By Patrick J. Egan on March 17, 2021
As pension shortfalls become more prevalent, companies with Union workforces need to pay close attention and be aware of the possible existence of withdrawal liability.
In essence, withdrawal liability is an exit fee triggered when an employer completely stops contributing to a union multi-employer defined benefit pension plan – or when an employer reduces its annual contributions beyond certain percentages over time. Withdrawal liability is an employer’s pro rata share of the unfunded benefits of a defined benefit multi-employer pension fund, and does not apply to defined contribution plans, such as 401(k) plans, or to welfare plans. It is important to note that withdrawal liability is a creation of statute and subject to strict enforcement, meaning there is very little subjective application to the process. Withdrawal liability assessments are typically significant and can, and often do, exceed the million-dollar threshold, regardless of the fact that an employer may only contribute to the Union pension plan on behalf of a small number of Union employees.
Most employers do not realize the many ways withdrawal liability assessments can be triggered. Common transactions, such as closing a facility, selling a business, or laying off employees, can trigger the assessment of withdrawal liability.
In addition, withdrawal liability extends to trades and businesses under common control with the withdrawing employer. Thus, each trade or business in the control group with an employer contributing to a multi-employer plan is jointly and severally liable, along with that employer, for the employer’s withdrawal liability. Even if the trades and businesses are unrelated, as long as there is common ownership, they are part of the control group. This applies to stock ownership with a common parent (parent-subsidiary corporations), corporations owned by five or less stockholders (brother-sister corporations), and combined groups of corporations that are members of a parent-subsidiary or brother-sister controlled group. Even entities that are under common ownership, though not corporations, can be subject to control group liability and held jointly and severally liable for the withdrawing employer’s action.
So, what should an employer do? The first step is to understand withdrawal liability and the potential amounts of such liability. Next, such companies should immediately work with legal counsel to determine what short-term, mid-term and long-term actions can be taken to minimize, or in some cases, eliminate your company’s risks of withdrawal liability.
As noted above, even if you do not participate in a Union multi-employer pension plan, you may still be at risk of a withdrawal liability assessment because of the control group rules imposed under Federal law.
If you answer “yes’ to any of the following questions, you may face potential exposure to a withdrawal liability assessment:
- Does the company you work for currently contribute to a multi-employer (union) pension plan?
- Has the company contributed to a Union multi-employer pension fund, at any time, during the past six years?
- Do any of the owners of the company also have an interest in another company that is contributing, or has contributed, to a Union multi-employer pension plan?
- Has the company acquired the stock, or assets, of a company that contributes or previously contributed to a Union multi-employer pension plan?
- Does the company have a close business relationship with a company that contributes to, or has contributed to, a multi-employer pension plan?
This blog is intended to provide information generally and to identify general legal requirements. It is not intended as a form of, or as a substitute for legal advice. Such advice should always come from in-house or retained counsel. Moreover, if this Blog in any way seems to contradict advice of counsel, counsel's opinion should control over anything written herein. No attorney client relationship is created or implied by this Blog. © 2023 Brouse McDowell. All rights reserved.