ERISA Section 4204 Sale of Assets

[ERISAatty]

Hi, all,

I have some 4204 questions to which I'm not finding answers in the boards:

I am involved in represenation of a multiemployer seller who is selling some assets to a buyer. The assets being sold DO NOT constitute 70% of the seller's total assets, and therefore the sale does not constitute a partial cessation. Therefore, assuming we've calculated correctly, there is no current withdrawal liability.

ERISA Section 4204 allows seller to become secondary for withdrawal liability for five years following the sale, while the buyer is primarily liable.

Question 1: If the buyer goes insolvent within the five years (bringing sellers secondary liability into play) HOW DO YOU CALCULATE THE LIABILITY.

According to 4204 and case law, the 4204 transaction transfers the five-year period of contribution history prior to the sale TO the Buyer. So if there was no withdrawal liability at the time of sale, wouldn't Seller owe nothing, in this scenario?

Question 2: Since we think that the withdrawal liability is zero, how do we meet the bond requirement of a 4204 transaction? Document the fact that the amount is zero, and therefore we can't get a bond?

OR - Question 3: - should we think about not doing 4204 at all in this situation?

Thanks to anyone out there with any knowledge of this issue.

[JanetM]

First, if you are just selling assets and the buyer is not taking over union contract there is no transfer of liability for withdrawal. Maybe I don't understand the fact pattern.

If buyer triggers a withdrawal in the following five years the liability will be calculated using the method specified by Plan. Could be based on % of contribution dollars or hours contributions were based on (aka contribution base units). The determination of the final liabiltiy belonds with the Plan. If withdrawal is partial it can't be calculated until the year following the year the withdrawal took place.

The bond amount would be calculated based on the Plan in total. For example, Central States and Sheet Metal Workers have huge unfunded liabilities.

[ERISAatty]

JanetM,

Thank you for your reply.

Yes, in this case, the seller is taking over the union contract.

Hats off to you if you work in the multiemployer area on a regular basis.

This stuff is a little daunting, but I'll get there.

Thanks, again.

[Kirk Maldonado]

I guess I analyze the situation differently than Janet M.

The parties to a sale of assets transaction have an incentive (in some circumstances) to comply with the requirements of Section 4204 because, if they don't, then the sale of assets triggers withdrawal liability. Thus, if there is substantial withdrawal liability the parties typically enter into a Section 4204 agreement.

Admittedly, the buyer agreeing to contribute to the plan changes the facts somewhat, but I doubt that would mean that the buyer also agrees to assume all of the contribution history of the seller for purposes of determining the amount of its withdrawal liability.

Thus, I think that you need to hire counsel to get actively involved in this situation. The amount of withdrawal liability can be huge. I once worked on a case where the amount was over $50,000,000.

[mal]

Kirk,

This is a very confusing area of the law. There is a

PBGC opinion letter from 1981 holding that

no withdrawal liability attaches at the time of

the sale...regardless of compliance with 4204.

It is worth a read...

PBGC Op. Ltr. 81-19...I don't have a link.

[Kirk Maldonado]

Here it is:

PBGC Opinion Letter 81-19, 07/01/1981

Reference(s): ERISA §4001 ERISA §4001(b) ERISA §4203 ERISA §4204 ERISA §4225

Dear Mr

This is in response to your letter requesting general guidance concerning the potential withdrawal liability under the Multi-employer Pension Plan Amendments Act of 1980 (“MPPAA”) of a construction contractor who sells a trade or business in the construction industry.

Your first two questions appear to relate to the applicability of the “sale of assets exception” in Section 4204 to the construction industry complete withdrawal provisions of Section 4203(b) and to the limitations on withdrawal liability in Section 4225. You pose the case of a construction contractor contributing to a construction industry plan who makes an arms-length sale of all the assets of the business. We assume that the seller is not under common control with any other trades or businesses under Section 4001(b) of ERISA .

