MEMORANDUM
VIA E-MAIL
TO:
John M. Grau
Chief Executive Officer NECA
FROM:
Gary L. Lieber, Esq.
Paul Heylman, Esq.
DATE:
April 15, 2010
RE:
Liability of Employers to Multiemployer Pension Funds
I.
QUESTIONS PRESENTED
You have asked us to briefly describe the potential liability of contractors who
contribute to multiemployer defined benefit plans in the following circumstances: (1) the
employer no longer has a contractual obligation to contribute to the pension fund on
behalf of some or all of its employees and/or (2) the employer has gone out of business
altogether or moved its business operations to another area. Further, we have
summarized potential liabilities of employers if the pension fund to which they contribute
experiences serious funding problems. The memorandum includes updates to our March
14, 2006 memorandum to address rules under the Pension Protection Act (“PPA”).
II.
EXECUTIVE SUMMARY
1.
Employers that contribute to a multiemployer pension plan may be liable
for withdrawal liability in the event that they cease making contributions
to the plan on behalf of some or all of their employees.
2.
If substantially all of the employer’s employees covered under the
collective bargaining agreement (“CBA”) are engaged in building and
construction work and the plan is a construction industry plan (or contains
a construction industry exception), the employer would not be subject to
withdrawal liability if it goes out of business or moves its business
operations to another area completely outside of the jurisdiction of the
CBA, as long as the employer does not resume such work in the CBA’s
jurisdiction within 5 years from the withdrawal.
3.
If the employer is not a construction employer or if the employer
continues to perform work in the jurisdiction of the CBA of a type for
John M. Grau
April 15, 2010
Page 2
which contributions were required, then the employer would be subject to
withdrawal liability.
4.
If a plan experiences financial problems and goes into reorganization
status and/or becomes insolvent, the employers contributing to the plan
will have to make increased contributions to the plan and the participants’
and beneficiaries’ benefits will likely have to be reduced.
5.
If the plan does not collect contributions sufficient to rectify the plan’s
financial difficulties an excise tax may be imposed on all employers
contributing to the pension plan.
6.
The plan actuary must determine the plan’s funding percentage each plan
year. The plan must notify the participants, contributing employers and
the federal government if the plan is substantially underfunded (in what is
called endangered, seriously endangered, or critical status).
7.
If the plan is in endangered or seriously endangered status, the bargaining
parties must implement a funding improvement plan, and if the plan is in
critical status, they must implement a rehabilitation plan (which may result
in benefit cutbacks).
8.
The trustees may decide to terminate the plan by amending it to freeze
benefit accruals or converting it to a defined contribution plan. If so, the
current employers must continue to contribute to the plan until the plan is
fully funded.
9.
The bargaining parties may agree to or undertake a “mass withdrawal”
from the plan. This would operate to terminate the plan. The plan may
need to be amended to reduce or suspend benefits to a level which can be
supported by the plan assets.
10.
Employers withdrawing from a plan terminated through a mass
withdrawal may be assessed withdrawal liability. The rules in paragraphs
(1), (2), and (3) would apply except that, under the construction industry
exception, an employer would be assessed withdrawal liability if it
resumes construction work in the jurisdiction of the CBA within 3 years
(not 5) from the withdrawal.
John M. Grau
April 15, 2010
Page 3
III.
APPLICABLE LAW
A.
WITHDRAWAL LIABILITY
The Multiemployer Pension Plan Amendments Act of 1980 (“MPPAA”) created
withdrawal liability, whereby employers withdrawing from multiemployer plans must,
upon withdrawal, pay a share of the plan’s unfunded vested benefits.
An employer’s withdrawal liability is based on its pro-rata share of the plan’s
unfunded vested benefits (“UVBs”). This share depends on the value of the plan’s assets
and benefits, which, in turn, depends on: (1) the date the assets and benefits are valued;
(2) the actuarial assumptions and methods used to value the assets and benefits; and (3)
the allocation formula chosen by the plan. The date of valuation is almost always the last
day of the plan year preceding the date of withdrawal. The allocation formula and the
actuarial assumptions and methods are subject to the plan sponsor’s discretion, within
statutory limits.
There are two types of employer withdrawals that can trigger payment of liability:
(1) complete withdrawals; and (2) partial withdrawals. “Complete withdrawals” occur
when there is: (1) a permanent cessation of the employer’s obligation to contribute under
the plan; or (2) a permanent cessation of the employer’s covered operations under the
plan. See ERISA §4203(a), 29 U.S.C. §1383(a).
What the term “permanent” means is not defined by the statute. However, the
legislative history indicates that “[a] plan sponsor need only make a reasonable
determination based on the evidence available that the cessation of covered operations or
obligation to contribute is not merely temporary.” See Senate Labor Report, 96th Cong.,
2d Sess. 13 (Comm. Print 1980). If an employer expresses an intent to resume
operations, it must be corroborated by extrinsic evidence. Moreover, a liquidation or
total shutdown need not occur, as long as the employer is no longer conducting business
activities that give rise to contributions.
