fully pay its withdrawal liability? Would it involve discounting quarterly payments at a higher interest rate? Are you familiar with multiemployer funds that negotiate discounted lump sum payments on an ad hoc basis?

[Bill Ecklund]

Is it common for a multiemployer pension fund to have a written procedure for determining a discounted single sum payment an employer can make to fully pay its withdrawal liability? Would it involve discounting quarterly payments at a higher interest rate? Are you familiar with multiemployer funds that negotiate discounted lump sum payments on an ad hoc basis?

The initial assessment notice contains the amount of the withdrawal liability. That is the lump sum that the employer can pay to pay off its withdrawal liability. The periodic payment schedule is the lump sum with interest added.

[Guest mcfeldman]

Understood. My question is: is it common for a fund to discount the assessed lump sum withdrawal liability to encourage an employer to pay immediately rather than over a period of up to 20 years?

[Peter Gulia]

If there were no consideration beyond time value of money, the trustees of a multiemployer pension plan should not “discount” the amount of a correctly determined single-sum withdrawal liability merely because the employer would pay the single sum rather than payments over time. It’s the periodic-payments schedule that’s adjusted for time value of money; the single-sum amount is, at least ostensibly, the “now” value.

But in the real world, a skillful negotiator sometimes can negotiate a withdrawal liability. Even if the plan’s true motivation is getting ready money now, the trustees need different reasoning to support a compromise as one that a prudent-expert fiduciary should make in the plan’s best interests and following all of the fiduciary’s many duties. For example, the trustees might consider the risks and expenses of arbitration and litigation, and thus may consider the value of certainty. To provide enough “cover” to allow the trustees to pretend that what’s really a prompt-payment discount is, at least to defensible appearances, a proper compromise of what would be a disputed withdrawal liability, an employer might begin with a credible showing of an ERISA/MPPAA lawyer’s work, and the employer’s readiness to arbitrate and litigate. The stronger the “documentation” of a credible and expensive challenge, the more room the trustees have to compromise. The employer’s lawyer would seek the broadest satisfaction and releases, and would draft the settlement agreement to reduce the risk that a release is a prohibited transaction.

In my experience, different plans’ needs and tastes vary considerably, and there is often a difference in outlooks among a plan’s staff, counsel, and trustees.

[Guest FBED]

To follow up on the original question, is anyone aware of any cases that have discussed a challenge of the enforceability of such settlement for a discounted withdrawal liability?

[ERISA25]

Has anyone seen any cases challenging the enforceability of a settlement for a discounted withdrawal liability?

[gregmk]

I know this thread has been dead for a while, but if anyone has any cases involving the enforcability of a discounted withdrawal liability settlement, I'd love to read them.

[Jim Dexter]

It's very common for plans to settle withdrawal liability for a discounted lump sum. This is particularly common in cases in which the 20 year payment cap applies. ERISA § 4219©(4) gives the employer the right to settle the withdrawal liability for the value of the unpaid withdrawal liability payments although it doesn't specify the interest rate to be used for determining the present value. Some plans are willing to settle for the present value of the payments determined at their funding interest rate. Others will discount at a somewhat lower rate -- sometimes as low as the PBGC rate.

In general, I am not aware of any plans that have formal policies regarding discounting lump sum payments. Instead they tend to view each offer based on the facts and circumstances. As a general rule, the trustees have a fiduciary obligation to collect the full withdrawal liability. However, there are generally arguments for discounting the liability if the employer is willing to pay an immediate lump sum. If there are any disputes pending, the lump sum will eliminate litigation risk and expense. The lump sum payment eliminates credit risk whether or not litigation risk exists. And there is less expense involved for the plan in collecting one lump sum as opposed to quarterly or monthly payments for many years.

I'm not aware of any situations in which the validity of a discounted withdrawal liability settlement has been challenged. ERISA § 4224 would seem to give the trustees pretty broad latitude to make any settlement that was consistent with their fiduciary responsibilities.

[gregmk]

Thanks for the thorough response, Jim. I agree on all counts. I'm trying to think of parties that would be prejudiced if the trustees make a bad deal on withdrawal liability. 1. The other employers (because a bad deal could hasten plan termination or mass withdrawal and require higher future contributions), 2. The participants and beneficiaries for similar reasons, 3. The PBGC, who may have to pay more, sooner. Do they all have a remedy for breach of fiduciary duty? Just thinking out loud.

Any thoughts on the ability of the trustees to release a withdrawing employer from future liability in case of mass withdrawal? My colleagues and I seemed to think it was a "bridge too far", but then again, I couldn't point to a specific reason to disallow it.

[Brian Haynes]

Funds seem to vary on whether they can waive and release any future mass withdrawal liability claims. Some Funds take the position that it would violate public policy to waive a future contingent liability event that is to be statutorily imposed (especially when not supported by additional consideration). Some Funds allow such a waiver but will do so only if the employer pays an additional amount to support that wavier. For example, a lump-sum settlement for a complete withdrawal made without the benefit of any 20-year cap or for an additional negotiated amount. All in all, most Funds will not release such claims but it is always worth trying to obtain.