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Guest pension222

Single employer plan to multiemployer plan transfer

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Guest pension222

Consider a single employer DB plan with $1.5 million in assets. Active PVAB is $600,000 and term vested/retiree PVAB is $300,000, so total PVAB is $900,000.

Assume that all PVAB's are calculated on the appropriate basis.

The active's are transferred to a multiemployer plan. Do we need to transfer $600,000, just enough to cover their PVAB or do we need to transfer $1 million, their pro-rata share of the entire $1.5 million of assets?

What if all participants are transferred to the multiemployer plan? Can we transfer $900,000 or do we need to move all the money?

I realize that IRC 401(a)(12) and 414(l) do not apply here. I also realize that ERISA 4232 addresses transfers between a multiemployer and single employer plan but really pertains to the transfer from multiemployer to single employer.

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Based on my experience, mergers tend to be negotiated. I don't think there are any hard rules. It seems to me that all of your suggestions could be ok, assuming both sides agree. And your right, all of the merger rules deal with single to single, or multi to single, but not single to multi.

I do have a few questions:

1)What is the funded status of the multi? Make sure your looking at comparable assumptions. Multi's see the world a little differently than singles.

2)Why would an overfunded single want to merge with a multi? They are trading a known non-liability for a portion of a potential withdrawal liability which they most likely will have no control (assuming that the owners of the single will not become Trustees in the multi).

I have been involved with a few of these, but it's always been an underfunded single merging with the multi as a way for the single to transfer the liability to the multi.

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Guest pension222

OK, here is a follow-up to my original queston.

Could we transfer a large portion of the single employer plan liability to the multiemployer plan but not transfer ANY assets to the multiemployer plan?

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Guest pension222

My last posting was not a position but a question. I am curious if it works.

I know this seems outrageous, but what would prevent a transfer of naked liability from a single employer to a multiemployer plan?

Reg. 1.401(a)-12 says "this section applies to a multiemployer plan only to the extent determined by the Pension Benefit Guaranty Corporation".

Reg. 1.414(l)-1©(2) says "except to the extent provided by regulations of the Pension Benefit Guaranty Corporation, section 414(l) does not apply to any transaction to the extent that participants either before or after that transaction are covered by a multiemployer plan within the meaning of section 414(f)."

Just a note here, the multiemployer plan is willing to take on the liability with little or no assets.

So once again, can the liability be transferred from a single employer plan to a multiemployer plan without transferring any assets.

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I'm not sure, but I think I agree with you that there would be nothing "wrong" with the tranfer of just liabilities assuming all parties agree, but I would want to make sure the lawyers are on board in case something blows up.

It smells pretty fishy that a multi, which exists for the good of the workers, would accept only liabilities from an OVERFUNDED single ER Plan, without some sort of trade off. Why are they doing it? Would you just accept someones liability for nothing? Something seems odd with this.

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Guest pension222

It's not that anyone is actually contemplating a transfer of naked liabilities. The question came up as to how much in assets needed to be transfered. My thinking is that we might transfer PVAB but not calculated on a PBGC basis.

However, this begged the question. If there I can transfer assets equal to some measurement of PVAB, and this PVAB calculation is not controlled by law or regulation, then is there any actual minimum amount of assets that must be transferred which of course leads to, can you transfer liabilities with no assets.

Nothing fishy, just trying to get to the logical conclusion of how much assets must be transfered in this situation.

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A major concern (which is not the question originally posed) implied in this thread is not "what assets or liabilities are to be transferred from the single employer plan?". Rather, a major concern is what liability is being transferred to the single employer from the multi employer plan?

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I have a little experience in these situations, not much.

In regards to the question about why the multiemployer might accept liabilities exceeding assets, it is clear from my experience that this can happen for political reasons. I was involved in a situation where the multi offered $x dollars in benefits (which was close to 100%), then virtually tripled the offer when they concluded the deal wouldn't get done because the local obtained expert actuarial advice who advised against the initial deal.

