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Opting-out of Participation


luissaha

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A local union and employer are bargaining over continuing participation in a multiemployer db plan, and they jointly approached the plan with a proposal as follows.  They would like to allow individual employees covered by the cba to have the option to opt-out of participation in the plan.  So, as I understand it, if there are 25 employees in the group, we could have a certain number (let's say 10) opt-out of participation, and the employer would be obligated to make contributions only on the remaining 15 employees who did not opt-out.  The plan does not have any language permitting employees to opt-out.  Is there any legal reason employees could not be allowed to opt-out?  My inclination is to say this would be allowed, provided the plan were amended accordingly to provide for the opt-out.  Any thoughts on this would be appreciated.

 

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I do not work on multiemployer plans, but it would probably be a good idea to verify, yes or no, whether the proposed action would raise any possible withdrawal liability issues. 

Besides that, allowing participants to opt out may require a plan amendment and would certainly require approval by the plan.  You ask whether there is any legal reason employees could not be allowed to opt out, and the absence of any plan language permitting them to do so could be a sufficient legal reason to prevent it from happening.

Always check with your actuary first!

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This seems like a perfect of example of encouraging anti-selection.  The Plan would be the loser.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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A lot depends on the funded status of the plan.  If it is underfunded, they would likely not permit this as they need the continued participation to help them recover. As David mentioned, adverse selection would hurt them. All of the younger members would likely opt out in favor of some sort of DC plan.  That would leave the fund with only older (ie expensive) participants and would throw the contribution rates out of balance.

Also, this could be a double edged sword for your employer as it could trigger a partial withdrawal which could cost them more than they are trying to save.

A lot of unknowns.  If i was the actuary for the fund I would tell them to reject the offer.  If I was consulting with the employer, I would tell them not to expect a favorable response.

It might be helpful to seek out an actuary who works with multi-employer plans to help you with the consulting.  

 

 

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

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