In the case of a construction industry plan, a complete withdrawal occurs, per ERISA Section 4203(b)(2) , if:

(A) an employer ceases to have an obligation to contribute under the plan, and

(B) the employer —

(i) continues to perform work in the jurisdiction of the collective bargaining agreement of the type for which contributions were previously required, or

(ii) resumes such work within 5 years after the date on which the obligation to contribute under the plan ceases, and does not renew the obligation at the time of the resumption.

In the case that you have presented, it appears that after the sale of the assets of the business the seller would not continue to perform work in the jurisdiction of the collective bargaining agreement, so that there would not be a complete withdrawal under Section 4203. Since there is no withdrawal under Section 4203, there is no need to consider the application of Section 4204 or Section 4225.

Your final inquiry is whether our answer would be different if the seller owned two companies in a controlled group relationship and sold one of them. We assume that one company would be in the construction industry, but you have not supplied us with facts concerning the business of the other company or its relation to the construction industry plan. Accordingly, we do not have sufficient information to respond.

I hope we have been of assistance.

Sincerely,

Henry Rose

General Counsel

[Kirk Maldonado]

mal:

Have you reviewed the provisions of Title IV setting forth the special withdrawal liability rules for the construction industry?

[mal]

Yes, unfortunately I have. The rules don't seem to

make much sense when applied to the construction

industry, multiemployer plan. Our problem arises when

you have a potential "alter ego" or "successor" of a

union shop that closes its doors. Inevitably, the

non-union arm ends up with equipment, personnel,

contracts, etc., and we are stuck with complicated

test to determine if the WL attaches to the second company.

[Bill Ecklund]

I am a bite late in getting into this discussion. However, I have a couple of observations to the original posted note. In the first place, the percentage of the seller’s assets being sold does not necessarily relate to whether or not a partial withdrawal will occur in the future.

Partial withdrawal occurs if there is a 70% contribution base unit decline over a period of years, regardless of assets sold. There are, however, other occurrences that can trigger partial withdrawal. For example, does the seller have more than one collective bargaining agreement and will one or more of these agreements be discontinued as a result of the sale of assets?

Assuming, however, that the sale does not constitute a partial withdrawal, there still is a reason for wanting to comply with Section 4204. Even though there is no withdrawal liability at this time, there may be withdrawal liability in the future and this sale of assets could be one of several sales of assets that could eventually trigger withdrawal liability. See the Arbitration of Kroger Co. and Southern California Food Workers Pension Fund, 6EBC 1346 (1985).

In response to your specific questions, if the buyer becomes insolvent and withdraws from the Pension Plan within 5 years after the sale of assets, then the buyer’s withdrawal liability is calculated at the time of withdrawal and if the buyer does not pay it, the seller is obligated to pay it, but not to exceed the amount of the seller’s withdrawal liability at the time of sale. Under the circumstances that you posit, the seller would have no withdrawal liability, so its secondary liability would be zero. Obviously, there would be no bond required. Even if there is minimal withdrawal liability, the bond would most likely be waived. See the Regulations under Section 4204, specifically, Sec. 4204.12.

Generally, the purchaser would probably not object to the Section 4204 Sale, although as part of that Section, the purchaser has to assume the last 5 years worth of contributions history of the seller. Therefore, the buyer’s potential withdrawal liability is increased. After a certain number of years, however, it makes no difference because the calculation of the purchaser’s withdrawal liability will be based upon its contribution history from and after the sale.

With respect to the Construction Industry discussion, there is an issue as to whether or not the exception applies. The PBGC has never issued regulations defining what it means to be an employer in the Building and Construction Industry. They originally proposed some regulations, but later withdrew them. The sticking point was work performed off of the construction site. For certain employers, such as painters, there is no issue because practically 100% of their work is performed on the site. For other contractors, however, such as sheet metal contractors, there is a real issue as to whether or not those contractors are in the Building and Construction Industry for purposes of the special rule. Each Plan has to define what it means for an employer to be in the Building and Construction Industry. For example, if a contractor had a work force of 100, 50 of whom always worked on the construction site and 50 of whom always fabricated in the shop, that contractor would not meet the definition of an employer in the Building and Construction Industry, whereas if the same 100 employees split their time between the shop and the field, that employer would most likely be in the Building and Construction Industry.