“An obligation to contribute under the plan” is one arising under one or more
CBAs or under applicable labor-management relations laws. See ERISA §4212(a), 29
U.S.C. §1382(a). Thus, an employer generally will have a complete withdrawal upon the
expiration and nonrenewal of its CBA. However, the employer’s withdrawal will not
occur upon the expiration of its CBA if the employer has an ongoing duty under the
National Labor Relations Act (“NLRA”) to contribute to the plan under the terms of its
expired CBA.
John M. Grau
April 15, 2010
Page 4
“Covered operations” under a plan refers to those business activities for which the
employer is required to contribute to the plan. Thus, where an employer that has an
obligation to contribute based on each hour worked by its covered employees
permanently ceases to conduct such covered work, it may incur a complete withdrawal
even though it may still have a legal obligation to contribute.
“Partial withdrawal” occurs when there is: (1) a 70% employer contribution
decline (“70% decline”); or (2) a partial cessation of the employer’s contribution
obligation. See ERISA §4205(a), 29 U.S.C. §1385(a). The 70% decline is measured
with respect to the employer’s contribution base units (“CBUs”). To determine if there
has been a 70% decline in a given year, the employer’s CBUs during a 3-consecutiveplan-year testing period are compared to the employer’s highest average CBUs during the
prior 5 years (referred to as the CBUs for the “high base year”). The CBUs for 3-year
testing period consist of the current plan year and the 2 preceding plan years. See ERISA
§4205(b)(1)(B)(i), 29 U.S.C. §1385(b)(1)(B)(i). The CBUs for the “high base year” are
the average number of CBUs for the two highest plan years within the 5 plan years
preceding the 3-year testing period. See ERISA §4205(b)(1)(B)(ii), 29 U.S.C.
§1385(b)(1)(B)(ii). An employer incurs a partial withdrawal if the employer’s CBUs in
each of the 3 years of the testing period do not exceed 30% of the CBUs in the high base
year.
The partial cessation of the employer’s contribution obligation refers to two
situations – “bargaining out” and a “facility closing”. The “bargaining out” situation
occurs where an employer that is obligated to contribute to the plan under more than one
CBA ceases to have an obligation to contribute with respect to one or more – but not all –
of those agreements, provided that work continues of the same type which was previously
covered by the agreement and for which contributions were required without the
obligation to contribute to that plan. See ERISA §4205(b)(2)(A)(i), 29 U.S.C.
§1385(b)(2)(A)(i). This may occur as a result of a change in union representation or if
the employer bargains out of an obligation to contribute to the plan.
The “facility closing” situation occurs where an employer has an obligation to
contribute for more than one geographic location, and where work that was undertaken at
one geographic location for which contributions to a plan were made is transferred by the
employer to different geographic location where contributions to a plan for the work
performed are not required. See ERISA §4205(b)(2)(A)(ii), 29 U.S.C.
§1385(b)(2)(A)(ii).
In either a bargaining out or facility closing situation, the partial withdrawal can
only occur if the employer continues to perform the type of work for which contributions
would be required. If the employer ceases or terminates one of several operations, it
would not be a bargaining out or facility closing situation, but may lead to a 70% decline.
John M. Grau
April 15, 2010
Page 5
There are special exceptions to these rules for the building and construction
industry. The exceptions will apply if substantially all the employees for whom the
employer has an obligation to contribute perform work in the building and construction
industry and the plan primarily covers employers in the building and construction
industry, or the plan is amended to provide that the industry exception will apply. See
ERISA §4203(b)(1), 29 U.S.C. §1383(b)(1). Although the statute does not define
“substantially all”, the only circuit court addressing the issue has defined it to mean that
at least 85% of the employer’s employees must work in the building and construction
industry. See, e.g., Central States Pension Fund v. Robinson Cartage Co., 55 F.3d 1318,
1324-25 (7th Cir. 1995); Continental Can Co. v. Chicago Truck Drivers, 916 F.2d 1154,
1160 (7th Cir. 1990); Central States Pension Fund v. Holloway Construction Co., 2000
U.S. Dist. LEXIS 925 (N.D. Ill. 2000).
ERISA also does not define “building and construction industry”. The legislative
history indicates that the PBGC and plan sponsors should refer to labor-management
relations law in defining the term. See Senate Labor Report, 96th Cong., 2d Sess. 14
(Comm. Print. 1980). Under labor-management relations law, the National Labor
Relations Board (“NLRB”) has dealt with the term “building and construction industry”
in a variety of circumstances.
In Painters, Local 1247 (Indio Paint & Rug Center), 156 NLRB 951 (1966), the
trial examiner surveyed many definitions of the “building and construction industry” and
arrived at the following formulation:
Within these various definitions, whether technical, common, or legal,
substantial concensus seems clear. Each formulation with respect to the
so-called building and construction concept subsumes the provision of
labor whereby materials and constituent parts may be combined on the
building site to form, make or build a structure.
