By LONIE A. HASSEL, a principal and co-chair of Groom Law Group's Plan Funding and Restructuring Group; and LARS C. GOLUMBIC, a principal with Groom focusing on ERISA-related matters
The sharp economic downturn has put multiemployer pension plans--sometimes referred to as Taft-Hartley pension plans--at greater financial risk than ever before. While the economy is expected to improve, large portions of the country's manufacturing base may never fully recover.
Employers that contribute to multiemployer pension plans on behalf of their unionized workers would be well-advised to understand and appreciate the requirements they face in connection with their participation in these plans.
A multiemployer pension plan is a collectively-bargained plan to which two or more unrelated employers contribute. Generally, employers contribute to multiemployer plans pursuant to a collective bargaining agreement for their employees covered by the collective bargaining agreement.
Multiemployer pension plans permit employers in industries in which employees move among employers to provide a portable benefit for their employees. Multiemployer pension plans also may be an administratively convenient method, especially for small employers, to provide a defined benefit pension to their employees.
Multiemployer pension plans are subject to minimum funding requirements and special funding rules under the Employee Retirement Income Security Act of 1974, and the Internal Revenue Code of 1986. ERISA also imposes withdrawal liability for contributing employers that withdraw from multiemployer pension plans.
The statutory funding requirement and withdrawal liability generally are a joint obligation of the company with employees in the plan and each member of that company's controlled group. A controlled group, generally, is a group of trades or businesses linked by at least an 80 percent ownership interest, by vote or value.
If an employer contributes to a multiemployer pension plan, the employer and its controlled group members face obligations related to contributions, withdrawal liability, and disclosure.
Generally, an employer's contribution obligation to a multiemployer pension plan is fixed in collective bargaining. Certain statutory provisions can require more than the collective bargaining agreement requires, however.
Under both ERISA and the IRS, meeting the minimum funding requirements for the plan is an obligation not only of the company that is a party to the collective bargaining agreement, but also that company's controlled group.
Based on these provisions, a parent or subsidiary, for example, of the company that signed a collective bargaining agreement also could be liable by statute for contributions due the multiemployer pension plan.
It is not clear, however, whether this statutory contribution obligation is enforceable through the usual mechanism of an action under section 502(g) of ERISA for unpaid contributions.
Excise Taxes. If contributions do not satisfy the plan's minimum funding standard for a plan year, an excise tax of 5 percent of the shortfall automatically is imposed pro rata on the contributing employers. The IRS may assess an additional tax of 100 percent of the funding deficiency if the initial excise tax is not paid. Assessment of the additional 100 percent tax is rare. Both the 5 percent and 100 percent excise taxes are joint and several obligations of the contributing employer and the members of its controlled group.
Critical and Endangered Plan Schedules. If a multiemployer pension plan is in critical (so-called "red zone") status or endangered (so-called "yellow zone") status based on the level of plan assets, benefit liabilities, and employer contributions, the plan trustees are required to take steps to improve the plan's funded status through reduced benefits or increased contributions or both. These changes are described in schedules that the plan trustees propose to the bargaining parties.
The plan trustees do not have the authority immediately to require the bargaining parties to agree to a schedule. But if the bargaining parties do not voluntarily adopt one of the schedules of rates and benefits offered by the plan trustees within 180 days after the collective bargaining agreement expires, the plan trustees are required to impose a so-called default schedule on the bargaining parties.
The default schedule likely will provide for reduced future benefit accruals for the employer's current employees and/or the reduction in benefits already accrued by former employees who are not yet receiving benefits under the plan. The default schedule also may require the employer to increase its contributions to the plan.
Contribution Surcharge. For plans in critical status, trustees are required to impose a surcharge of 5 percent of current contributions on employers. After the first year in critical status, the surcharge increases to 10 percent of contributions. The surcharge continues until the bargaining parties adopt a schedule consistent with a schedule proposed by the plan trustees.
An employer that no longer has an obligation to contribute to a multiemployer pension plan or that no longer has operations covered by the plan, because, for example, it agrees with the union to provide pension benefits through another plan or goes out of business, may be found to have withdrawn from the plan and therefore to be subject to withdrawal liability. Liability for a complete withdrawal is triggered when an employer permanently ceases to have an obligation to contribute to the multiemployer plan or permanently ceases operations covered by the multiemployer plan.
Liability for a partial withdrawal is triggered by a substantial decline in covered operations (to 30 percent of their previous level for three consecutive years) or by bargaining out of fewer than all of the employer's bargaining units or facilities formerly covered by the plan.
Withdrawal liability is a share of the plan's unfunded vested benefits, if any, usually based on the employer's share of total contributions to the plan. The contributing employer and all members of its controlled group are liable for withdrawal liability and partial withdrawal liability.
Pay First, Litigate Later. The rules for assessing and paying multiemployer withdrawal liability are written to require employers to pay first and litigate later. Thus, once a multiemployer plan assesses withdrawal liability against an employer, the employer generally is required to begin payment of the withdrawal liability, usually in quarterly installments.
While the employer is making the payments, it may challenge the assessment through arbitration. An arbitration award may then be enforced or challenged in federal court. If, at the end of the litigation, the employer prevails, the plan must reimburse the withdrawal liability payments with interest.
Last Employer Standing. The rules for computing an employer's withdrawal liability are complex, and can differ from plan to plan. In general, the rules are designed to allocate all of a plan's unfunded vested benefits among the employers responsible for contributing to the plan based on each employer's share of the plan's contributions. All allocation formulas must allocate to an employer a share of unfunded vested benefits that cannot be collected from other withdrawn employers. Thus, if an employer is unable to pay its withdrawal liability--for example, if it files for bankruptcy and satisfies a plan's withdrawal liability claim for cents on the dollar--significant liabilities could be added to other contributing employers' potential withdrawal liability.
Mass Withdrawal. When all employers withdraw from a multiemployer plan or when substantially all employers withdraw from the plan pursuant to an agreement or arrangement to withdraw, the plan experiences a mass withdrawal. In a mass withdrawal, each employer's withdrawal liability is calculated using more conservative assumptions than generally are used for calculating regular withdrawal liability. This results in higher liability amounts for employers.
Further, employers that withdrew during the two years preceding the year in which the mass withdrawal occurred are presumed to have withdrawn pursuant to an agreement or arrangement to withdraw. Employers therefore must rebut the presumption to avoid increased mass withdrawal liability.
The International Accounting Standards Board and the U.S. Financial Accounting Standards Board are both considering new rules that would require auditors to provide a substantial amount of additional information on the audited financial statements of employers that contribute to multiemployer plans.
In particular, the proposed rules could require multiemployer plans to provide footnote information on the possibility and amount of withdrawal liability in the event of a withdrawal from a multiemployer plan.
An obligation to identify an amount of withdrawal liability that in many cases is merely hypothetical could have an effect on a public company's ability to obtain credit and undertake day-to-day transactions.
May 1, 2011
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