Problem with Collective Bargaining Agreement

[mal]

A union client called and asked questions relating to

his negotiation of a "stand alone" contract. The union

is in the construction industry and its plan is a multiemployer

arrangement. However, the contract in question is

negotiated with one large company that employs

several members of the union.

At some point in the past, the company agreed to

contribute to the union's multiemployer db plan on

behalf of its member/employees.

The db plan calculates a person's retirement benefit

by multiplying the years of credited and partial

service by a dollar amount ($90). Based on the

usual contribution amount of roughly $4.00 per

hour, a person needs to work approximately

300 hours to earn 1/4 credit.

Now the problem...

When the union negotiated this stand-alone

agreement several years ago, the parties

agreed to put only 20 cents per hour into

the plan. This means a person who works

2200 hours per year will never have sufficient

contributions to earn even a 1/4 credit.

Is this a situation where the trustees of

the plan could return the contributions

under a "mistake of fact/law" theory?

Has the union breached its duty of fair

representation by negotiating such a

deal?

Wouldn't this arrangement violate the

IRC/ERISA vesting and benefit accrual

rules?

I'm quite frankly not even sure where to

begin on this mess.

[Guest BenefitsLawyer]

I'm not clear on how the benefit is calculated--is it calculated on the basis of the amount of the contributions paid? Or is it just that, at contributions of $4.00 per hour, an employee would need to work about 300 hours for the plan to receive enough in contributions to pay for the $90 benefit? And I'm also not clear on whether this is really a vesting problem--I don't think vesting can be tied to the amount of the contributions paid by the employer.

Bearing in mind my confusion about the way the benefit is calculated, and whether this is a vesting problem, here are some thoughts. (And I agree--this is one of those "where do I start" problems!!)

1. What does the trust agreement say about who determines the benefit? If the trustees determine the benefit, they may be able to create a special reduced benefit for these employees, with the reduced benefit calcuated actuarially to reflect the much-reduced contribution level.

2. Do the trustees have a set of "minimum standards" for employer participation in the plan? Some multiemployer plan trustees have adopted such minimum standards for precisely the reason outlined in your post--to get the plan out of the problem created when a union negotiates a contract with a contribution level that is insufficient to support the standard package of benefits.

3. If this is a vesting problem, there was a fair amount of litigation back in the 90's about plans that had vesting schedules that resulted in very small percentages of the participants ever vesting--I think a number of the lawsuits related to the Alaska pipeline. My recollection is that the participants were not successful in convincing courts that the trustees had violated any fiduciary duty by adopting those vesting schedules.

[MGB]

mal,

It sounds like you, or whoever is providing you this information, is mixing two different subjects together. The contribution rate (4.00/hr or 20 cents/hour) and the calculation of the benefit amount (90 per year of service) probably are not linked in anyway whatsoever. Dividing one by the other should not have anything to do with calculating a year of service.

There should be a completely separate definition of what constitutes a year of service that is based on hours worked.

Example:

Let's say it is defined as 2200 hours in a calendar year. A person works exactly 2200 hours and there is a contribution of 20 cents/hour or 440 dollars. For this $440 they receive 90 per month at normal retirment age for life. There is no connection between the 90 per month at retirement and the 20 cents.

[mal]

I understand the confusion...

All of the DB plans I work with are multiemployer

and set up as a "percentage of contribution"

arrangement. That is, 1000 hours of service

would earn you a benefit equal to a percentage

of your contributions.

However, this is a DB plan in which a certain level of

contributions earns you either a partial or

full credit. Approximately $1,200 in contributions

earns you a 1/4 credit for the year. When

a participant retires, the administrator multiples

the total "credits" by a predetermined amount...

roughly $90. Thus a man with 30 years of

uninterupted employment should have a

monthly benefit of $2,700.

The problem in this case is that the union

negotiated an hourly contribution rate

that will never allow a member with 2200

hours of service to accrue a benefit. It is

almost as if the hours worked are irrelevant.

The member essentially has to accrue sufficent

contributions to "buy" the credit.

[RTK]

I still do not understand the link between contributions and (full or partial) credited service under the plan.

Nonetheless, I do not believe that a plan can determine the number of hours of service credited (used for year of service credit for vesting and year of participation credit for benefit accrual) by the amount of contribution paid for an hour (or for that matter the rate of pay for an hour) without violating vesting and benefit accrual requirements.

This is different than the actual amount of benefits accrued for a given level of contributions.

[KJohnson]

I think you are stuck with 1,000 hours for eligibility and vesting, but I think that you can require more than 1,000 hours during an accrual computation period to credit the employee with a full benefit accrual unit (i.e. a full "year of participation" for benefit accrual computation purposes), so long as an employee who is credited with at least 1,000 Hours of Services is credited with a partial benefit accrual unit that is at least equal to a ratable portion of a full accrual unit. See See 2530.200b-1 and 2530.204-2c.

Thus I think you must give someone with over 1,000 hours at least a "ratable" portion of a year of service for benefit accrual purposes. However, how you would determine a "ratable" potion when you are actually tying what is a "full year" to a contribution rate is beyond me. I think I am with RTK that I am not really sure this works.