Likewise, in Carpenters (Rouley-Schlimgen), 318 NLRB 714 (1995), the
Board not only relied on the Painters, Local 1247 formulation, but also adopted
the definition of construction used in the Standard Industrial Classification
(“SIC”) Manual for 1957 and 1987 – “The term construction includes new work,
additions, alterations, reconstruction, installations, and repairs”. In South Jersey
Regional Council of Carpenters, Local 623 (Atlantic Exposition Services, Inc.),
335 NLRB 586 (2001), the Board relied on the SIC Manual for 1997 which
defines “construction” to include new work, additions, alterations, reconstruction,
installation, maintenance, repairs, demolition, clearing of building sites, and the
sale of material from demolished structures.
John M. Grau
April 15, 2010
Page 6
A complete withdrawal occurs with respect to a construction industry plan only
where a construction industry employer both “ceases to have an obligation to contribute
under the plan” and either “continues to perform work in the jurisdiction of the collective
bargaining agreement of the type for which contributions were previously required” or
resumes such work within five years from the date the obligation to contribute ceased.
See ERISA §4203(b)(2), 29 U.S.C. §1383(b)(2). Thus, unlike other employers,
construction industry employers that go out of business completely do not incur
withdrawal liability, and even those that continue in business incur withdrawal liability
only if, within 5 years from the cessation of the obligation to contribute, they engage in
the same type of work in the same geographic area covered by the CBA under which the
plan was maintained.
Construction industry employers are not liable for withdrawal liability simply by
ceasing to contribute. Rather, they must not only cease to contribute, but also continue
(or resume within five years) work: (1) of the type covered by the CBA; and (2) within
the jurisdiction of the CBA. The question of when an employer is performing work
within the meaning of element (1) – the “of the type covered by the CBA” – is not
defined in the statute.
A 2007 decision clarified what constitutes “the type of work covered by” the
CBA. In Oregon-Washington Carpenters-Employers Pension Trust Fund v. BQC
Construction, Inc., 485 F.Supp.2d 1206 (D.Or. 2007), the employer performed
installation work both with its own employees and through subcontractors. The
collective bargaining agreement required that any subcontractors be covered by the
Carpenters CBA, and made the employer liable for pension shortfalls of the
subcontractors. The employer ceased performing such work itself, but engaged
subcontractors to perform the work.
The Fund claimed that by using subcontractors to perform the work the employer
had previously performed, it was “continuing” to perform work in the industry. The
parties went to arbitration, and the arbitrator accepted the employer’s argument that using
subcontractors was not “continuing” to perform work in the industry. The Fund
appealed, and the court held that for purposes of establishing withdrawal liability to a
construction industry fund, using subcontractors constituted “continuing” performance of
work of the type covered by the collective barginining agreement. The decision rested in
significant part on the fact that the collective bargaining agreement made the employer
secondarily liable for subcontractor contributions when the employer actually worked in
the industry. The decision illustrates the importance of the wording of the contribution
language in the collective bargaining agreement. Partial withdrawal rules are applicable
to a construction industry employer “only if the employer’s obligation to contribute under
the plan is continued for no more than an insubstantial portion of its work in the craft and
John M. Grau
April 15, 2010
Page 7
area jurisdiction of the collective bargaining agreement of a type for which contributions
are required.” See ERISA §4208(d)(1), 29 U.S.C. §1388(d)(1).
The PPA introduced two rules giving construction industry plans more flexibility
in dealing with withdrawal liability. The first new rule deals with how a withdrawing
employer’s liability is calculated. Generally, withdrawal liability calculations reach back
many years to determine a withdrawing employer’s liability. For the first time,
construction industry plans are eligible to use the “fresh start” rules in determining
withdrawal liability, eliminating all liabilities for any year that falls before the “fresh
start” year.
Construction industry plans can now pick any year in which they were fully fund
as the “fresh start” year. That is, in calculating withdrawal liability, such plans can now
ignore older unfunded vested benefits and pick a new starting point for calculations. For
construction industry plans this “fresh start” year must be a year in which the plan was
fully funded. However, the fresh start permits the plan to disregard underfunding in the
years before the fresh start for purposes of withdrawal liability calculations.
The PPA also removed the rule prohibiting construction industry plans from
offering new employers joining the plan a “free look” at the plan. Prior to the PPA, plans
that were not construction industry plans could offer new employers a chance to join the
plan for up to six years (or the vesting period if shorter) with no withdrawal liability,
provided the new employer’s contributions were less than 2% of the total employer
contributions for each year. Pre-PPA law expressly barred construction industry plans
from offering this “free look” option. The PPA amended ERISA to permit construction
industry plans to offer the free look option, provided that the employer met the general
multiemployer test (benefits not vested and less than 2% of overall contributions each
year).
The PPA gives contributing employers the right to access more information about
possible withdrawal liability, and protects them from retaliation for requesting
information about withdrawal liability. If a contributing employer submits a written
request to the plan administrator for a withdrawal liability calculation, the plan
administrator has 180 days to provide the employer with:




an estimate of the amount of the employer’s withdrawal liability;
an explanation of how the withdrawal liability was calculated;
the actuarial assumptions and methods, data regarding contributions,
unfunded vested benefits and annual changes to UVBs used in making the
calculations; and
any applicable limits on withdrawal liability (such as the de minimus rule
and the 20 year limitation on payments).
