This article was originally published in the 2017 edition of the Utility and Transportation Contractor Association’s Magazine.
If you are a union contractor, you are probably making contributions into one or more union pension funds every month. These pension funds, known as multi-employer pension plans (MEPs), rely on a number of employers paying their share toward a common fund. Notably, because of the nature of these pension plans, many (if not all) of them are underfunded and do not presently have enough assets to cover their expectant liabilities. However, despite underfunding, employees are still entitled to their full pension benefits. But who is responsible for this unfunded amount, and what happens if you exit the fund?
You may be surprised to learn that the contributing employers are liable for all of the vested benefits that must be paid, even if they leave the pension plan altogether. Put another way, the responsibility, or liability, for benefits that the fund cannot cover actually belongs to the employers paying into the fund. Each employer owns a proportionate share of the unfunded liability, and that share is referred to as “withdrawal liability”.
1. What is Withdrawal Liability?
Withdrawal liability exists for all employers who contribute to underfunded MEPs. Under withdrawal liability rules and federal law, an employer who experiences a “triggering event” (such as ceasing to contribute to the MEP due to leaving the fund, closing down, going out of business, etc.) has to continue to make payments to the fund to cover their proportionate share of the unfunded liability. Withdrawal liability essentially acts as an exit fee, which requires you, the employer, to pay a share of the pension plan’s future benefits which have not already been funded by previous contributions or investments. This way, the fund is covered for the benefits that need to be paid out. Thus, even if you end your relationship with the fund and you are “current” in your monthly contributions, you may still be on the hook for your proportionate share of the unfunded amount. Upon withdrawal, the plan determines the amount of an employer’s liability, notifies the employer of that amount, and collects it from the employer.
2. When Do You Need to Worry?
Withdrawal liability can be triggered when an employer shuts down or has a substantial reduction in business operations. Unfortunately, this is true even when the reasons for closing are primarily financial. A pension fund can even assess withdrawal liability when employees vote to change or decertify their union. Common events that can trigger some form of withdrawal liability include, but are not limited to, the sale of the business, a sale of assets, substantially downsizing, going non-union, moving the business, closing the business, or the termination of the Collective Bargaining Agreement (CBA). Typically, a withdrawal is classified into one of two types:
A. Complete Withdrawal
A complete withdrawal from a plan is when the contractor permanently ceases to have a current financial duty to the fund. This can occur when (1) the employer permanently ceases all covered operations under the plan (i.e., closing up shop) or (2) the employer permanently ceases to have an obligation to contribute (i.e., terminating the CBA).
B. Partial Withdrawal
Partial withdrawal can occur when there is a substantial decline in the obligation to contribute, including layoffs, plant or warehouse closures, sales, or even changes in the CBA. In the building and construction industry, a 70% base unit decline in contribution will be considered a partial withdrawal. Partial withdrawal may also occur when an employer no longer has contractual obligations under one or more, but not all of the CBA’s, and continues to perform the same type of work within the jurisdiction of the CBA. Additionally, a “facility take-out” may also trigger partial withdrawal liability, where the employer no longer has an obligation to contribute for the work at some, but not all, of its locations but the employer continues to perform work in at least one location where the contractual obligation to contribute exists.
3. The Construction Industry Exemption
There is a special rule applicable to “building and construction industry” employers. Under the exemption, if
1) the employer does not perform the same work in the same geographic jurisdiction; or
2) resumes such work within five (5) years;
there is no withdrawal liability when the employer’s contributions end. Thus, if a contractor ceases operations for a full five years, they can avoid paying the withdrawal liability. This can be useful when going out of business.
Unfortunately, if you contribute to an MEP the actual amount of withdrawal liability you are responsible for may be out of your control. However, there are steps employers can take to have a better sense of their potential liability, and to be aware of any changes to that amount.
As an employer, you have a legal right to request from the plan an estimate of your potential withdrawal liability. Sending a letter to each MEP in which you contribute requesting an estimate or assessment of your potential liability can keep you aware of what you might owe.
It is important to be aware of your obligations under your pension plan, and what can trigger your withdrawal liability, in order to make financially sound business decisions going forward.
Jonathan Landesman is Co-Chair of the Firm’s Labor & Employment Group. He practices in all areas of labor and employment law.