Guest Article

Contractor Liabilities - Participating in the Multiemployer Pension Plan

A pension plan for union workers has been the mainstay of collective bargaining agreements since the early 1950's. For decades, contractors assumed that their only responsibility to the participants of these plans was to make the contributions required by the collective bargaining agreement. This was true until the passage of ERISA which created funding standards and the passage of the Multiemployer Pension Plan Amendments Act of 1980 ("MPPAA") which introduced the concept of employer withdrawal liability.

The concept of withdrawal liability is relatively simple. If an employer withdraws from participation in a multiemployer pension plan, and if at the time of the withdrawal that pension plan is underfunded, then the employer must pay its share of that underfunding to the plan in the form of a withdrawal liability payment. The purpose of this statute was to prevent the situation where the last contractor in the plan would be stuck for all of the unfunded liability. Philosophically and technically, the scheme works. However, it was a great shock to contractors to discover that they could be liable for something more than they had bargained for in the collective bargaining agreement.

If at the time of withdrawal, the plan is fully funded (i.e., it has enough assets to pay all of the benefits that it has promised to date) then there is nothing to pay. In most industries, if the employer sells its business, goes out of business or substantially cuts back its workforce, a withdrawal liability will most likely be owed to an underfunded plan. The construction industry has special rules for construction industry plans. Contractors who participate in construction industry pension plans will only be subject to a withdrawal liability if they continue to perform work in the jurisdiction of the plan but no longer have an obligation to contribute to the plan. In other words withdrawal liability will only be owed if the employer goes non-union, or negotiates the pension plan out of its collective bargaining agreement. The sale of the business, going out of business or substantially cutting back the contractor's workforce will not trigger withdrawal liability as long as the obligation to contribute to the plan remains.

The passage of MPPAA encourages employers who participate in these multiemployer plans to take a much more active role as trustees in seeing that the plan is properly administered and adequately funded. After all, if a plan is fully funded, there is no withdrawal liability.

There is another and equally as persuasive reason for employers to become actively involved as trustees in the management of multiemployer pension plans. ERISA and the Internal Revenue Code create funding standards for pension plans. Plan actuaries will advise the trustees what the minimum and maximum contributions to a plan will be on an annual basis. If a plan is severely overfunded, contributions to the plan may no longer be tax deductible. On the other hand, if a plan is severely underfunded such that the contribution level is not sufficient to meet the minimum funding standards, excise taxes can be imposed. These are taxes that are imposed upon the contractor and paid to the federal government. The excise tax can be as high as 100% of the contractor's contribution obligation. Not only are these excise taxes something that have to be paid even thought they are not provided for in the collective bargaining agreement, the taxes themselves do not go to the plan to help alleviate the underfunding problem, they go to the government.

Faced with a severely underfunded plan, logically a contractor would rather double its contribution to the plan than pay the excise taxes. The dollar amount is the same, but by making the contribution to the plan, the underfunding problem can eventually be cured. However, this is above and beyond what the collective bargaining agreement calls for.

The lesson to be learned is how important it is to have proper administration of the multiemployer pension plan. Contributing employers should be willing to serve as trustees to this plan, actively participate in the management of the plan, and insure that the plan has good advisors and consultants. If this practice is followed, contractors will be able to avoid unforeseen liabilities in the future.

William K. Ecklund (wecklund@felhaber.com) is a shareholder in the Twin Cities law firm of Felhaber, Larson, Fenlon and Vogt, P.A. To learn more about Mr. Ecklund or the Felhaber law firm, contact him at (612) 373-8509, or visit our Web site at www.felhaber.com.

© 2001, Felhaber, Larson, Fenlon and Vogt, P.A. All rights reserved, excerpt that permission is granted to reproduce this article in full if the credit and copyright notices are included.

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