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Personal Exposure to Withdrawal Liability: Beware of “Business Activites”

Posted in Court Cases, Retirement Plans

In case you are completely overwhelmed with PPACA compliance issues, I decided to write about my other favorite topic: withdrawal liability.  When employers who contribute to a multiemployer defined benefit retirement plan cease to have a contribution obligation, they can be assessed withdrawal liability, which can be a very big number and can really come as a surprise to a business if they did not plan for it.  It usually stays with the business and is not a personal liability for the owners.  But it can be if they are not careful.

In Central States Southeast & Southwest Areas Pension Fund v. Messina Products, LLC, the 7the Circuit Court of Appeals recently reversed a lower court decision that absolved Mr. and Mrs. Messina of any personal liability for the withdrawal of their company from the pension fund.  The Messinas owned a piece of property individually (not as a business entity but personally) that they rented to their business.  The 7th Circuit found that the rental property was a "trade or business" under common control and so the Messinas were liable as if they were sole proprietors of the business.  The Messinas argued that the real estate was a passive investment, and not an active trade or business, but in the absence of any operating documents or agreements, the Court disagreed.     

There are many cases that deal with individual liability for sole proprietors so this decision is not completely novel.  But it should serve as a reminder to any business owner that has a business that contributes to a multiemployer pension fund that it is extremely important to address these ownership issues in advance.  The definition of "trade or business" for withdrawal liability is unique and should not be assumed to be the same as in tax or common law.  So don’t get caught unprepared and personally liable.  Structure and plan in advance to avoid a withdrawal surprise.