Bill Ecklund

The law requires that an individual must separate from service before retirement benefits can begin. In order for termination of employment or “separation from service” to occur, there has to be an intention to retire. Separation from service means termination of the employment relationship between the employee and the company with no expectation that the employment relationship would be resumed. There is a technical advice letter from the Internal Revenue Service dealing with this particular issue. The technical advice request was from a defined benefit plan that had just been declared to be in critical status. As part of the rehabilitation plan, the Trustees had adopted a default schedule, which eliminated an unreduced early retirement pension benefit. The plan was concerned that about 300 people would immediately retire in order to be able to draw this early retirement pension before it was eliminated. The plan was requesting that the service provide a ruling “as to whether allowing participants who are eligible for subsidized early retirement benefits to ‘retire’ on one day in order to qualify for the early retirement subsidy, and then immediately return to work with payment of their early retirement pension benefits suspended (as disqualifying employment), would result in disqualification of the plan.” In the technical advice letter, the Internal Revenue Service cited a number of regulations dealing with separation from service. Section 1.409A-1(h)(1)(i) of the regulations provides that in general an employee separates from service with an employer if the employee dies, retires, or otherwise has a termination of employment with the employer. Section 1.409A-1(h)(1)(ii) of the regulations provides that whether a termination of employment has occurred is based on whether the facts and circumstances indicate that the employer and employee reasonably anticipated that no further services would be performed after a certain date or that the level of bona fide services the employee would perform after such date would permanently decrease to no more than 20% of the average level of bona fide services performed (whether as an employee or an independent contractor) over the immediately preceding 36 month period. After discussing the facts and circumstances, the following paragraph appeared in this technical advice letter: Taken together, sections 1.409A-1(h)(1)(i) and 1.409A-1(h)(1)(ii) provide that when an employee legitimately retires, he separates from service with the employer. Accordingly if both the employer and the employee know at the time of “retirement” that the employee will, with reasonably certainty, continue to perform services for the employer, a termination of employment has not occurred upon “retirement” and the employee has not legitimately retired. Obviously, quitting work on a Friday, only to start again on a Monday, would not constitute separation from service. In addition, a decision by the employee and the employer that the employee would quit and remain unemployed for a certain time, but then resume employment, would not constitute separation from service. There has to be an intention to retire, and then later on some intervening event occurs, which causes the employee to want to return to work, or causes the employer to ask the employee to return to work.

There are basically two kinds of Controlled Groups: a Parent-subsidiary group or a Brother-Sister group: In a Parent-Subsidiary group the parent owns ≥80% of stock of subsidiary The regs define a Brother-Sister Group as two or more organizations conducting trades or businesses if (i) the same five or fewer persons who are individuals, estates, or trusts own (directly and with the application of §1.414©-4) a controlling interest in each organization, and (ii) taking into account the ownership of each such person only to the extent such ownership is identical with respect to each such organization, such persons are in effective control of each organization. The five or fewer persons whose ownership is considered for purposes of the controlling interest requirement for each organization must be the same persons whose ownership is considered for purposes of the effective control requirement. The Brother-Sister group would be the one you would be looking at. If you look at the IRS regs. under section 414©, you will see a number of illustrations that will show that in your scenario there will no liability beyond the 25% General Partner

Contact social security. They have your employment records way back to when you started working.

The second paragraph of my previous post should be: Normally a building and construction industry employer that meets the definition in ERISA § 4203(b)(1), who stops self-performing the work but continues doing the same work through subcontracting, will not have withdrawn from the plan as provided in § 4203(b)(2) unless the prior CBA had a clause making that employer liable for contributions owed to the plan by a subcontractor who fails to pay. See PBGC Opinion letter 85-5

If the employer has already been assessed withdrawal liability, the procedure is to sign a new CBA, and then follow the abatement procedures under ERISA § 4207 to abate the withdrawal liability. The employer will not be able to get back the withdrawal liability payments already made. If the employer can negotiate a new CBA with retroactive contributions back to the date the prior CBA terminated, and with the approval of the Plan, the withdrawal liability assessment could be withdrawn. Normally a building and construction industry employer that meets the definition in ERISA § 4203(b)(2), who stops self-performing the work but continues doing the same work through subcontracting, will not have withdrawn from the plan as provided in § 4203(b)(2) unless the prior CBA had a clause making that employer liable for contributions owed to the plan by a subcontractor who fails to pay. See PBGC Opinion letter 85-5

