Opinion ID: 117896
Heading Depth: 2
Heading Rank: 2

Heading: MPPAA's Basic Approach

Text: The way in which MPPAA calculates interest is related to the way in which that statute answers three more general, and more important, questions: First, how much is the withdrawal charge? MPPAA's lengthy charge-determination section, § 1391, sets forth rules for calculating a withdrawing employer's fair share of a plan's underfunding. See 29 U. S. C. § 1391. It explains (a) how to determine a plan's total underfunding; and (b) how to determine an employer's fair share (based primarily upon the comparative number of that employer's covered workers in each earlier year and the related level of that employer's contributions). One might expect § 1391 to calculate a withdrawal charge that equals the withdrawing employer's fair share of a plan's underfunding as of the day the employer withdraws. But, instead, § 1391 instructs a plan to make the withdrawal charge calculation, not as of the day of withdrawal, but as of the last day of the plan year preceding the year during which the employer withdrew a day that could be up to a year earlier. See §§ 1391(b)(2)(A)(ii), (b)(2)(E)(i), (c)(2)(C)(i), (c)(3)(A), and (c)(4)(A). Thus (assuming for illustrative purposes that a plan's bookkeeping year and the calendar year coincide), the withdrawal charge for an employer withdrawing from an underfunded plan in 1981 equals that employer's fair share of the underfunding as calculated on December 31, 1980, whether the employer withdrew the next day (January 1, 1981) or a year later (December 31, 1981). The reason for this calculation date seems one of administrative convenience. Its use permits a plan to base the highly complex calculations upon figures that it must prepare in any event for a report required under ERISA, see 29 U. S. C. § 1082(c) (9), thereby avoiding the need to generate new figures tied to the date of actual withdrawal. Second, how may the employer pay the withdrawal charge? The statute sets forth two methods: (a) payment in a lump sum; and (b) payment in installments. The statute's lump-sum method is relatively simple. A withdrawing employer may pay the entire liability when the first payment falls due; pay installments for a while and then discharge its remaining liability; or make a partial balloon payment and afterwards pay installments. See 29 U. S. C. § 1399(c)(4). The statute's installment method is more complex. The statutory method is unusual in that the statute does not ask the question that a mortgage borrower would normally ask, namely, what is the amount of each of my monthly payments? What size monthly payment will amortize, say, a 7% 30-year loan of $100,000? Rather, the statute fixes the amount of each payment and asks how many such payments there will have to be. To put the matter more precisely, (1) the statute fixes the amount of each annual payment at a level that (roughly speaking) equals the withdrawing employer's typical contribution in earlier years; (2) it sets an interest rate, equal to the rate the plan normally uses for its calculations; and (3) it then asks how many such annual payments it will take to amortize the withdrawal charge at that interest rate. 29 U. S. C. §§ 1399(c)(1)(A)(i), (c)(1)(A)(ii), (c)(1)(C). It is as if Brown, who owes Smith $1,000, were to ask, not, How much must I pay each month to pay off the debt (with 7% interest) over two years?but, rather, Assuming 7% interest, how many $100 monthly payments must I make to pay off that debt? To bring the facts closer to those of this case, assume that an employer withdraws from an underfunded plan in mid-1981; that the withdrawal charge (calculated as of the end of 1980) is $23.3 million; that the employer normally contributes about $4 million per year to the plan; and that the plan uses a 7% interest rate. In that case, the statute asks: How many annual payments of about $4 million does it take to pay off a debt of $23.3 million if the interest rate is 7%? The fact that the statute poses the installment-plan question in this way, along with an additional feature of the statute, namely, that the statute forgives all debt outstanding after 20 years, 29 U. S. C. § 1399(c)(1)(B), suggests that maintaining level funding for the plan is an important goal of the statute. The practical effect of this concern with maintaining level payments is that any amortization interest § 1399(c)(1)(A)(i) may cause to accrue is added to the end of the payment schedule (unless forgiven by § 1399(c)(1)(B)). Third, when must the employer pay? The statute could not make the employer pay the calculated sum (or begin to pay that sum) on the date in reference to which one calculates the withdrawal charge, for that date occurs before the employer withdraws. (It is the last day of the preceding plan year, i. e., December 31, 1980, for an employer who withdraws in 1981.) The statute, of course, might make the withdrawing employer pay (or begin payment) on the date the employer actually withdraws. But, it does not do so. Rather, the statute says that a plan must draw up a schedule for payment and demand payment as soon as practicable after withdrawal. 29 U. S. C. § 1399(b)(1). It adds that [w]ithdrawal liability shall be payable . . . no more than 60 days after the date of the demand. § 1399(c)(2). Thus, a plan that calculates quickly might demand payment the day after withdrawal and make the charge payable within 60 days thereafter. A plan that calculates slowly might not be able to demand payment for many months after withdrawal. For example, in the case of the employer who withdraws on August 14, 1981, incurring a withdrawal charge of $23.3 million (calculated as of December 31, 1980), the lump sum of $23.3 million, or the first of the installment payments of roughly $4 million, will become payable to the plan no later than 60 days after the plan sent the withdrawing employer a demand letter. The day of the first payment may thus come as soon as within 60 days after August 15, 1981, or it may not come for many months thereafter, depending upon the plan's calculating speed.