In many ways, the Great Recession forced businesses to address issues that should have been dealt with years ago. For some, it was too late. For those who survived, there may have been missed opportunities in the partial recovery we have enjoyed. But, of all the lessons learned in the last several years, one seemingly remains lightly regarded: the potentially devastating consequences of multiemployer plan withdrawal liability.
Multiemployer pension plans are common in many industries, covering union employees who may work for many different employers. Most employers who are parties to union collective bargaining agreements are obligated to contribute to multiemployer pension plans. Multiemployer plans are governed by the Employee Retirement Income Security Act of 1974. Under ERISA rules, if an employer pulls out of a multiemployer pension plan (i.e., withdraws) — such as, by offering a different type of plan, closing its business, going non-union — the employer must pay a portion of any unfunded benefits the plan may have. The withdrawing employer’s portion of unfunded benefits is known as withdrawal liability. Withdrawal liability is often particularly painful to employers because it can be a very large dollar amount, even for a small number of employees. Also, the employer may be required to pay the withdrawal liability in a single payment within a very short time, depending on the circumstances of the withdrawal.
Pension plan trustees work with actuaries and other consultants to determine each employer’s obligation to fund the plan. But, most often this obligation is set through collective bargaining, and that’s where the process can break down. Collective bargaining typically involves compromise on both sides in work rules, wages and benefits. While a multiemployer pension plan may need $50 per employee each week to ensure that the plan is not underfunded, union negotiators may settle on $35 per employee in an effort to reach the best economic package possible for both sides. What many employers do not realize, however, is that this agreement to contribute a lesser amount does not reduce the employer’s overall liability to fund the plan. Employers can still be held liable for any underfunded amount that may exist.
Businesses need to fully consider the potential long-term impact of multiemployer plan contribution requirements in collective bargaining agreements. Pension benefits are based on actuarial projections, which change constantly, depending on the demographics of an employer’s workforce, market conditions and myriad other factors. Yet, collective bargaining agreements often lock in a set amount of contributions for several years. Unions and employers are extremely reluctant to open up hard-fought contracts to adjust one component; so, the funding deficit can grow over time. Add to that a plummeting stock market (as in 2008) and wide variations in interest rates, and a plan’s underfunding problem can quickly go from bad to worse.
When the full force of the recession hit, it accelerated the triggering of withdrawal liability as companies shut down or opted for a different business strategy that forced them out of collective bargaining agreements. What appeared to be a sound business strategy to survive the recession was blown up by a significant withdrawal liability. For multiemployer plans, as businesses went bankrupt and could not pay their withdrawal liability, the underfunding problem just got worse. The situation today has not improved much for many plans.
Planning for withdrawal liability is a lot easier before the full weight of the obligation hits than afterwards. Businesses should consider the following:
Under ERISA, some businesses may be eligible for a cap on withdrawal liability if the owner sells substantially all of the company’s assets. If the business is being sold, it may even be possible to structure the sale in a manner that shifts the withdrawal liability obligation to the purchaser.
Businesses that are considering shutting down operations and starting up an entirely different line of service should examine potential withdrawal liability first. A more practical solution might be to keep the existing business open and gradually add the new line of service.
There are several very nuanced exceptions to withdrawal liability. A business that is concerned about its potential withdrawal liability should discuss its options with its employee benefits attorney.
In the end, the best advice is to avoid putting off the tough decisions. Pay close attention to the pension funding obligations in collective bargaining agreements. With savvy negotiation, an employer may be able to minimize, or even eliminate, the threat of withdrawal liability. Nonetheless, an employer may be faced with a “pay me now or pay me later” decision that should be weighed carefully to avoid being unexpectedly burdened by a large withdrawal liability obligation.
DOUGLAS S. NEVILLE is an officer of the law firm Greensfelder, Hemker & Gale, P.C. and manages its employee benefits practice group. Kristy J. Wrigley-Durer is an associate with the firm’s employee benefits practice group.