This would only be a partial withdrawal if there is a 70% contribution base unit decline over a three year period of time, otherwise there is no withdrawal. Three years will pass before there would be an assessment from the plan, by that time your sale would be concluded. Obviously the employer would like to have the contribution history removed from its history for purposes of determining future withdrawals. I don’t have any specific authority on the time delay, but it appears to me that the sale should be structured as a 4204 sale conditioned upon the state’s approval of the sale. Make sure that the agreement defines the “year of sale” when the state approves it and title is transferred. When the buyer commences the new business, it will assume the last five years of contribution history from the seller and the sellers contribution history removed. Assuming the purchaser contributes for the same number of CBU’s that the seller contributed to prior to its shutdown of the operations, and fulfills the other requirements of 4202, the plan should readily accept this. Although I know of no specific authority on this, I would suggest checking with the plan to make sure that they would accept this

Attached is the form of seller's bond that Central States uses.

Bill, I took this to mean one of the bargaining units negotiated out of the plan. Therefore, I think they would meet the second criterea "An employer permanently ceases to have an obligation to contribute under the Plan with respect to work performed at one or more but fewer than all of its facilities, but continues to perform work at the facility of the type for which obligation to contribute ceased." Assuming that is true, wouldn't that have created a partial withdrawal liability? Gordon - can you be more specific about what triggered the partial. That would trigger partial withdrawal liability. There are really only two things that can trigger complete or partial withdrawal liabilty - going non-union or negotiating the contribution to the plan out of the CBA

There shouldn't have been an assessment of partial withdrawal liability in the first place. Whether or not a partial withdrawal occurs in the building and construction industry is determined by Section 4205 and Section 4208 of ERISA. Section 4205 has two circumstances under which a partial withdrawal can occur. The first is a 70% contribution decline and the second is a partial cessation of the employer’s contribution obligation. A “partial cessation of the employer’s contribution obligation” in turn is determined by meeting one of two tests: •The employer permanently ceases to have an obligation to contribute under one or more, but fewer than all Collective Bargaining Agreements under which the employer has been obligated to contribute under the Plan but continues to perform work in the jurisdiction of the Collective Bargaining Agreement of the type for which contributions were previously required or transfer such work to another location, or •An employer permanently ceases to have an obligation to contribute under the Plan with respect to work performed at one or more but fewer than all of its facilities, but continues to perform work at the facility of the type for which obligation to contribute ceased. Once an employer is deemed to have partially withdrawn, then for purposes of the building and construction industry, the next determination is whether or not the employer is liable for this partial withdrawal. This is governed by Section 4208(d)(1) of ERISA, which provides: An employer to whom Section 1383(b) of this title (relating to the building and construction industry) applies is liable for a partial withdrawal only if the employer’s obligation to contribute under the Plan is continued for no more than an insubstantial portion of its work in the craft and area jurisdiction of the Collective Bargaining Agreement of the type for which contributions are required. A partial withdrawal would occur if the Collective Bargaining Agreement still required contributions on behalf of the construction workers, but the employer was not making contributions on behalf of certain or all of its construction workers (for example reason of being double breasted). A reduction of workforce is not a reason for assessing partial withdrawal. That is the main reason for the B & C rule. Workforces rise and fall in the construction industry all the time. The Legislative history of the Building and Construction Industry exemption states: "Therefore, the construction industry exception is designed to impose liability only on former contributors that continue to work within the plan’s area. It exempts from liability employers that cease contributions because they have no work in the area; there is no liability when a company goes out of business, is sold, or is simply without work for a time."

The subject matter of your post states: “Construction industry exemption, partial withdrawal liability”. The content of your post however does not reference the construction industry exemption. Normally if the construction industry exemption applies, there is neither partial nor complete withdrawal liability unless the employer continues to do the same type of work it had previously done, but no longer contributes to the plan. Ignoring the construction industry exemption rules, when a multiemployer pension fund has already assessed partial withdrawal liability, and later the employer permanently ceases its operations, then the plan will assess complete withdrawal liability and a credit is given for the partial withdrawal liability previously assessed. See ERISA §4206(b) and the regulations issued thereunder for the credit that applies.