But, isn't there a fiduciary responsibility on the part of the trustees of the single employer to protect the participants when they go to the multi?

Isn't there an analagous requirement that participants be placed in a position no less favorable after the merger than before?

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The fiduciary analysis is interesting. It would seem that under the Supreme Court's decisions in Spink and Jacobson that the decision on whether to merge and the conditions for the merger would be a "settlor" decision and could not be attacked on fiduciary grounds as long as all "techncial" requirements are met.

However, in the multiemployer world, I don't think that DOL has yet admitted that a Spink analysis applies. But even with multis I believe that DOL takes the position that the fiduciary analysis is based on the financial/actuarial position of the merged plan and not the "individual pieces" that go into the Plan. As long as the merged plan is not in "finacial trouble", it would seem that the DOL would give a "pass" on fiduciary issues. Thus DOL has allowed mergers of a multi with UVBs with one that had assets well in excess of vested benefits. Where you have a single and a multi, I don't know what DOL's position would be, mut you may want to look at this:

Department of Labor.

Pension & Welfare Benefit Programs.


September 25, 1989

Re: Textile Workers Pension Fund, Identification No.: F-3813A


Ronald E. Richman, Esq.

Chadbourne & Parke

1230 Avenue of the Americas

1st Floor

New York, NY 10112


This is in response to your letters requesting an advisory opinion regarding the application of sections 403, 404 and 406 of the Employee Retirement Income Security Act of 1974 (ERISA) to the proposed merger of three multiemployer pension plans.

You represent that the Textile Workers Pension Fund (the Fund) is the sponsor and administrator of four multiemployer pension plans; the National, New England, Mid Atlantic, and Philadelphia Pension Plans. n1 The National, New England and Mid Atlantic Plans (the Plans) are each independent legal entities. Each plan has its own tax identification number, plan benefits, summary plan description, actuarial valuation, and files its own Form 5500. The assets of each plan are used only to pay the benefits and expenses of such plan. n2

n1 The Philadelphia Plan will not participate in the merger.

n2 By letter dated May 17, 1989, you notified the Department that the contributing employers to the New England Plan have ceased contributing to the New England Plan and are now contributing to the National Plan.

You further represent that the Fund provides all administrative services for the Plans. Most of the Plans' assets are invested in a commingled trust and assets attributable to each plan are allocated to the plan in accordance with strict accounting principles. The Trustees of the Fund are trustees and fiduciaries of each of the multiemployer plans participating in the proposed merger. Some of the Fund's Trustees are stockholders and/or employees of contributing employers to the New England and Mid Atlantic Plans. The Fund's Trustees make all policy decisions for the Plans. The Fund Manager is responsible for the operation of the Plans on a day-to-day basis. In addition, the Amalgamated Clothing and Textile Workers Union (ACTWU) is the collective bargaining representative for all employees who participate in the Plans.

Each of the Plans has a different level of funding. The National Plan has assets well in excess of vested benefits. The New England Plan has assets slightly in excess of vested benefits. The Mid Atlantic Plan has less assets than vested benefits. n3

n3 As of October 1, 1988, the Mid Atlantic Plan had unfunded vested benefits in the amount of $18,285,000.

You state that the Trustees of the Fund propose to merge the New England and Mid Atlantic Plans into the National Plan. Under the terms of the proposed merger, participants in each of the Plans will maintain all benefits accrued to the date of the merger. Immediately subsequent to the merger, all participants in the merged National Plan will earn future benefits at the present National Plan formula. Individuals who participated in the National Plan prior to the merger will continue to earn past and future benefits in accordance with the formula used to calculate benefits in the National Plan which was in effect prior to the merger.

