Avoid Partial Withdrawal Liability

[Guest ERISAQuestioner]

An employer who is negotiating a new CBA doesn't want to get tagged for withdrawal liability, so it is trying to negotiate a situation in which it has to pay in as little as possible to the pension fund under a new CBA by restricting eligibility. This employer would obviously like to avoid a finding of a partial withdrawal under a 70% decline. Is there any way for an employer to ensure that it isn't going to run into this problem negotiating a new contribution obligation under these circumstances? Is it going to have to hire an actuary in order to determine whether a bargaining proposal triggers this liability?

[Bill Ecklund]

An employer who is negotiating a new CBA doesn't want to get tagged for withdrawal liability, so it is trying to negotiate a situation in which it has to pay in as little as possible to the pension fund under a new CBA by restricting eligibility. This employer would obviously like to avoid a finding of a partial withdrawal under a 70% decline. Is there any way for an employer to ensure that it isn't going to run into this problem negotiating a new contribution obligation under these circumstances? Is it going to have to hire an actuary in order to determine whether a bargaining proposal triggers this liability?

What status has the actuary certified the plan to be in? Trustees of plans that are in endangered or critical status may not accept a collective bargaining agreement or participation agreement with respect to a multiemployer plan that provides for (1) a reduction in the level of contributions

for any participants; (2) a suspension of contributions with respect to any period of service, or (3) any new direct or indirect exclusion of younger or newly hired employees from plan participation. (ERISA Section 305). If the plan is in endangerd or critical status and you negotiate a CBA in the manner you have described, the trusees will reject the contract and the employer will have completely withdrawn from the plan.

If the plan is not in endangered or critical status, a 70% contribtuion base unit decline is only one of two things that can trigger partial withdrawal liability. (see ERISA Section 4205). A partial cessation of the employer's contribution obligation will also trigger this.

This is defined in 4205(b)(2):

There is a partial cessation of the employer's contribution obligation for the plan year if, during such year—

(i) 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 transfers such work to another location or to an entity or entities owned or controlled by the employer, or

(ii) 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 the obligation to contribute ceased.

The 70% CBU decline is pretty easy to calulate and you don't need an actuary to do that. You may need a lawyer to help you determine if there is a partial cessation of the employer's contribution obligation.

Keep in mind that most multiemployer plans have very broad powers for trustees to determine whether or not an employer can particpate in the plan. If the CBA contains langauge that they believe is not in the besst interests of the plan, they can reject the contract and the employer will have withdrawn. See Central Hardware Co. v. Central States Pension Fund, 6 EBC 2525 (1985)

[Guest ERISAQuestioner]

Bill, thanks for this thoughtful treatment. The Plan is in critical status. The Employer has full time and part time staff. In order to continue as a contributing Employer, it will have to adopt the Rehabilitation Plan. Without reducing the level of contributions, based on the provisions you cite, it seems that if the Employer reduces staff by terminating some part timers, there is a risk of the 70% decline. (Partial cessation isn't an issue for this Employer since it only has the one CBA and the one facility.) Layoffs seem to be the only way to reduce pension obligations.

An employer who is negotiating a new CBA doesn't want to get tagged for withdrawal liability, so it is trying to negotiate a situation in which it has to pay in as little as possible to the pension fund under a new CBA by restricting eligibility. This employer would obviously like to avoid a finding of a partial withdrawal under a 70% decline. Is there any way for an employer to ensure that it isn't going to run into this problem negotiating a new contribution obligation under these circumstances? Is it going to have to hire an actuary in order to determine whether a bargaining proposal triggers this liability?

What status has the actuary certified the plan to be in? Trustees of plans that are in endangered or critical status may not accept a collective bargaining agreement or participation agreement with respect to a multiemployer plan that provides for (1) a reduction in the level of contributions

for any participants; (2) a suspension of contributions with respect to any period of service, or (3) any new direct or indirect exclusion of younger or newly hired employees from plan participation. (ERISA Section 305). If the plan is in endangerd or critical status and you negotiate a CBA in the manner you have described, the trusees will reject the contract and the employer will have completely withdrawn from the plan.

If the plan is not in endangered or critical status, a 70% contribtuion base unit decline is only one of two things that can trigger partial withdrawal liability. (see ERISA Section 4205). A partial cessation of the employer's contribution obligation will also trigger this.

