Brian Haynes

It is pretty clear to me that under the PPA, if a pension fund in critical status fails to leave critical status at the end of the rehabilitation period or for 3 consecutive years has failed to make scheduled progess, the fund is treated as having an AFD subject to excise tax. This excise tax may be waived by the IRS for reasonable cause and not willful neglect (who knows how willing the IRS will be to waive the tax). If this appears likely to happen, employers may have to agree to increase their contributions to avoid the excise tax. Since the pension fund rules in the PPA expire at the end of 2014, it is unclear whether this AFD-excise tax will remain in the law. Further, since no pension fund has yet reached the end of its rehabiliation period, no AFD-excise has yet been triggered. It is also clear to me that the employer contribution rates under an adopted schedule may not be increased during the duration of the applicable collective bargaining agreement, although some funds allow contribution rates to be decreased if the rates go down in future schedules. Some funds have a provision in their trust agreement that allows the trustees to establish "minimum contribution rates" (which allows the trustees to theoretically increase rates above the adopted schedule rate). I would forefully argue that a fund in critical or endangered status may not use such a provision to increase rates beyond those specified in the adopted schedule.

Thanks Bill. PBGC Reg. 4221.3(b) allows the parties to agree on an extension of time to arbitrate once liability has been assessed by the fund. Always appreciate your thoughts.

Can the employer and pension fund agree to extend the deadline for the employer to commence arbitration? I recall that PBGC Regulation 4221.36(b) used to allow for this provided that the fund had already made the assessment. Thanks.

A client has passed away and had an account balance in a qualified defined contribution plan and IRA. He named his daughter as beneficiary of both, a Canadian non-resident alien. Can she elect to rollover the dc plan benefit to a US Rollover IRA and can she establish a US Inherited IRA for the IRA? If so, free of any income tax? Thanks.

Thanks for your comments. I am not sure a pension fund would consider the contribution of assets to a new entity in which the transferor has retained an interest as a sale of assets under Section 4204. If anyone feels different please let me know your thoughts. The complete line of union business would be contributed to the new joint venture so the transferor would not be able to make or retain any obligation to contribute to the pension fund. There is no attempt to avoid withdrawal liability just economic reasons to enter into a new joint venture with an unrelated party.

I have a publicly traded client that wants to contribute certain operating assets to a new joint venture (an LLC) in return for a 20% equity interest. These operating assets are subject to an obligation to contribute to a multiemployer pension fund. The other 80% member will be a private unrelated non-union company that will contribute assets for an 80% equity interest. The new joint venture will assume the obligation to continue making contributions to the pension fund at issue. Under Section 4218 of ERISA, a change in corporate structure does not trigger withdrawal liability (this exception covers a merger, consolidation or division of an employer). The Second Circuit in Bowers (27 F.3d 800) in 1994 held that two companies that formed a separate joint venture and transferred to it their unincorporated operations were subject to withdrawal liaiblity since there was no division or merger. Citing several PBGC Opinions, the Court viewed a division as requiring some kind of stock transaction where stock is divided away from a control group and acquired by a new owner. The asset transfer and contribution to the joint venture for an equity position thus did not qualify as a division exempt from liability. The Court also held that such a transaction was not a merger or consolidation. Any ideas on how my client can form a joint venture without triggering withdrawal liability? Since my client is publicly traded, I do not believe that the joint venture can be considered part of its control group (and thus exempt) even if it owns more than 50% of the new venture. Any thoughts are appreciated.

Under Code Section 432(f)(4), for a critical status plan, during the rehabilitation plan adoption period, the trustees of a Pension Fund are prohibited from accepting a collective bargaining agreement that provides for a reduction in the level of contributions, suspends contributions for any period or service, or results in the direct or indirect exclusion of younger or newly hired employees from participation. This prohibition does not technically apply once the rehabilitation plan adoption period has commenced (unlike for endangered status plans). Has anyone seen a Pension Fund that allows such provisions once the period has commenced? It is my understanding that there were once proposed technical corrections that would have applied the restrictions for critical status plan once the period commenced (just like for endangered status plans). These were never enacted. Under these restrictions, would a new provision in a collective bargaining agreement requiring employer contributions only after the new employee has completed 1,000 hours of service be allowed (assume the Pension Fund allows initial participation only after the completion of 1,000 hours of service)? I assume the restrictions would prohibit the establishment of a new plan for new hires. Would the IRS rule on a potential provision that may violate the prohibition? Thanks.

I think that if the TPA is a fiduciary, the payment of the referral fee would be prohibited under Section 406(b) of ERISA. If not, then it is less clear. If the Plan hires the corporate trustee with no principal motivation for the payment of the finders fee, it seems like there is no PT. I think it comes down to whether the TPA is considered a fiduciary, which is not always clear.

