Yellow’s Failed PBGC Fight Alters Pension Withdrawal Calculus

Employers must prepare for the risk of high costs if they drop out of multiemployer pension plans buoyed by federal bailout money, benefits attorneys warned after Yellow Corp. lost its challenge against rules for calculating withdrawal liability.

A bankruptcy judge late last week upheld Pension Benefit Guaranty Corporation regulations that fundamentally changed the way that liability is measured, according to benefits lawyers. The rules initially exclude the amount of special financial assistance (SFA) that plans receive under the 2021 American Rescue Plan Act when determining the unfunded vested benefits (UVB) that employers owe when they pull out of a plan.

“The decision will have a widespread impact because of the number of plans receiving the SFA money,” said Greg Ossi, a partner at Norton Rose Fulbright LLP.

An estimated total of more than $97 billion in pension bailouts will be distributed to approximately 250 plans, bolstering the ailing finances of the PBGC, which acts as an insurer for the sponsors of single- and multiemployer plans. The agency, which said it was “pleased” with the Sept. 13 ruling, reported a surplus of more than $46 billion across its single- and multiemployer insurance programs last fiscal year.

The Employee Retirement Income Security Act defines pension withdrawal liability as an employer’s portion of unfunded vested benefits, which is calculated as the difference between the value of vested benefits and plan assets. Now when employers withdraw, they will be subject to liability calculations based on a “fiction of what the assets are,” said Katherine Kohn, a partner at Thompson Hine LLP.

“PBGC regulations here just create a situation where there’s even more of a detachment from reality in terms of what the financial condition of the plans are and what employers owe to the plans if they withdraw,” she said.

The agency has argued in this case that its rulemaking aims to assure that SFA payments spare participants from pension cuts and save underfunded plans, as lawmakers intended. “Congress did not want SFA to take the place of contributions,” the PBGC said in a July 12 filing. “And it authorized PBGC to impose reasonable conditions relating to withdrawal liability.”

‘Draconian Consequences’

Yellow halted its trucking operations in 2023, attempting to avoid vested worker benefits payments after withdrawing from 11 pensions including the Teamsters’ Central States Plan. Those plans relied on the PBGC’s rules to argue that Yellow owes them $6.5 billion in withdrawal liability.

The company countered that the agency lacked the statutory authority to issue those regulations, and contended its financial obligation to the plans should be reduced because they received more than $40 billion in special financial assistance from the government.

Delaware Bankruptcy Court Judge Craig T. Goldblatt partially sided with the plans, upholding PBGC’s power to clarify withdrawal liability during the 10-year “phase-in” period after a plan has received a bailout.

In essence, the SFA funds can’t be used to reduce a plan’s unfunded vested benefits, which are used to calculate an employer’s withdrawal liability.

“Here you’ve got a court saying there is a difference between withdrawal liability and UVBs,” Ossi said.

The ruling, he said, fundamentally changes “the definition of a plan asset by saying you get the money, but you can ignore it for this one purpose.”

But employers aren’t always in control of when they withdraw and deciding whether to do so within the phase-in period mandated by the PBGC rules will become a bigger part of the decision-making process for businesses that contribute to those plans, according to Kohn.

“I’ve been advising employers that were hoping the court would go another way, and they would have a little bit more flexibility in the near term to consider their options, or not necessarily have these draconian consequences if they hope to withdraw,” she said. “It’s certainly going to impact the way employers look at these plans.”

Employers withdrawing during the phase-in period would be subject to mass withdrawal rates for the valuation of those plan assets, now that the PBGC has been cleared to regulate the interest rates used for those calculations, according to Ossi, who says Yellow is likely to appeal the ruling.

The case is In re Yellow Corp., Bankr. D. Del., No. 23-11069-CTG, 9/13/24.