John M. Grau
April 15, 2010
Page 8
The plan administrator can impose a “reasonable” charge for providing this
information and need only respond to one request by any given employer once every 12
months. As a protection for employers who may be reluctant to disclose the fact that they
are considering withdrawal, the PPA amends the anti-retaliation provision of ERISA to
protect an employer’s right to ask for withdrawal information.
The PPA also established new rules governing withdrawal liability disputes where
the plan alleges that the principal reason for an employer’s past business transaction was
to avoid or evade withdrawal liability. So long as the challenged transaction was both
after December 31, 1998 and more than five years1 before the alleged withdrawal, the
employer can defer making any withdrawal liability payments until the final resolution of
the dispute. Moreover, the usual presumption in favor of the plan’s determination of
liability is reversed on the question of whether the transaction is designed to evade or
avoid liability. The employer must provide notice within 90 days of the liability
determination, and must post a bond if the proceeding takes longer than one year.
B.
REORGANIZATION AND INSOLVENCY
MPPAA amended both ERISA and the Code to strengthen the funding
requirements of multiemployer plans, to prescribe new requirements for financially
distressed multiemployer plans, and to revise the termination insurance provisions to
reduce the potential burden on the Pension Benefits Guaranty Corporation (“PBGC”).
The PBGC guarantees for multiemployer plans are significantly different from
single-employer plans, and apply when the plan becomes insolvent. See ERISA §4022A,
29 U.S.C. §1322A. If a multiemployer plan is insolvent, (i.e., the plan’s available
resources are insufficient to pay benefits under the plan when due for the plan year) the
PBGC loans money to the plan in an amount sufficient to allow the plan to continue to
pay the guaranteed level of benefits. The loans are made on a year-to-year basis, and
occur only if the assets remaining in the plan are insufficient to pay guaranteed benefits
for a given year. It is expected that the plan will repay the loan it receives from the
PBGC when its funding status improves. See ERISA §4261, 29 U.S.C. §1431.
A plan must enter into “reorganization” status and suspend and reduce benefit
payments to the level guaranteed by the PBGC before its participants are eligible for
guarantee payments from the PBGC. See ERISA §4245(a) and (c), 29 U.S.C. §1426(a)
and (c). A plan will enter reorganization status if the amount necessary to amortize the
value of the plan’s unfunded benefits for retirees over 10 years and all other unfunded
1
Two years for small employers (employers with less than 500 total employees, and contributing for less
than 250 employees).
John M. Grau
April 15, 2010
Page 9
vested benefits over 25 years exceeds the plan’s regular funding requirements. See Code
§418, 26 U.S.C. §418.
Once in reorganization, the plan’s minimum funding standards are increased. The
new funding standard is called the “minimum contribution requirement” (“MCR”), and is
the amount necessary to amortize the unfunded benefits of retirees over 10 years and all
other unfunded vested benefits over 25 years, plus the amount necessary to pay the
normal cost of current accruals attributable to play amendments adopted while in
reorganization. See Code §418B(b), 26 U.S.C. §418B(b). The MCR is reduced by an
“overburden credit” based on the extent to which the plan has more retirees than active
employees, and the rate of increase in contributions is generally limited to 7% per year.
See Code §418B(b) and (d), 26 U.S.C. §418B(b) and (d); Code §418C, 26 U.S.C. §418C;
ERISA §4243(d), 29 U.S.C. §1423(d). Generally, the plan is permitted to eliminate
benefits that were added by amendments adopted within 5 years before the plan went into
reorganization which would reduce the MCR, thus ameliorating (to some extent) the
increase in contributions that would otherwise be required. See Code §418D, 26 U.S.C.
§418D. Moreover, lump sum distributions in excess of $1,750 are not permitted to be
made. See ERISA §4241(c), 29 U.S.C. §1421(c).
If the reorganization does not prevent insolvency, then the plan is required to limit
its benefit payments for the year to a level that can be supported by the amount of assets
projected to be available that year, otherwise known as the “resource benefit level.” If the
plan is unable to pay benefits at least at the PBGC guaranteed level, the payment of all
benefits other than basic benefits must be suspended and the plan would need to seek a
loan from the PBGC. See Code §418E, 26 U.S.C. § 418E; ERISA §4245, 29 U.S.C.
§1425.
Throughout plan reorganization and insolvency, employers are still required to
make contributions to the plan in an amount sufficient to meet the MCR. If the plan’s
minimum funding standards are not met in any one year, the contributing employers may
be assessed an excise tax of 5% of the amount of the accumulated funding deficiency.
See Code §4971(a), 26 U.S.C. §4971(a). If the deficiency is not corrected, the IRS has
the authority to impose an additional tax equal to 100% of the funding deficiency. See
Code §4971(b), 26 U.S.C. §4971(b). The liability for payment of the excise tax is to be
allocated in a reasonable manner among contributing employers, first on the basis of their
respective delinquencies, and then on the basis of their respective contribution liabilities.