I have a client, a potential corporate trustee of a number of 401(k) plans, who has been asked by the current third party administrator (TPA) for these plans, to make an offer as to a referral fee it will pay to the TPA if the TPA recommends to the sponsoring employers that my client act as corporate trustee (as a replacement of the current corporate trustee who is winding down its business). I wonder whether any such referral fee for existing plans, or for any new plan accounts in the future, is permissible under ERISA. I would think the TPA and my cleint would need to clearly disclose the payment of a referral fee to the employer sponsors. I am not sure whether any disclosure is required to participants since the referral fee would be paid from the general assets of the corporate trustee. If the TPA was my client I think I would be concerned that it would be breaching a possible ERISA fiduciary duty by recommendiing the new corporate trustee be the entity that pays the TPA the highest referral fee. Would this be a prohibited transaction? What additonal advice should I give my client? Thanks for your help.

It is my guess that the IRA provider changed its default rule from the IRA owner's "estate" to a list of surviving individuals so that there would not be accelerated RMD distributions required after her death. If the IRA was payable to her estate, the full IRA balance would have to be paid out within 5 years if she died before age 70-1/2 or over her remaining fixed-term life expectancy if she died after age 70-1/2). For RMD purposes, in the absence of any affirmative beneficiary designation by the IRA owner, the default language in the custodial agreement controls. If there are individual living beneficiaries under the default provision, then RMDs can usually be spread out of the life expectancy of the beneficiary (which can be a very significant advantage). Further, if the IRA had been paid to her estate, RMDs would probably have been subject to higher and compressed tax rates. The IRA provider likely changed this provision to protect its IRA owners from a failure to name a beneficiary. Unfortuantely, it had a bad collateral result in your fact pattern. I agree with the comment made, never rely on default language and make an affirmative beneficiary designation.

I represent a client that is receiving monthly payments under an Excess Retirement Plan and Supplemental Plan (both non-qualified arrangements). The client received a letter from his prior employer informing him that the benefits he is receiving are incorrect and that future monthly benefits will be reduced and that the client must return a substantial sum. In justifying this, the employer stated that this must be done in order to satisfy IRS requirements regarding payments from non-qualified deferred compensation plans and to avoid the employee being penalized under Section 409A. Would Section 409A require this corrective action? Thanks.

I agree with you. I was getting caught up with the Vaughn v. Sexton case (975 F.2d 498) where the court held that the shareholder of a contributing employer was held personally liable for withdrawal liability when he also was the trustee and beneficiary of a revocable family trust that leased property to the contributing employer since the court held that he was the alter ego of the trust. In my facts, it is not a control group issue and whether there is personal liability because one of the members of the group is not incorporated or an LLC, but rather is a stock transfer to the GRAT. I agree that the limited liability feature of owning the stock in a company should insulate both the trust and the former shareholder (who is now annuitant beneficiary of the GRAT). Of course, this assumes that there is no piercing of the corporate veil or any other self-employed business. Thanks for the comments which are always welcome.

If the shareholder transfers his ownership to a GRAT, and since the GRAT is unincorporated, I think I may expose the former owner to personal liability for any future withdrawal liability (because although the owner is technically the trust, the former owner is the grantor and is considered as owning it or he may be considered the alter ego of the trust)? Any thoughts?

If the 100% shareholder of a closely held company transfers his stock to a 10-year GRAT, will the transfer to the GRAT and the ultimate transfer of the stock to the remiander beneficiaries trigger withdrawal liability by the company? Under Section 4218 of ERISA it is not a liquidation or merger, consolidation or division, but is it a mere change in identy or form? The 100% shareholder is transferring ownership of the stock into the name of the trust, while the shareholder is considered the grantor. I guess you could argue that a mere stock transfer is not a trigger. Any thoughts?

If a Pension Fund accelerates interim withdrawal liability payments under the rationale of the recent Central States v. O'Neill Bros. Transfer & Storage 7th Circuit decision, the full amount of the assessed withdrawal liability amount becomes due. Is the amount due from the employer subject to the 20-year cap? Thanks for any input.

Assuming there is withdrawal liability, you are correct that ERISA imposes that liability on the seller. ERISA does not contain any authority to impose the seller's liability on the buyer as a successor employer. However, I note that under Section 4212© of ERISA, if there is a principal purpose to evade or avoid withdrawal liability, the pension fund may pursue its claim for withdrawal liability without regard for the transaction. As a general rule, an entity that purchases the assets of another entity does not assume the seller's liabilities. However, under federal common law successor liability doctrine, there may be an exception to this rule that may impose the withdrawal liability on the buyer. There are a number of factors that determine whether the buyer is considered a successor (e.g., acquired substantially all the assets and continued without interruption or substantial change, the seller's business operations, etc.). Assuming in your facts the buyer would likely be considered a successor (and you cannot adjust any factors post-closing that would change this), I would specifically state in the asset purchase agreement that the buyer is not a successor, obtain indemnfication for any such claim and/or adjust the purchase price for this potential liabiltiy. Hope this helps.

All of the pension funds I have seen that made the WRERA election in 2009 certified their critical status in 2010. I think the funds take the position that the election to stay out of critical status for 2009 means that they were never in red status for purposes of removing itself from that status in the following years.

