What Contractors Should Know About Withdrawal Liability

Every contractor who contributes to a multiemployer defined benefit plan needs to know how and when withdrawal liability may be assessed by that plan. Withdrawal liability is assessed pursuant to the Multiemployer Pension Plan Amendments Act of 1980 (“MPPAA”). The MPPAA amended Employee Retirement Income Security Act (“ERISA”) to impose withdrawal liability upon employers who cease contributions to a multiemployer defined benefit pension plans with unfunded vested benefits. Withdrawal liability only applies to multiemployer defined benefit pension plans; it does not apply to health and welfare plans, annuity plans or other defined contribution plans. It also only applies where the plan has unfunded liabilities; that is costs for future vested benefits which have not been paid for through previous contributions or investment returns. Withdrawal liability exists over and above the monthly contribution requirements the contractor was required to make pursuant to its collective bargaining agreement while participating in the plan.

This paper is intended to give a brief overview of withdrawal liability. Because withdrawal liability rules are complicated, any employer who is considering terminating its collective bargaining agreement, selling its business or declaring bankruptcy, should consult with its own legal counsel.

Definition of Withdrawal Liability

Under the applicable law, a contractor may withdraw from a multiemployer defined benefit plan either completely or partially. If, when it does so, the plan has unfunded vested benefits allocable to the contractor, the plan will assess withdrawal liability. The plan is responsible for determining the amount of liability owed, notifying the contractor of the liability, and collecting what is owed from the contractor. The amount of withdrawal liability owned is determined under the formula established by law. However, certain exceptions in the law may permit the withdrawal liability to be mitigated or excused.

When Does Withdrawal Occur?

A contractor is considered to have withdrawn from a multiemployer defined benefit plan in the following circumstances:

COMPLETE WITHDRAWAL

A complete withdrawal occurs when a contractor either:

1. permanently ceases to have an obligation to contribute: or
2. permanently ceases all covered operations under the plan.

PARTIAL WITHDRAWAL

A partial withdrawal occurs when there is a:

1. 70 percent contribution decline measured over a three-year period; or
2. partial cessation of the employer’s contributions to the plan under one or more but not all collective bargaining agreements requiring contributions to the plan and the employer continues to perform work in the jurisdiction or transfers such work to another location; or
3. permanent cessation of an obligation to contribute with respect to work performed at one or more but not all facilities but continues to perform work at the facility of the type for which contributions were previously required.

Exceptions to Withdrawal Liability

There are a number of exceptions to the withdrawal liability rules which may mitigate or eliminate the withdrawal liability owed. Here are some of the most common:

DE MINIMUS RULES
Withdrawal liability may be reduced by a so-called “de minimis reduction rule.” Any withdrawal liability of $50,000 (or, if 1ess, ¾ of 1 percent of the plan’s unfunded vested benefits) or less is completely eliminated and between $50,001 and $150,000, the reduction is $50,000 less the liability over $100,000.

SALE OF ASSETS/STOCK
A contractor’s choice to sell its business via either a sell of its stock or via a sell of assets of the business effects whether withdrawal liability is assessed. The sale of stock does not constitute a withdrawal from a multiemployer pension plan, and if stock is sold, there need be no accommodation for withdrawal liability as part of the sale transaction. The sale of assets, however, is generally a classic case of a withdrawal from a multiemployer pension plan.

CONSTRUCTION INDUSTRY EXEMPTION
Plans covering primarily building and construction industry employees may be subject to the construction industry exception. Contractors are considered construction industry employers if substantially all (85 percent or more) of its employees for which it has a contribution obligation to the plan work in the building and construction industry. Under this rule, a withdrawal occurs only if the employer ceases its obligation to contribute to the plan but continues to work within the jurisdiction of the collective bargaining agreement, or returns to do the same type of work in the jurisdiction within five years, without in either case resuming contribution obligations to the plan.

Also, under the construction industry exception, a partial withdrawal occurs only if the contractor’s obligation to contribute under the plan is continued for no more than an insubstantial portion of the potentially covered work which the employer performs in the craft and area jurisdiction of the collective bargaining agreement. This has been interpreted to mean that a partial withdrawal occurs only when an contractor has substantially shifted its work mix in the jurisdiction so that only an insubstantial part of such work in the jurisdiction is covered.

Who Is Responsible For Paying Withdrawal Liability?

In addition to the company itself, all trades or business in the controlled group of the withdrawing contractor are jointly and severally liable for withdrawal liability. The controlled group generally consists of any brother/sister or parent/subsidiary entities. In addition, personal liability for owners of incorporated entities may be liable as are owners of incorporated entities if the plan is able to pierce the corporate veil. Attempts to evade withdrawal liability by going out of business and resuming business under a different name will generally be disregarded and withdrawal liability will be assessed to the new business.

Disputes Over Withdrawal Liability

Any dispute between a contractor and a multiemployer pension plan involving withdrawal liability must be submitted to arbitration. The MPPAA has established a procedure for conducting the arbitration. Generally, once the plan notifies a contractor of its withdrawal liability assessment, the contractor has ninety (90) days to contest the assessment and request review by the plan. Failure to request a review during that period, bars arbitration and renders the withdrawal liability assessment final. If a review is requested and after the review, the plan continues to assess withdrawal liability, the dispute may then be arbitrated. A request for arbitration must be made within 60 days after the plan notifies the contractor of its final determination, or if earlier, within 120 days of the date the employer seeks the initial review. Arbitration may also be initiated jointly within 180 days of plan’s initial determination of assessment. Review does not toll the contractor obligation to make installment payments on the assessed withdrawal liability. If the plan’s assessment is determined to be in error, monies paid in excess of the amounts owed during the review process are required to be returned by the plan to the contractor.