On March 29, 2024, the U.S. District Court for the Northern District of Illinois issued its decision in Central States, Southeast and Southwest Areas Pension Fund v. Event Media, Inc. In a matter of first impression for federal courts, the Northern District found that Central States’ atextual interpretation of ERISA caused it to “incorrectly use the post-2014 highest contribution rate in calculating the employers’ withdrawal liability payments” which in turn forced a much higher withdrawal liability upon the employer. This decision represents a major victory for employers faced with inflated withdrawal liability demands.

Withdrawal Liability under ERISA and Selection of the Highest Contribution Rate

The Employee Retirement Income Security Act of 1974 (ERISA), as amended by the Multiemployer Pension Plan Amendments Act of 1980 (MPPA), sets minimum funding and other standards for employer-sponsored benefit plans, including multiemployer defined benefit pension plans. Under ERISA and MPPA, an employer that exits a multiemployer plan must pay “withdrawal liability” to the fund in an amount to cover the exiting employer’s share of the plan’s existing unfunded liabilities. The withdrawal liability is determined by plan actuaries, using one of several different formulas. An exiting employer’s withdrawal liability is paid in quarterly or monthly installments. Those installments are calculated differently than the withdrawal liability itself. The installment payment equals the product of the employer’s “highest contribution rate” and highest three consecutive-year average of the employer’s “contribution base units” divided by four (for quarterly payments) or 12 (for monthly payments). Contribution base units are the number of hours, weeks, or months worked for which the employer contributed to the fund. An exiting employer only needs to pay up to 20 years of these installment payments. If, at the end of the 20 years the employer still has not paid off the full amount of the withdrawal liability, the remaining withdrawal liability is forgiven. Thus, an employer’s “highest contribution rate” can have a significant impact on the amount of withdrawal liability an employer must actually pay.

As a result of legislation meant to satisfy competing interests in both 2006 and 2014, determining the “highest contribution rate” became the source of heated dispute.

To combat the severe underfunding of many multiemployer pension funds, Congress enacted the Pension Protection Act of 2006, which forced plans in an “endangered” or “critical” status to implement a “funding improvement plan” or “rehabilitation plan” which, among other things, alters both benefit structures for beneficiaries and contribution amounts for employers. ERISA § 305(a), (c)(1)(B) and (e)(1)(B). Specifically, employers were required to make additional contributions to a pension fund to help it cover the funding gap. This caused an increase in withdrawal liability calculations by allowing plan actuaries to include the higher contribution rates being paid by employers to plans that were in an “endangered” or “critical” status, even though those very same plans saw their unfunded vested benefits going down.

Congress addressed this in 2014 with the Multiemployer Pension Reform Act of 2014, which excluded increases in contribution rates by employers that were “required or made in order to enable the plan to meet the requirement of the funding improvement plan or rehabilitation plan” from the withdrawal liability calculations. ERISA § 305(g)(3)(A).¹ The 2014 legislation is meant to protect employers from paying higher withdrawal liability payments based on weekly contribution rates that are artificially inflated due to compliance with the Pension Protection Act of 2006. This makes sense, because these weekly contribution rates were not raised due to “increased levels of work, employment, or periods for which compensation is provided nor are the additional contributions used to provide an increase in benefits.” Rather, they were created to cover a preexisting funding shortfall and to help a struggling pension fund obtain greater financial security. The Multiemployer Pension Reform Act of 2014 clarifies that only where weekly contribution rates are raised due to such natural factors such as increased levels of employment and thus increased future liabilities, and not to made pursuant to the Pension Protection Act of 2006, may they be considered when selecting an employer’s highest contribution rate. See ERISA § 305(g)(3)(B).

The Event Media Decision

In Event Media, Central States, Southeast and Southwest Areas Pension Fund assessed withdrawal liability against two employers for a 2019 withdrawal from the plan. Central States selected a high weekly contribution rate of $424 as of December 31, 2019, from which to base the calculation of the installment payment. In two separate arbitrations, the employers argued that, under the Multiemployer Pension Reform Act of 2014, Central States should not have been permitted to include any post-2014 contribution rate increases in the highest contribution rate. The employers argued that Central States should have selected the weekly contribution rate of $328 as of December 31, 2014, as all increases to the weekly contribution rate after December 31, 2014, were due to the rehabilitation plan, and thus should be excluded.

In making its argument for using the high contribution rate of $424, Central States relied on its interpretation of one of the two narrow exceptions to ERISA § 305(g)(3)(A) found in ERISA § 305(f)(1)(B).² Central States relied on the statutory exception that provides “additional contributions … used to provide an increase in benefits, including an increase in future benefit accruals, permitted by subsection (d)(1)(B) or (f)(1)(B)” are to be used in calculating the highest rate. ERISA §305(g)(3)(B). That subsection allows for plans to amend their rehabilitation plans after they are adopted, so long as, among other things, the plan’s actuary “certifies that such increase is paid for out of additional contributions not contemplated by the rehabilitation plan.” ERISA § 305(f)(1)(B). Here the plan’s actuary never made such a certification. Instead, Central States argued that while (f)(1)(B) may prohibit rehabilitation-plan amendments that increase benefits without actuary certifications, it “otherwise permits contribution increases,” such that this narrow exception to the “broad prohibition on including increases” in the context of rehabilitation plans would actually “allow many more kinds of increases other than those explicitly stated by the statute.”

The court rejected Central States’ position and stated that it “has no textual support.” The court ultimately held that Central States “incorrectly used the post-2014 highest contribution rate of $424 in calculating the employers’ withdrawal liability payments, because the post-2014 contribution increases were not the result of a certified rehabilitation plan amendment, but instead had been in place since 2008” (emphasis added) (when Central States was subject to a rehabilitation plan).

The court vacated the arbitrators’ awards and ordered Central States to recalculate withdrawal liability payments based on the contribution rate in effect as of December 31, 2014, at $328 per week.

Observations and Recommendations

While employers facing withdrawal liability assessments have been making this argument for years, this opinion will be useful in continuing to insist that post-2014 contribution rate increases because of a rehabilitation plan are not to be used in calculating a withdrawing employer’s installment payment.