See Code §413(c)(5), 26 U.S.C. §413(c)(5). The IRS may waive all or part of the excise
tax if it finds that the funding deficiency was due to reasonable cause and steps have been
taken to remedy the shortfall. See Code §4971(f)(4), 26 U.S.C. §4971(f).
The Pension Protection Act of 2006 (“PPA”) left the existing funding rules for
multiemployer plans largely intact; though, the PPA did add a new set of accelerated
John M. Grau
April 15, 2010
Page 10
funding and benefit restrictions for certain plans depending on the plan’s level of
underfunding. Plans may be deemed “endangered” requiring them to adopt a “funding
improvement plan” or “critical” requiring them to adopt a “rehabilitation plan.” See Code
§432(a)(1) and (2), 26 U.S.C. §432(a)(1) and (2); ERISA §305(a)(1) and (2), 29 U.S.C.
§1085(a)(1) and (2). The determination as to whether the plan is in endangered or critical
status is made by the plan actuary and must be certified to the Secretary of the Treasury
and to the plan sponsor. These new rules apply for plan years beginning after 2007 until
plan years beginning after 2014. See PPA §213(b) and 221(c).
A plan is deemed to be in endangered status if the plan is not in critical status and,
as of the beginning of the plan year, (1) the plan is less than 80 percent funded, or (2) the
plan has an accumulated funding deficiency for such plan year, or is projected to have
such an accumulated funding deficiency for any of the six succeeding plan years, taking
into account any extensions of the amortization period. See Code §432(b), 26 U.S.C.
§432(b); ERISA §305(b)(1), 29 U.S.C. 1085(b)(1). Plan that meet both of the above
criteria are classified as “seriously endangered.” See Code §432(b), 26 U.S.C. §432(b);
ERISA §305(b)(1), 29 U.S.C. 1085(b)(1).
Sponsors of endangered plans must implement a funding improvement plan that is
designed to increase the plan’s funded percentage by 33% by the later of: (1) 12 years
from the date the funding improvement plan was adopted or (2) 10 years from the date of
expiration of a CBA covering at least 75 percent of the plan's participants that is in effect
when the plan became endangered. See Code §432(c)(3)(A) and (4)(A), 26 U.S.C. §432
(c)(3)(A) and (4)(A); ERISA §305(c)(3)(A) and (4)(A), 29 U.S.C. §1085(c)(3)(A) and
(4)(A). Seriously endangered plans generally must increase the plan's funded percentage
by 20 percent over a 15-year period. See Code §432(c)(3)(B), 26 U.S.C. §432 (c)(3)(B);
ERISA §305(c)(3)(B), 29 U.S.C. §1085(c)(3)(B).
A certification that the plan is endangered triggers immediate restrictions to
prevent the plan's funding problems from becoming more serious. Between the
certification of endangered status and implementation of the funding improvement plan,
the plan sponsor may not accept a CBA or participation agreement that provides for (1) a
reduction in the level of contributions for any participants; (2) a suspension of
contributions with respect to any period of service; or (3) any new direct or indirect
exclusion of younger or newly hired employees from plan participation. See Code
§432(d)(1)(A), 26 U.S.C. §432(d)(1)(A); ERISA §305(d)(1)(A), 29 U.S.C.
§1085(d)(1)(A). Additionally, the plan cannot be amended to increase the liabilities of
the plan through an increase in benefits, accruals, or accelerated vesting, unless such
amendment is required by law. See Code §432(d)(1)(B), 26 U.S.C. §432(d)(1)(B);
ERISA §305(d)(1)(B), 29 U.S.C. §1085(d)(1)(B). Similarly, while the funding
improvement plan is in effect contributions cannot be reduced or suspended, younger or
newly hired employees may not be excluded, and benefit increases are only allowed if
John M. Grau
April 15, 2010
Page 11
they are part of the funding improvement plan and are paid for out of contributions not
required by the funding improvement plan to meet the applicable benchmarks under the
funding schedule. See Code §432(d)(2)(B) and (d)(2)(C), 26 U.S.C. §432(d)(2)(B) and
(d)(2)(c); ERISA §305(d)(2)(B) and (d)(2)(c), 29 U.S.C. §1085(d)(2)(B) and (d)(2)(C).
A plan is considered in critical status and must implement a rehabilitation plan if
one of four situations exist:




The plan is less than 65% funded and the sum of (1) the market value of
plan assets, plus (2) the present value of reasonably anticipated employer
and employee contributions for the current plan year and each of the six
succeeding plan years is less than the present value of all benefits
projected to be payable under the plan during the current plan year and
each of the six succeeding plan years. See Code §432(b)(2)(A), 26 U.S.C.
§432(b)(2)(A); ERISA §305(b)(2)(A), 29 U.S.C. §1085(b)(2)(A).
The plan (1) has an accumulated funding deficiency for the current plan
year, not taking into account any amortization extension, or (2) is
projected to have an accumulated funding deficiency for any of the three
succeeding plan years (four succeeding plan years if the funded percentage
of the plan is 65 percent or less), not taking into account any amortization
extension. See Code §432(b)(2)(B), 26 U.S.C. §432(b)(2)(B); ERISA
§305(b)(2)(B), 29 U.S.C. §1085(b)(2)(B).
