“Segal Blend” Struck Down

Employers who want to leave union plans are often discouraged if the price of exiting (the withdrawal liability) is excessive. To that end Segal actuaries have been making up their own rules for maximizing these withdrawal liability amounts. Last week the Sixth Circuit Court of Appeals upheld a lower court decision that ERISA prohibits a multiemployer plan from using the “Segal Blend” to determine the liability to the plan of a withdrawing employer. Here are excerpts from the October Three Consulting story that catch you up.

When an employer withdraws from one of these plans it will generally trigger “withdrawal liability” under the multiemployer plan if the plan’s actuary determines that there are not enough assets in the plan to pay for the vested benefit liability, i.e., there is an unfunded vested liability (UVB). The amount of that UVB, and the withdrawing employer’s withdrawal liability, can be shockingly large. And the calculation of that liability has for some time been a subject of significant contention between withdrawing employers and the plans (and the unions backing the plans).

Multiemployer plans (and their actuaries) use a number of different interest rate bases for determining withdrawal liability, but the most common are:

  • The plan funding rate. Unlike single employer plans, multiemployer plans are for funding purposes required to value plan liabilities based on an expected return on plan assets, typically resulting in a higher valuation rate than is used for single employer plans. In the plan in dispute in Sofco, the plan’s actuary used a 7.25% plan funding rate.
  • PBGC rates. The Pension Benefit Guaranty Corporation publishes rates to be used to (among other things) in single employer plan distress terminations and in multiemployer plan “mass withdrawals.” These rates have been quite low recently – between 1.5% and 2.5% during 2021.
  • The Segal Blend. In many cases, the plan will value liabilities for purposes of calculating an employer’s withdrawal liability based (in effect) on a blend of the funding rate and the PBGC rates, called the “Segal Blend.” (Technically, the “Segal Blend” is a blend of liability determinations, not a blend of rates, but it has a similar effect.) Under this approach, funded liabilities are valued using PBGC rates and unfunded liabilities are valued using the plan funding rate.

The procedure for an employer challenge of a plan’s determination of withdrawal liability is somewhat complicated. The employer must, among other things, submit to arbitration, before it can sue in federal court. In this case, the arbitrator upheld the plan’s use of the Segal Blend. The district court (in effect) reversed this decision, finding that the use of the Segal Blend violated ERISA and that the plan should recalculate the withdrawal liability using the plan’s funding rate. The arbitrator must presume that the plan sponsor’s factual determinations are correct unless the employer disproves a determination by a preponderance of the evidence.

In Sofco Erectors, Inc. v. Trustees of the Ohio Operating Engineers Pension Fund, the Sixth Circuit struck down the use of the Segal Blend and instead required the use of the (much higher) 7.25% interest rate used for plan funding.

Based on the Sofco decision, employers may seriously consider challenging multiemployer plan determinations of withdrawal liability on the basis of the Segal Blend. In this regard, in modeling the potential effects of a withdrawal from a plan that currently uses the Segal Blend, they should consider the potential effects of the plan changing from the Segal Blend to the plan funding rate (and thus, a lower ultimate withdrawal liability) in evaluating the risk presented by a withdrawal.

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