By Robert R. Perry, Esq., Jackson Lewis P.C.
Overview
Under the Employee Retirement Income Security Act ("ERISA"), as amended by the Multiemployer Pension Plan Amendments Act ("MPPAA"), an employer faces potential "withdrawal liability" upon the cessation or reduction of their obligation to contribute to jointly-administered pension plans ("multiemployer plans"). Withdrawal liability has become a particularly significant issue due to a confluence of factors, including the impact of the recession, historically low interest rates, and changing workforce demographics. This primer is intended to introduce the reader to the basic rules governing the assessment and collection of withdrawal liability and their application in certain situations.
What is Withdrawal Liability?
Withdrawal liability is a statutory obligation imposed upon employers who withdraw from a multiemployer plan. A withdrawal can occur either in a complete withdrawal or a partial withdrawal. Special rules discussed below apply to determining whether employers in certain industries have incurred a withdrawal.
Complete Withdrawal
General Rule
A complete withdrawal occurs when:
- the employer has permanently ceased all covered operations; or the employer permanently ceases to have an "obligation to contribute" to the plan.
The cause of the complete withdrawal is irrelevant; union or fund conduct (such as a union's disclaimer of interest or a fund's expulsion of an employer) can and does trigger withdrawal liability. For this purpose, MPPAA's definition of "employer" treats both the entity obligated to make fund contributions and any trade or business under common control with such entity as a single "employer." ERISA § 4001(b)(1).
Special Industry Rules
Building and Construction
Under a "Building and Construction Industry Exception," a construction industry employer will not be deemed to have withdrawn, notwithstanding the permanent cessation of covered operations or the obligation to contribute, unless it continues to perform on a noncontributory basis (or resumes within five years) work of the type for which contributions were required under the collective bargaining agreement. ERISA § 4203(b).
Entertainment; Trucking, Moving and Warehousing
Special rules affecting the occurrence of a complete withdrawal also apply to employers obligated to contribute for work performed in the entertainment industry (ERISA § 4203(c)) and to employers primarily engaged in the long- and short-haul trucking industry, the household goods moving industry, or the public warehousing industry. ERISA § 4203(d). The latter, hyper-technical and rarely invoked, involves a determination by the Pension Benefit Guaranty Corporation and a bonding requirement. The trucking industry exception applies only to plans where substantially all contributions are made by employers primarily engaged in the trucking industry.
Partial Withdrawal
MPPAA also contains the concept of partial withdrawal. ERISA § 4205. A partial withdrawal can occur upon:
- a 70% contribution decline (ERISA § 4205(a)(1)); or a partial cessation of the employer's contribution obligation (ERISA § 4205(a)(2)) by reason of:
- A "bargaining unit take-out" (ERISA § 4205(b)(2)(A)(i)); or A "facility take-out" (ERISA § 4205(b)(2)(A)(ii)).
Payment of Withdrawal Liability
A withdrawn employer is allocated part of the plan's unfunded vested benefits ("UVB") based upon their historical contributions to the plan. ERISA § 4211. Allocated UVB is paid in annual (or more frequent) installments; payment in a lump sum is not required. The amount of each annual payment is determined by a statutory formula. ERISA § 4219(c)(1)(C)(i). The employer's withdrawal liability is generally limited to the first 20 annual payments regardless of the UVB allocable to the employer. ERISA § 4219(c)(1)(B). This "20-year cap" often serves as the employer's primary leverage in settlement negotiations.
Dispute Resolution
Mandatory Arbitration
Most withdrawal liability disputes are subject to mandatory arbitration. ERISA § 4221(a)(1). MPPAA's rules universally favor the plan. Time periods are specified for an employer to contest withdrawal liability, first to the plan (ERISA § 4219(b)(2)(A)) and then through arbitration. ERISA § 4221(a)(1). Failure to timely act causes the withdrawal liability demanded to become due, owing and not thereafter subject to challenge. All determinations made by the plan are presumed correct under a clearly erroneous standard. ERISA § 4221(a)(3). Notwithstanding these hurdles, however, employers can eliminate or significantly reduce a withdrawal liability demand.
