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 John M. Grau 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 John M. Grau April 15, 2010 Page 14 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. John M. Grau April 15, 2010 Page 15 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 John M. Grau April 15, 2010 Page 16 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 John M. Grau April 15, 2010 Page 17 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.