In response to fiduciary guidance: The Trustees responsibility is to do whatever is best for the plan and its participants. Generally Trustees would rather have contributions come in on an ongoing basis than collect withdrawal liability. A declining active participant base for a pension plan is not good. Having said that, however, the devil is in the details. The scenario you suggest, with selective participation, is probably not good for the plan. Who gets to choose who is covered and not covered? Not only may there be discrimination issues depending on coverage, adverse selection is generally never good for either a pension plan or a health and welfare plan. In response to iPod: Decertification, does lead to withdrawal liability and it has happened in the past. There have been situations where one union is looking to replace another union and has guaranteed to the employer that the union will pick up the withdrawal liability. In further response to BR58W: In order for a participation agreement to be accepted by the Trustees, there has to be provisions in the trust agreement allowing for that. The settlors in establishing the trust have already made a settler decision whether or not participation agreements can be accepted and who they can cover. I believe the Trustees in administering the plan, per the trust agreement, do have a fiduciary duty in determining whether or not to accept a participation agreement. The DOL has recognized, however, that in certain situations and depending upon whether the plan documents allow it, the Trustees can act in a settlor capacity, not a fiduciary capacity. I am aware of situations in California where apprenticeship and training funds have entered into agreements with non-union contractors to supply apprentices (in some cases even journeypersons). Those contractors have never had a CBA but they do contribute to the apprenticeship fund. As to the 25% rule, I have not heard of that. (Doesn’t mean it doesn’t exist). You should check out 29 CFR §2510.3-37. This discusses what is needed to initially establish a multiemployer plan. Once established a multiemployer plan remains as such, even if there is only one employer left. For Health and Welfare funds; having too many non-bargaining unit participants can cause the plan to run afoul of the MEWA rules.

Under the facts as you have described, technically yes an employer who employs only non-union employees can participate in the multiemployer plan under a participation agreement. However it is very unlikely that the trustees of a multiemployer plan would allow an employer to continue to participate in the plan after the employer no longer has a collectively-bargained obligation to do so. If you look carefully at the definition of multiemployer plan, it does not require that every employer that is participating must do so pursuant to a collective bargaining agreement. Most employers probably would not have become a contributing employer to a multiemployer plan however without a collective bargaining agreement.

I am also interested in knowing the timing requirements for the seller's bond under 4204; does the bond have to be posted by the closing date of the sale. There is an arbitration decision that addressed this issue: Chemed Corp and Central States Fund 11 EBC 2681. In that decsion the arbitrator stated in his opinon: "Purchaser did not timely obtain withdrawal liability bond as required to qualify for sale of assets exemption from withdrawal liability, where purchaser purported to make bond acquired nine months after asset sale retroactive to date ofsale, since, although bonding requirement need not be embodied in sale contract, purchaser must provide bond as offirst day ofplan year beginning after sale ofassets, in this case Jan. 1, 1987, following Dec. 31, 1986 sale, and since permitting lengthy lapse would leave pension fund without full protection to which it is legally entitled; no more than 30 days' grace is reasonable or required to afford purchaser flexibility in obtaining bond where sale occurs on last day ofplan year, by analogy to PBGC rule permitting limited bonding lapse where variance request is denied, as longer period would leave parties who did not seek timely bond waiver in better position than those who did so."

Yes you are correct. 4204 has a number of other requirements that have to be met besides the buyer assuming the obligation to contribute to the plan. The buyers WL will be based only on its own contribution history. Thanks, Bill. One follow-up. Have you seen situations where an employer assumes the CBA and then negotiates out of the obligation to contribute only a few months after the asset sale. In that case, the new company would have only a few months of contribution history and I suppose its withdrawal liability would be dependent on the plan's method of calculating liability (as provided in the plan document). Presumably, the liability would be small with such a short history. Have you seen similar situations? The buyers liability is calculated only on its own contribution history (absent a 4204 agreement). With only a brief contribution history, its liability would most likely be zero. Many plans also have a five year "free look rule", which means that if the buyer withdraws within five years from joining the plan, there would be no withdrawal liability.

Yes you are correct. 4204 has a number of other requirements that have to be met besides the buyer assuming the obligation to contribute to the plan. The buyers WL will be based only on its own contribution history.