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Watch Out For Withdrawal Liability: Think Before You Change

Posted in Plan Administration, Retirement Plans

For employers who presently contribute to a multiemployer defined benefit pension plan, withdrawal liability, the news is not good.  According to a PBGC report to Congress, multiemployer plans had a 48% aggregate funding ratio, based on the PBGC’s conservative interest rate assumptions.  One of the most alarming statistics was the fact that only 39.3% of participants are active workers.  Out of roughly 1,500 plans, 21% were in the “red zone” and facing significant, immediate funding problems.  Some reports suggest that almost every multiemployer pension plan is underfunded, which means withdrawal liability is a real risk for withdrawing employers.

Now consider the following scenarios:

  1. Employer closes one facility and consolidates activities into another location
  2. Employer sells the assets of a company to a competitor
  3. Union employees of employer vote to decertify
  4. A different union takes over representation of bargaining unit members

In each of these scenarios, the employer potentially faces withdrawal liability.  And coincidentally, in each of these cases the employer did not consider possible withdrawal liability implications.  I know, because in each instance, the employer was assessed with a large withdrawal liability bill after the event, much to their surprise and dismay.

Sometimes companies overlook the fact that withdrawal liability can be triggered in a variety of ways.  But the one clear trigger to consider is if at any point you stop contributing to a multiemployer pension fund, for any reason, you better have considered the possibility of withdrawal liability before completing the transaction.  Frequently I see transactions that were done for tax or corporate reasons where withdrawal liability was never discussed.  When the bill comes from the fund, there is much frustration over the fact that accountants, lawyers or executives involved in the transaction planning did not give it a thought.  When the bill comes due, the finger pointing begins and blame starts to flow.

That’s why it is always essential to give the following thought to any transaction that results in an employer ceasing to make a payment to a multiemployer pension fund: If after this transaction, I am no longer going to be sending a check to the current pension fund for that location or from that business, will there be withdrawal liability?  If the answer is yes, don’t complete the transaction until you have sorted out the withdrawal liability details.  Get assistance in finding out exposure and prepare for it.  When you are taking an action that potentially involves a multiemployer pension fund, remember that just like you would consider tax consequences, financial impacts and the overall bottom line of the deal, you have to think about withdrawal liability as well.  Don’t change first and get billed later.  Plan ahead.

For assistance in dealing with withdrawal liability issues, make sure to contact your attorney at Fox Rothschild.