This is defined in 4205(b)(2):

There is a partial cessation of the employer's contribution obligation for the plan year if, during such year—

(i) 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 transfers such work to another location or to an entity or entities owned or controlled by the employer, or

(ii) 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 the obligation to contribute ceased.

The 70% CBU decline is pretty easy to calulate and you don't need an actuary to do that. You may need a lawyer to help you determine if there is a partial cessation of the employer's contribution obligation.

Keep in mind that most multiemployer plans have very broad powers for trustees to determine whether or not an employer can particpate in the plan. If the CBA contains langauge that they believe is not in the besst interests of the plan, they can reject the contract and the employer will have withdrawn. See Central Hardware Co. v. Central States Pension Fund, 6 EBC 2525 (1985)

[Bill Ecklund]

Bill, thanks for this thoughtful treatment. The Plan is in critical status. The Employer has full time and part time staff. In order to continue as a contributing Employer, it will have to adopt the Rehabilitation Plan. Without reducing the level of contributions, based on the provisions you cite, it seems that if the Employer reduces staff by terminating some part timers, there is a risk of the 70% decline. (Partial cessation isn't an issue for this Employer since it only has the one CBA and the one facility.) Layoffs seem to be the only way to reduce pension obligations.

Depending on how contributions are measured (ie. by the hour or week), laying off or terminating the part timers may not result in a 70% CBU decline.

An employer who is negotiating a new CBA doesn't want to get tagged for withdrawal liability, so it is trying to negotiate a situation in which it has to pay in as little as possible to the pension fund under a new CBA by restricting eligibility. This employer would obviously like to avoid a finding of a partial withdrawal under a 70% decline. Is there any way for an employer to ensure that it isn't going to run into this problem negotiating a new contribution obligation under these circumstances? Is it going to have to hire an actuary in order to determine whether a bargaining proposal triggers this liability?

What status has the actuary certified the plan to be in? Trustees of plans that are in endangered or critical status may not accept a collective bargaining agreement or participation agreement with respect to a multiemployer plan that provides for (1) a reduction in the level of contributions

for any participants; (2) a suspension of contributions with respect to any period of service, or (3) any new direct or indirect exclusion of younger or newly hired employees from plan participation. (ERISA Section 305). If the plan is in endangerd or critical status and you negotiate a CBA in the manner you have described, the trusees will reject the contract and the employer will have completely withdrawn from the plan.

If the plan is not in endangered or critical status, a 70% contribtuion base unit decline is only one of two things that can trigger partial withdrawal liability. (see ERISA Section 4205). A partial cessation of the employer's contribution obligation will also trigger this.

This is defined in 4205(b)(2):

There is a partial cessation of the employer's contribution obligation for the plan year if, during such year—

(i) 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 transfers such work to another location or to an entity or entities owned or controlled by the employer, or

(ii) 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 the obligation to contribute ceased.

The 70% CBU decline is pretty easy to calulate and you don't need an actuary to do that. You may need a lawyer to help you determine if there is a partial cessation of the employer's contribution obligation.

Keep in mind that most multiemployer plans have very broad powers for trustees to determine whether or not an employer can particpate in the plan. If the CBA contains langauge that they believe is not in the besst interests of the plan, they can reject the contract and the employer will have withdrawn. See Central Hardware Co. v. Central States Pension Fund, 6 EBC 2525 (1985)

[Guest wmbenefits]

What status has the actuary certified the plan to be in? Trustees of plans that are in endangered or critical status may not accept a collective bargaining agreement or participation agreement with respect to a multiemployer plan that provides for (1) a reduction in the level of contributions

for any participants; (2) a suspension of contributions with respect to any period of service, or (3) any new direct or indirect exclusion of younger or newly hired employees from plan participation. (ERISA Section 305). If the plan is in endangerd or critical status and you negotiate a CBA in the manner you have described, the trusees will reject the contract and the employer will have completely withdrawn from the plan.

Are you sure about that? With respect to plans in critical status, the restrictions on excluding new participants, etc., under ERISA Section 305 appear only to apply to the rehabilitation plan adoption period.

[Guest Smash]

My guess is the lack of parallel language in the rehab period is an oversight. The language for endangered plans is in both places. Either way, I can't imagine how a trustee would accept an agreement that allows for this type of reduction in the contribution base.

There are a number of employers who monitor the 70% decline rule to be sure that they don't trigger. It is possible to wind down participation without triggering a 70% decline. However, a plan may go after an employer if the intention of the wind down was to evade or avoid withdrawal liability.