The merger proposal contains four elements designed to reduce the Mid Atlantic Plan's pre-merger unfunded liabilities. First, contributing employers to the New England and Mid Atlantic Plans will enter the merged National Plan with a "withdrawal liability" account balance equal to the amount of unfunded vested benefits allocable to them by the plan to which they contributed prior to the merger. n4 Contributing employers to the National Plan will maintain their "withdrawal liability" account balances as calculated under the National Plan's modified direct attribution withdrawal liability method. Since the merged National Plan will maintain the National Plan's method of calculating withdrawal liability, the former contributing employers to the Mid Atlantic Plan (the only plan which has unfunded vested benefits) will have the ultimate responsibility for paying the unfunded vested benefits attributable to the Mid Atlantic Plan. This liability will be terminated if the merged National Plan has no unfunded vested benefits at the conclusion of five years after the merger.

n4 You indicate that the merger proposal calls for an assessment of withdrawal liability pursuant to individual employer contracts. It was represented that such assessment is outside of the provisions of Title IV of ERISA because the merged National Plan will be fully funded.

Second, effective September 1987, the contributing employers to the Mid Atlantic Plan increased their contributions from $57 per participant per month to $90 per participant per month. The merger proposal calls for continued contributions at this rate for at least five years. In each year, the first $1 million of contributions from former Mid Atlantic employers will be allocated to reduce the existing unfunded liability. Third, the balance of the contributions, after the first $1 million is allocated to the existing unfunded liability, will be used to provide future service benefits under the National Plan formula. Under the merged National Plan, former Mid Atlantic Plan employees will be provided past service benefits in accordance with amounts accrued under the former Mid Atlantic Plan. It is represented, therefore, that the balance of such contributions will exceed the amount required (on an actuarial basis) to provide future service-only benefits. This excess amount will also be used to offset the Mid Atlantic Plan's pre-merger unfunded vested benefits.

Fourth, as a condition precedent to the merger, the ACTWU and contributing employers to the Mid Atlantic Plan will transfer a lump sum of $6 million to the Mid Atlantic Plan. The collective bargaining parties will obtain this money by terminating the Dyers Vacation and Welfare Fund (the Dyers Fund) and contributing $6 million of the Dyers Fund's assets in excess of the assets necessary to satisfy all of the Dyers Fund's liabilities to the Mid Atlantic Plan. n5 You have stated that the termination will comply with section 403(d)(2) of ERISA.

n5 All of the Dyer's Fund participants are also participants in the Mid Atlantic Plan.

You have represented that the total of the amounts transferred to the merged National Plan pursuant to the above provisions will be less than 100% of the Mid Atlantic Plan's unfunded vested benefits as of October 1, 1988. However, the Fund's actuary estimates that, if the merger occurs in accordance with the Trustees' proposal, the merged National Plan will have assets slightly in excess of vested benefits.

Finally, you have represented that the proposed merger will satisfy all of the merger requirements for mergers of multiemployer plans set forth in section 4231 of ERISA and regulations promulgated thereunder by the Pension Benefit Guaranty Corporation (PBGC). As a condition precedent to the merger, the Fund will obtain a favorable compliance determination from the PBGC.

You have requested an advisory opinion that:

(1) The proposed merger would not violate sections 403©(1) and 404(a)(1) of ERISA; and

(2) The proposed merger would not constitute a prohibited transaction under section 406 of ERISA.

Section 403©(1) of ERISA provides, in part, that the assets of a plan shall never inure to the benefit of any employer and shall be held for the exclusive purposes of providing benefits to participants in the plan and their beneficiaries and defraying reasonable expenses of administering the plan.

Section 404(a)(1) of ERISA similarly requires that fiduciaries of a plan discharge their duties solely in the interest of the participants and beneficiaries of the plan, and for the exclusive purpose of providing benefits to participants and their beneficiaries and defraying reasonable plan administration expenses.

Section 406(a)(1)(D) of ERISA provides that a fiduciary with respect to a plan shall not cause the plan to engage in a transaction if he knows or should know that such transaction constitutes a direct or indirect transfer to, or use by or for the benefit of, a party in interest, of any assets of the plan.