The plan meets the following three requirements: (1) the plan's normal
cost for the current plan year, plus interest for the current plan year on the
amount of unfunded benefit liabilities under the plan as of the last day of
the preceding year, exceeds the present value of the reasonably anticipated
employer contributions for the current plan year, (2) the present value of
nonforfeitable benefits of inactive participants is greater than the present
value of nonforfeitable benefits of active participants, and (3) the plan has
an accumulated funding deficiency for the current plan year, or is
projected to have an accumulated funding deficiency for any of the four
succeeding plan years (not taking into account amortization period
extensions). Code §432(b)(2)(C), 26 U.S.C. §432(b)(2)(C); ERISA
§305(b)(2)(C), 29 U.S.C. §1085(b)(2)(C).
The sum of (1) the market value of plan assets, plus (2) the present value
of the reasonably anticipated employer contributions for the current plan
year and each of the four succeeding plan years is less than the present
value of all benefits projected to be payable under the plan during the
current plan year and each of the four succeeding plan years. Code
§432(b)(2)(D), 26 U.S.C. §432(b)(2)(D); ERISA §305(b)(2)(D), 29 U.S.C.
§1085(b)(2)(D).
John M. Grau
April 15, 2010
Page 12
A rehabilitation plan generally must be designed to enable the plan to emerge
from critical status by the later of: (1) 12 years from the date the funding improvement
plan was adopted or (2) 10 years from the date of expiration of a CBA covering at least
75 percent of the plan's participants that is in effect when the plan became endangered.
See Code §432(e)(4)(A), 26 U.S.C. §432(e)(4)(A); ERISA §305(e)(4)(A), 29 U.S.C.
§1085(e)(4)(A). The plan remains in critical status until the plan actuary certifies that the
plan is not projected to have an accumulated funding deficiency for the plan year or any
of the nine succeeding plan years. See Code §432(e)(4)(B), 26 U.S.C. §432(e)(4)(B);
ERISA §305(e)(4)(B), 29 U.S.C. §1085(e)(4)(B).
In order to facilitate rehabilitation of the plan, contributing employers are subject
to a surcharge of 5 percent of the contribution otherwise required during the first plan
year in which the plan is in critical status, and 10 percent for each succeeding year the
plan is in critical status. See Code §432(e)(7)(A), 26 U.S.C. §432(e)(7)(A); ERISA
§305(e)(7)(A), 29 U.S.C. §1085(e)(7)(A). This obligation ceases once a CBA or other
contribution agreement consistent with the terms of a rehabilitation plan becomes
effective. See Code §432(e)(7)(C), 26 U.S.C. §432(e)(7)(C); ERISA §305(e)(7)(C), 29
U.S.C. §1085(e)(7)(C). Additionally, benefits adopted within 60 days of the initial
critical year may be reduced. Code §432(e)(8)(A)(iv)(III), 26 U.S.C
§432(e)(8)(A)(iv)(III); ERISA §305(e)(8)(A)(iv)(III), 29 U.S.C. §1085(e)(8)(A)(iv)(III).
As with endangered plans, new rules apply to critical plans between the
certification of critical status and implementation of the rehabilitation plan. During that
period the plan sponsor may not accept a CBA or participation agreement that provides
for (1) a reduction in the level of contributions for any participants; (2) a suspension of
contributions with respect to any period of service; or (3) any new direct or indirect
exclusion of younger or newly hired employees from plan participation. See Code
§432(f)(4)(A), 26 U.S.C. §432(f)(4)(A); ERISA §305(f)(4)(A), 29 U.S.C. §1085(f)(4)(A)
Also, the plan may not be amended to increase the liabilities of the plan through an
increase in benefits, accruals, or accelerated vesting, unless such amendment is required
by law. See Code §432(f)(4)(B), 26 U.S.C. §432(f)(4)(B); ERISA §305(f)(4)(B), 29
U.S.C. §1085(f)(4)(B).
Upon issuance of the plan's notice to participants that the plan actuary has
initially certified that the plan is in critical status, the plan is prohibited from paying
benefits in lump sum or otherwise in excess of the monthly amount of a life annuity, with
the exception of lump sums for accrued benefits with a value of no more than $5,000. See
Code §432(f)(2), 26 U.S.C. §432(f)(2); ERISA §305(f)(2), 29 U.S.C. §1085(f)(2). Also,
critical plans may not be amended during the adoption period to increase benefits,
including future benefit accruals, unless the plan actuary certifies that such increase is
paid for out of additional contributions not contemplated by the rehabilitation plan, and
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April 15, 2010
Page 13
the plan is still reasonably expected to emerge from critical status on schedule. See Code
§432(f)(1)(B), 26 U.S.C. §432(f)(1)(B); ERISA §305(f)(1)(B), 29 U.S.C. §1085(f)(1)(B).