Thanks Bill. I agree totally. I will push back on this issue and ask for any authority given to the Trustees to impose a 5% surcharge after a schedule is adopted and effective by the parties. There are so many unanswered questions on how the PPA is to be implemented. Too bad we never got technical corrections.

On November 17, 2009 there was a discussion in this forum on Section 432(e)(3)(B) of ERISA which provides that the rates provided by the trustees and relied upon by the bargaining parties are to remain in effect for the duration of the collective bargaining agreement, even though the trustees are required to update their contribution schedules yearly. It seems clear to me that if the rates, say under the default schedule, go up after the parties adopt it and while the collective bargaining agreement remains in effect, any such increases in the default schedule rates cannot be imposed on the employer until the agreement expires. However, I have a pension fund that agrees with this conclusion but says it will nontheless impose a 5-10% surcharge on any employers who are not making any additional increased percentage contributions under future revised schedules. This seems like an end run around the inability to impose higher rates on the employer. Any thoughts?

If you are sure there is no withdrawal liability, then I would put a note on the last remittance report transmitting employer contributions to the Fund to let them know. This way, they will not be looking for further contributions. If there is withdrawal liability, the date of the cessation of the obligation to contrribute is a date determined under ERISA. Was the employer making any contributions while the new contract was being negotiated? If not, then the date the obligation ended would be the expiration of the last agreement, absent some other provision in the new contract extending the date the last contributions were due.

Doubt you will find any cases that help. As you stated, without an available exception, bargaining out of a Pension Fund will constitute a permanent cessation of the obligation to contribute which can trigger withdrawal liability.

Here are a couple of thoughts. If the client has an IRS PLR which states that the plan is a "church plan", you use that PLR as the basis for requesting an advisory opinion from the DOL. In my experience, the DOL views this as very persuasive but will make its own determination. The IRS PLR only speaks to qualification requirements under the Code. You need a DOL opinion so the plan is exempt from ERISA. I believe there is some case law (or DOL advisory opinions) which takes the position that merely calling yourself an ERISA covered plan and operating in compliance with ERISA does not make the plan an ERISA plan. However, if you simply stop filing Form 5500, the IRS will start sending delinquent notices. Since the non-filing penalties are potentially severe, you take the risk that the IRS and DOL will not agree that you are in fact an exempt "church plan". It is my understanding that the IRS does not automatically reject a Form 5500 filed by a non-electing church plan. I have been told by the DOL that if the plan had been calling itself an ERISA covered plan and now is taking the position that it is not, it must inform participants and beneficiaries of this fact and take out all references and obligations under ERISA in the plan document and summary plan description. Hope this helps.

Here are a couple of thoughts. I don't think there is a problem with the union and employer retroactively ceasing the employer's obligation to contribute to the Pension Fund. However, the Pension Fund may have a problem with the retroactive application. The Pension Fund might sue the employer for delinquent employer contributions for the period of retroactivity since it was not put on notice of the cessation and/or relied on the employer's contributions for that period for funding purposes. Depending on the terms of the plan, the Fund might deny the employer's union employees with benefits for the retroactive period. If the Pension Fund had the employer sign a Participation Agreement which required contributions until the end of the collective bargaining agreement, the Fund could sue for delinquent employer contributions for that entire period since the Fund is just a third party beneficiary of that amended agreement. I know you stated not to be concerned with withdrawal liability, but, absent some sort of exception, the permanent cessation of the obligation to contribute (or the permanent cessation of covered operations) will trigger any withdrawal liability. Further, if it's to its advantage, the Fund might take the position that the retroactive date of cessation does not determine the date of withdrawal but rather the withdrawal date should be the date the collective bargaining agreement expires based on the evade or avoid rule under Section 4212(e) of ERISA. Hope this helps.

Not much you can do to force the Trustees to adopt the RP any sooner. My experience is that most funds will provide the default and alternative schedules sooner than required under the PPA. A few funds will allow you a credit for the 5-10% surcharge if you later adopt the alternative schedule. Check your cba and see if you have any reopener language that will allow you to negotiate over the schedules when provided. Even if there is a reopener, some employers will pay the surchage if it is cheaper than the rates under the schedules or will pay the surcharge for a limited time until their cbas expire so that there is full negotiation over all benefits and wages, not just pension on a reopener. Many unions will voluntarily agree to reopen to avoid surcharges on the employer. In fact, many have reallocated future wages and benefit increases to the pension fund. Make sure any reallocation will be treated by the trustees as the adoption of a schedule and make sure any reopener will not void any no-strike pledge. Good luck.

As added by the Pension Protection Act, Section 101(l) of ERISA requires the Trustees of a Pension Fund to provide an estimate of the dollar amount of withdrawal liability. The Section then states that the Trustees may impose a reasonable charge to cover the "cost of copying, mailing and other expenses involved in furnishing the notice." This language seems to only allow the Trustees to charge for the expenses of sending the notice and does not allow a charge for the actuarial fees in preparing the amount of withdrawal liability. Is this right? I have a Pension Fund that wants to charge $2,500 for the actuarial fees in preparing the estimate (which seems excessive in any event). Thanks.