"Evade or Avoid"
Further indicative of MPPAA's bias is the "evade or avoid" rule. "If a principal purpose of any transaction," including bona fide, arm's length transactions, is "to evade or avoid" withdrawal liability, liability "shall be determined and collected without regard to such transaction." ERISA § 4212(c). The possible application of this rule should always be considered when considering a transaction involving potential withdrawal liability.
Transactional Considerations
Stock vs. Asset Sales
A sale of stock or other equity interest does not generally cause a complete withdrawal. A sale of assets, however, is often coupled with a complete or partial cessation of covered operations or the obligation to contribute and, therefore, can trigger a withdrawal by the seller.
The "Sale of Assets Exception"
Under a "Sale of Assets Exception," an asset sale will not trigger a withdrawal by the seller if the following are satisfied:
- The sale must be a bona fide arm's length transaction between "unrelated parties"; The buyer must assume at closing an obligation to contribute for "substantially the same number" of "contribution base units" as seller had previously; The buyer must bond or escrow (or obtain a variance) an amount roughly equal to one year of the seller's contributions prior to the last day of the plan year in which the sale occurs; and The contract of sale must provide that the seller remains secondarily liable if the buyer withdraws within the next five plan years.
Who is Liable?
Control Group Liability
In addition to the nominal employer, each trade or business under common control with such employer (collectively the "control group") is jointly and severally liable for withdrawal liability. ERISA § 4001(b)(1); PBGC Opinion Letter 97-1. A control group can consist of corporations, partnerships, limited liability companies, sole proprietorships, estates, trusts, or any combination thereof.
ERISA does not define "trade or business." Courts have generally required that a trade or business be engaged in an activity (1) for the primary purpose of income or profit and (2) with continuity and regularity. Commissioner of Internal Revenue v. Groetzinger, 480 U.S. 23, 35 (1987). Courts have uniformly held that an entity that leases property to a withdrawing employer is a trade or business. See, e.g., Central States Southeast and Southwest Pension Fund v. Miller, 868 F. Supp. 995 (N.D. Ill. 1994).
Two or more trades or businesses are under common control if five or fewer persons:
- own at least 80% of each entity; and own more than 50% of each entity, taking into account only the smallest percentage ownership interest held by each such person in each organization. Reg. § 1.414(c)-2(c)(1).
Under detailed constructive ownership or attribution rules, a person (or entity) is treated as owning interests both owned directly and interests owned by certain related individuals or entities. Reg. § 1.414(c)-4(a). A detailed analysis of these hyper-technical rules is beyond the scope of this primer.
Successor Liability
Due to their dire funded status, multiemployer plans have become increasingly aggressive and creative in their withdrawal liability collection efforts. One example is the successor liability doctrine.
Under the common law, an asset purchaser generally does not assume the asset seller's liabilities. However, federal courts have formulated a successor liability exception for certain labor and employment-related liabilities. The successor liability doctrine is based on a judicial determination that certain labor policies supersede the competing policy considerations (such as fluidity of corporate assets) reflected in the general rule.
Courts that have recognized the successor liability doctrine have almost universally required:
- "sufficient indicia of continuity between the two companies" (substantial continuity), based upon the continuity of the workforce, management, equipment and location, completion of work orders begun by the predecessor, and constancy of customers; and notice of its predecessor's liability, either by actual knowledge or by evidence allowing the fact finder to imply constructive knowledge from the circumstances.
There is a clear judicial trend toward the expansion of the successor liability doctrine in recent years. Accordingly, companies engaging in asset acquisitions can no longer rely on the common law rule to shield them from unwilling or unwanted liability assumption. Additional protections (such as escrows, indemnifications, and price reductions) may be required to insulate an asset acquirer from successor liability.
Conclusion
Employers with unionized operations, or those who are considering acquiring such operations, must be cognizant of the potential withdrawal liability implications. Due to the highly technical nature of these rules, and the magnitude of potential liabilities, employers may want to retain counsel with specialized expertise in these matters.
Additional Resources
1. Robert R. Perry, "A Troubling Expansion of Successor Liability," Employee Benefits for Employers, Winter 2015
2. Robert R. Perry, "Arbitrator Slashes Annual Withdrawal Liability Payments in Underfunded Multiemployer Pension Plan Dispute"
3. Jackson Lewis Webinar, "Understanding the Dilemma: An Introduction to Withdrawal Liability"
5. PBGC, Laws & Regulations
Region:
United States
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