The rehabilitation plan may, depending on collective bargaining, reduce or
eliminate certain “adjustable benefits.” These include early retirement subsidies, benefit
payment options, 60-month and post-retirement death guarantees, recent increases and
disability benefits not yet in pay status. While eliminating adjustable benefits under a
rehabilitation plan would reduce plan’s actual underfunding, withdrawal liability is
calculated as if the benefits were still being paid. The PBGC issued regulations on
December 30, 2008, requiring plans to add the reduced or eliminated adjustable benefits
back into the calculation of overall plan liabilities when making a withdrawal liability
calculation, but has deferred issuing regulations on a simplified method of making the
revised withdrawal liability calculation.
A multiemployer defined benefit plan may be terminated in three circumstances:
(1) the adoption of an amendment freezing all future benefit accruals; (2) the adoption of
a plan amendment causing the plan to become a defined contribution plan; or (3) a mass
withdrawal. See ERISA §4041A(a), 29 U.S.C. §1341A(a). A termination does not in
and of itself result in the end of the operation of the plan or in the PBGC’s taking over the
plan. Rather, the trustees will continue to administer the plan until all benefits are paid.
A minimum rate of employer contributions applies if the plan terminates as a
result of a plan amendment that freezes accruals or causes the plan to become a defined
contribution plan. In that case, the rate of the employer’s contributions under the plan for
each plan year beginning on or after the termination date must be no less than the highest
rate of contributions at which the employer was obligated to pay in the 5 preceding plan
years, unless the PBGC approves a lower rate based on a finding that the plan is, or will
soon be, fully funded. See ERISA §4041A(e), 29 U.S.C. §1341(e).
A “mass withdrawal” is a simultaneous withdrawal by every employer in the plan,
or is deemed to occur when substantially all the contributing employers withdraw
pursuant to an agreement or arrangement. See ERISA §§4041A(a) and 4219(c)(1)(D), 29
U.S.C. §§1341A(a) and 1399(c)(1)(D). If the reason for the termination is a mass
withdrawal from a multiemployer plan and plan assets are insufficient to fully provide all
vested benefits, the plan is required to be amended to reduce benefits and then suspend
other benefit payments to match the benefits to the plan assets. See ERISA §4281(a), 29
U.S.C. §1441(a). However, only the benefits attributable to an amendment that has been
in effect for less than 5 years may be reduced. See ERISA §4281(c)(2)(B) and 4022A(b),
29 U.S.C. §§1441(c)(2)(B) and 1322A(b). Benefits will continue to be paid at the
reduced level until the plan does not have sufficient resources to meet required benefit
payments during the next plan year. See ERISA §4281(d)(2), 29 U.S.C. §1441(d)(2). At
that point, the plan must begin reducing benefits to the levels that are expected to be
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April 15, 2010
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supported by anticipated income for the next plan year. See ERISA §4281(d)(1), 29
U.S.C. §1141(d)(1). This process will continue until the plan has reduced benefits to the
level guaranteed by the PBGC.
If the plan terminates as a result of a mass withdrawal, the trustees continue to be
responsible for the determining and collecting any withdrawal liability amounts until
either plan assets are distributed in full satisfaction of its obligation to pay vested benefits
or the PBGC determines that plan assets are sufficient to satisfy such obligation. An
employer that withdraws in the plan year of the mass withdrawal may incur withdrawal
liability calculated under the plan’s standard rules (but not including certain relief
provisions), plus “reallocation liability”, which is the employer’s additional share of the
plan’s remaining unfunded vested benefits. In addition, employers that withdrew during
the 3 years prior to the mass withdrawal are presumed to be part of the arrangement or
agreement and are treated as if they had withdrawn in a mass withdrawal. See ERISA
§4219(c)(1)(D), 29 U.S.C. §1399 (c)(1)(D); 29 C.F.R. §4219.12(c).
The PPA also contains a new rule dictating how to account for reallocation
liability (basically uncollectible liability) in mass terminations. As described in our prior
memorandum, when all employers independently leave a plan, or substantially all
employers agree to leave a plan, there is a termination by mass withdrawal. Each
employer is assessed a pro-rata share of the total withdrawal liability, including a
“reallocation” liability representing certain uncollectible amounts. The PPA change in
the calculation of the reallocation liability could shift part of the reallocation liability
from the employers with the largest share of withdrawal liability to employers with little
or no withdrawal liability attributable to their own contributions.
For construction industry employers, the building and construction industry
exception to the imposition of withdrawal liability still applies to a mass withdrawal
termination, except that a complete withdrawal will occur if the employer resumes the
same type of work in the same geographic area covered by the CBAs within 3 years (not
5 years) from the cessation of the employer’s obligation to contribute. See ERISA
§4203(b)(3), 29 U.S.C. §1383(b)(3). Once the plan purchases and distributes annuities to
cover all guaranteed benefits, the withdrawn employers may cease making withdrawal
liability payments. See ERISA §4219(c)(8), 29 U.S.C. § 1399 (c)(8); 29 C.F.R.
§4219.16(h).
Finally, the PBGC may partition a multiemployer plan where an employer
bankruptcy will result in such a significant reduction in contributions that contributions
will need to be increased substantially in reorganization and where the plan is likely to
become insolvent. The PBGC must find that the partition would significantly reduce the
likelihood of insolvency. See ERISA §4233, 29 U.S.C. §1413.
