As published by Law360 (January 13, 2020, 5:43 PM EST)

Following oral arguments that were held in February 2018, in a long-anticipated decision in the National Retirement Fund v. Metz Culinary Management Inc., the U.S. Court of Appeals for the Second Circuit held that a multiemployer pension fund’s use of a lower interest rate that was adopted after the statutory withdrawal liability measurement date violated the Employee Retirement Income Security Act. The decision will greatly benefit certain employers who (as Metz did) withdrew from the National Retirement Fund, or NRF, during 2014 and may also impact other employers and funds.

Under the withdrawal liability rules set forth in ERISA as amended by the Multiemployer Pension Plan Amendments Act, or MPPAA, an employer who withdraws from a multiemployer pension fund is responsible for its allocable share of the fund’s unfunded vested benefits. At issue in Metz was the interest rate that was used to calculate the fund’s unfunded vested benefits and therefore Metz’s withdrawal liability.

According to court documents, Metz withdrew from the NRF in 2014. Under the MPPAA, withdrawal liability is calculated as of the last day of the plan year preceding the plan year of the withdrawal. Since the NRF operates on a calendar-year basis, the applicable measurement date for calculating Metz’s (and all other employers who withdrew from the NRF in 2014) withdrawal liability was Dec. 31, 2013.

In October 2013, the NRF replaced Buck Consultants LLC, who had been the NRF’s actuary for many years. Buck had used an interest rate assumption of 7.25% for withdrawal liability purposes for many years prior to its ouster. In June 2014, the NRF’s new actuary announced to the NRF trustees that the interest rate assumption was being changed from the prior 7.25% rate to a floating rate based on interest rates published by the Pension Benefit Guaranty Corp., or PBGC.

As of Dec. 31, 2013, that PBGC rate was 3%. Since future liabilities are discounted back to present value to calculate unfunded vested benefits, the interest rate assumption bears an inverse relationship to withdrawal liability; that is, a lower interest rate will result in higher withdrawal liability, and vice versa. Accordingly, the interest rate assumption change had a dramatic effect on Metz’s (and others’) withdrawal liability, increasing it from approximately $254,000 (at Buck’s prior 7.25% rate) to nearly $1 million (using the revised 3% rate).

The NRF issued a demand for the higher withdrawal liability amount, and Metz challenged NRF’s demand under the MPPAA’s mandatory arbitration regime. Metz argued in arbitration that the retroactive application of the lower interest rate assumption (adopted in 2014 and applied as of the Dec. 31, 2013, measurement date) violated the MPPAA.

The arbitrator decided in favor of Metz, finding that “there is no dispute that [the new actuary] did not adopt the PBGC rates as the interest rate assumption for withdrawal liability purposes until some time in 2014” and that the NRF’s decision to apply this 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 NRF appealed the arbitral holding to the U.S. District Court for the Southern District of New York and the district court reversed, vacating the arbitral award. The district court held that ERISA does not require actuaries to calculate withdrawal liability based on interest rate assumptions used prior to the statutory measurement date.

The district court further held that the withdrawal liability interest rate assumption must be affirmatively decided each year and that (contrary to the arbitrator’s finding) the rate in effect during the prior year does not remain in effect unless changed, holding that MPPAA “does not allow stale assumptions from the preceding plan year to roll over automatically.”

On appeal, after noting that the parties had used “copious amounts of ink in argument” over the applicable standard of review and other minutia, the Second Circuit succinctly stated the legal issue as “whether, under the MPPAA, a fund may select an interest rate assumption after the Measurement Date and retroactively apply that assumption to withdrawal liability calculations.”

The court first noted that the MPPAA (specifically, ERISA Section 4213) is silent as to whether the interest rate assumptions must be affirmatively elected, or whether the rate in effect during a given year automatically remains in effect for the next year absent an affirmative change.

As noted, the district court had held that Section 4213 does not allow assumptions from the prior year to roll over. The Second Circuit expressly rejected this finding, concluding that “there is no statutory or caselaw support for that proposition, and we do not agree with it.”

The Second Circuit then turned to Section 4214 of ERISA, which requires multiemployer plans to provide notice to employers prior to implementing any withdrawal liability plan rule or amendment. Citing legislative history, the Second Circuit concluded that Section 4214 was intended to protect employers from the retroactive application of rules relating to the calculation of withdrawal liability.

The Second Circuit found that the retroactive selection of interest rate assumptions for withdrawal liability purposes (the position advocated by the district court) was inconsistent with Congress’ stated intent, concluding that withdrawal liability interest rate assumptions do not “remain open forever and subject to retroactive changes in later years.”

In reaching its decision, the Second Circuit correctly recognized the “significant opportunity for manipulation and bias” that would result if funds were allowed unfettered discretion in retroactively selecting interest rate assumptions after the measurement date. The court feared that under such a rule:
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 Second Circuit then noted that this “opportunity for manipulation and bias [was] particularly great where [as was the case here] the funds use different interest rate assumptions for withdrawal liability than those used for other purposes such as minimum funding.” The Second Circuit concluded that the retroactive application of the interest rate change represented the type of situation that could be attacked as presumptively unreasonable under the U.S. Supreme Court’s decision in Concrete Pipe and Products of California Inc. v. Construction Laborers Pension Trust for Southern California.

In an area where the law is extremely skewed in favor of funds, Metz represents a significant win for employers. Certainly, the numerous employers who withdrew from the NRF in 2014 and are currently contesting their withdrawal liability demands in arbitration will benefit greatly from the decision, since their withdrawal liability should (as the Second Circuit ordered) be recalculated using the higher 7.25% rate that was in effect on the Dec. 31, 2013, measurement date.

While other employers who withdrew from the NRF in 2014 and did not demand arbitration will likely not be benefit in the same way (since withdrawal liability becomes fixed and payable absent an employer timely demanding arbitration), the case serves as a good example of the need for experienced counsel in this area. Metz could also impact other multiemployer plans and employers who have withdrawn from such plans, since NRF is likely not the only plan to have changed the withdrawal liability interest rate assumption in this manner.