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Withdrawal Liability: Don’t Let it Sneak Up on You!

Posted in Plan Administration, Retirement Plans

Employers with unionized employees are all too familiar with the issues that arise in the negotiation and maintenance of collective bargaining agreements.  It is not uncommon for the union to require the employer to participate in the union multiemployer defined-benefit pension plan and contribute toward the employees’ retirement benefits.  Now, more than ever, it is likely that there pension plans are “underfunded.”   So employers have to be keenly aware of the possibility of certain transaction triggering “withdrawal liability.”

What Does Underfunded Mean?

Generally speaking, a defined benefit pension plan promises and employee an amount of benefit after he or she retires.  This is usually paid out periodically until the death of the employee.  For these defined benefit plans, the amount of money currently going in is rarely enough to cover the actual amount of benefits that will be paid.  The plan has to make money through investing the plan assets to generate more income.  The plan makes certain assumptions about how long employees will live, how much of a return the plan will make on investments and how much employers will contribute over time.  Employees continue to accrue benefits based on years of service and vest in their right to receive certain benefits.  At any point in time, the plan’s actuary can calculate the anticipated payout of these benefits and compare it against the value of the total assets of the plan. If the value of the benefits exceeds the value of the plan assets, the plan is said to be “under funded.”  In other words, there is not enough money to pay all the promised benefits.

What is Withdrawal Liability?

Withdrawal liability is the employer’s share of the unfunded liability of the plan.  Under the provisions of the Multiemployer Pension Plan Amendments Act (“MPPAA”), an employer who withdraws from a multiemployer pension fund is liable for that portion of unfunded liability that is attributed to the employer under the formulas provided in the statute.  The employer is required to continue payments to the plan to help complete funding of the liability for benefits.  Depending on the amount of under funding, or unfunded liability the plan has, the amount of the withdrawal liability can be substantial.

How is Withdrawal Liability Triggered?

MPPAA recognizes two specific types of withdrawal: complete and partial. A complete withdrawal occurs when the employer ceases to have any obligation to contribute to the plan. This can happen for a variety of reasons, including the expiration of a bargaining agreement, a decertification of the union or because the employer sells or terminates the business. A partial withdrawal can occur when the amount of contributions to the plan drops significantly or when the employer ceases to have an obligation to contribute at one, but not all, of its facilities. Partial withdrawals can occur as a result of substantial layoffs or because of a decertification at one, but not all of the company’s facilities.

 

Who is Liable?

Unlike liability for contributions, which applies to the employer maintaining the collective bargaining agreement, withdrawal liability extends to all members of a “control group” of the employer.  While the determination of whether an entity is part of a control group can get very technical, the general rule is that any business entity that is owned, in whole or in part, by the same owners of the withdrawing employer can be part of the “control group” of that employer.  Control group members are jointly and severally liable for the withdrawal liability of any other member of the control group. So simply shutting down one business may not avoid the liability since other business ventures could be part of the control group and have to pay instead.

What Should a Company Do?

Withdrawal liability can be a hidden hazard because it can be triggered in a variety of ways.  Certainly the sale of the company has withdrawal liability implications.  Reductions in workforce can also cause concerns.  Mergers between companies that participate in multiemployer plans can have significant liability implications, as can the acquisition of a company that is a contributing employer.  Changing unions and closing facilities can also trigger assessment of withdrawal liability.  Any company considering these actions would do well to consider whether withdrawal liability will be an issue before taking any specific action.

Considering a Sale?

Don’t do it without making sure you know whether or not their is potential withdrawal liability and if it will be triggered.  Asset purchases generally leave it with the seller, and that can take a big bite out of any sale proceeds.  Stock sales generally send it to the buyer, so a buyer can end up getting a huge unanticipated liability that encumbers their future operations.  So if a mutliemployer pension plan is involved, address potential withdrawal liability sooner rather than later.  Waiting until the last minute (or not dealing with it all) can be very costly.

For more information about withdrawal liability and its potential impact on business, please contact your attorney at Fox Rothschild.