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April 15, 2010
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If the PBGC orders a partition, the plan’s liabilities are divided into two
components -- the liabilities attributable to the withdrawn employer and the liabilities of
the employers still in the plan. Once the partition is complete, a successor plan and a
terminated plan will remain. The bankrupt employer will have withdrawal liability for
the terminated plan and the successor plan will cover employees of the participating
employers other than the bankrupt employer. See ERISA §4233(e), 29 U.S.C. §1413(e).
IV.
ANALYSIS
A.
WITHDRAWAL LIABILITY
If substantially all of an employer’s employees covered under the CBA are
engaged in building and construction work and the plan is a building and construction
industry plan (or, if not, contains a plan provision that the industry exception will apply),
then the employer would not be subject to withdrawal liability if it goes out of business
altogether or moves its business operations to another area completely outside the
jurisdiction of the CBA to which the employer was signatory. As long as the employer
does not within 5 years resume work in the jurisdiction of the CBA of the type for which
contributions had been required, the employer will escape the imposition of withdrawal
liability.
If, on the other hand, the construction employer continues (or resumes within 5
years) work in the jurisdiction of the CBA of a type for which contributions had been
required, and is no longer required to contribute to the plan, the regular withdrawal
liability rules would apply.
Moreover, if some, but not all, of the employer’s employees for whom pension
contributions are made remain in the jurisdiction of the CBA and perform work of a type
for which contributions are due, then the partial withdrawal rules may apply if the
employer’s continued obligation to contribute to the plan is only for an insubstantial
portion of its work in the craft and area jurisdictions of the CBA.
If the employer is not a construction industry employer (i.e., less than 85% of the
employer’s employees on whose behalf contributions to the pension fund are made work
in the construction industry or the work performed by the employer’s employees does not
constitute “construction” within the meaning of NLRA), then the regular withdrawal
liability rules would apply. When an employer goes out of business, moves its business
operations outside the jurisdiction of the CBA, and/or no longer has a contractual
obligation to contribute on behalf of all of its employees, then there would be a complete
withdrawal (assuming there is a permanent cessation of the employer’s obligation to
contribute to the plan or a permanent cessation of the employer’s covered operations
under the plan). If the employer no longer has an obligation to contribute on behalf of
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April 15, 2010
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some, but not all, of its employees, or if there has been a 70% decline in its CBAs, then a
partial withdrawal may occur.
B. REORGANIZATION AND INSOLVENCY
Employers need to know the funding status of the multiemployer pension plans to
which they contribute. Employers contributing to plans that are endangered, seriously
endangered or critical need to investigate the funding improvement or rehabilitation
plan(s), and prepare for possible changes in benefits and/or contributions.
There may also need to be discussions with the employer trustees about reducing
future benefit accruals, eliminating benefits that are not protected under Code §411(d)(6),
freezing future benefit accruals or even converting the plan to a defined contribution plan,
with all the attendant costs and problems. The main objective of the bargaining parties
and the trustees should be to keep the plan from going into reorganization status and/or
from becoming insolvent. However, sometimes this cannot be avoided.
If the plan goes into reorganization status and/or becomes insolvent, the
participants’ and beneficiaries’ benefits will likely be reduced and contributing employers
will have to continue to make contributions to the plan. These contributions may have to
be more than what is required under the existing CBA. If employer contributions are not
sufficient to prevent an accumulated funding deficiency, excise penalties may also be
imposed on the employers contributing to the pension fund. These excise taxes will be
allocated amongst all employers who have an obligation to contribute to the plan. The
IRS does have the discretion under Code §4971(f) to waive these excise taxes if
requested by the trustees. However, it must be shown that steps are being taken to
remedy the accumulated funding deficiency.
The bargaining parties may – by agreement or conduct – have a “mass
withdrawal” from the plan. If this occurs, the plan may need to be amended to reduce or
suspend benefits if the plan assets are insufficient to pay all vested benefits. Employers
may be assessed withdrawal liability. For non-construction industry employers, and
employers who remain in construction business in the CBA’s jurisdiction, withdrawal
liability will include not just the regular withdrawal liability, but also a reallocation
liability to cover the plan’s remaining unfunded vested benefits. For construction
industry employers withdrawing from the plan, withdrawal liability will not be assessed
if the employer goes out of business or moves its business operations to another area
outside of the CBA’s jurisdiction, as long as the employer does not resume work with the
CBA jurisdiction within 3 years.
Finally, if a major contributing employer goes bankrupt, the trustees of the plan
may seek a partition of the multiemployer plan from the PBGC to ensure its ongoing
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April 15, 2010
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financial viability. The plan would continue with all the employers (other than the
bankrupt employer) without the benefit liabilities of the bankrupt employer’s employees.
However, partition is only available in limited circumstances and would not be available
if the bankrupt employer was not a substantial contributor to the plan and the employer’s
bankruptcy would not likely cause the plan to become insolvent.
We trust this memorandum responds to the questions that you raised. If there is a
question you had that was not addressed, please contact us.