Sections 406(B)(1) and 406(B)(2) of ERISA provide that a fiduciary with respect to a plan shall not deal with the assets of the plan in his own interest or for his own account or in his individual capacity or in any other capacity act in any transaction involving the plan on behalf of a party (or represent a party)whose interests are adverse to the interests of the plan or the interests of the participants or beneficiaries.

Section 408(B)(11) of ERISA provides that the prohibitions of section 406 shall not apply to a merger of multiemployer plans, or the transfer of assets or liabilities between multiemployer plans, determined by the PBGC to meet the requirements of section 4231 of ERISA. Section 408(f) provides that section 406(B)(2) shall not apply to any merger described in subsection (B)(11).

Finally, section 4231© of ERISA provides that the merger of multiemployer plans or the transfer of assets or liabilities between multiemployer plans shall be deemed not to constitute a violation of the provisions of section 406(a) or section 406(B)(2) if the PBGC determines that the merger or transfer otherwise satisfies the requirements of this section. n6

n6 Section 4231 is contained within Title IV of ERISA which is within the sole jurisdiction of the PBGC.

In discussing section 4231 of ERISA, Congress noted in the legislative history accompanying the Multiemployer Pension Plan Amendments of 1980 Act that:

The rules regarding mergers and transfers are designed to allow mergers in all cases where the resulting plan will not be expected to be in financial trouble. This facilitates the committee's purpose of encouraging mergers which expand a plan's contribution base to provide greater stability by looking at the prospects for the resulting plan instead of focusing on the narrow mechanical test provided under current law. The committee believes that a merger which complies with the conditions will generally be in the best interest of plan participants.

House Comm. on Education and Labor, H.R. Rep. No. 869, 96th Cong., 2nd Sess. 87 reprinted in [1980] U.S. Code Cong. & Ad. News 2918, 2955.

Issue 1

The provisions of Title I of ERISA do not expressly prohibit or limit mergers of multiemployer pension plans. In the Department's view, whether a proposed merger of multiemployer pension plans complies with the provisions of sections 403©(1) and 404(a)(1) of ERISA can only be determined by the appropriate plan fiduciaries based on all relevant facts and circumstances. Based on the statutory framework and the Congressional intent described above, it is the opinion of the Department that, in determining the propriety of a merger of multiemployer pension plans, the fiduciaries of each multiemployer plan must make their determinations under sections 403© and 404(a)(1) by reference to the multiemployer plan resulting from the proposed merger. In making such determinations, the fiduciaries must consider the funded status of the resulting merged plan, as well as the long-term financial viability of such plan. n7 In this regard, it is contemplated that the fiduciaries would, among other things, take into account the economic outlook of the industry, demographics of the resultant participant population, current and anticipated contribution rates and administrative expenses. The fiduciaries should be aware that compliance with the requirements of section 4231, as determined by the PBGC, will not, in and of itself, satisfy the fiduciaries' obligations under sections 403© and 404(a)(1) of ERISA. n8 Accordingly, the Department expects that the fiduciaries will make independent determinations taking into account all relevant information pertaining to the proposed merger.

n7 In the instant case, we note that the trustees may wish to consider, among other things, actuarial projections made of assets and accrued and vested liabilities for the merged plan under a variety of alternate scenarios.

n8 This analysis of fiduciary duties under sections 403 and 404 of ERISA is limited strictly to instances of multiemployer pension plan mergers.

Issue 2

You represent that, as a condition precedent to the merger, the Fund will obtain a favorable compliance determination under section 4231 of ERISA from the PBGC. Therefore, it is unnecessary for the Department to address the issues raised under section 406(a) and 406(B)(2) by the proposed merger.

Whether the proposed merger is prohibited by the provisions of section 406(B)(1) of ERISA involves questions of a factual nature which can only be answered by the Trustees based on all of the relevant facts and circumstances.

This letter is an advisory opinion under ERISA Procedure 76-1. Section 10 of the procedure describes the effect of an advisory opinion.

Robert J. Doyle

Director of Regulations and Interpretations

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