Sheet Metal & Air Conditioning Contractors’ National Association

Trustee Advisor Blog

This blog educates industry trustees to aid them in better fund operations in order to control costs and provide quality benefits to fund participants.

What Trustees Need to Understand about Withdrawal Liability - Part 1 of 2

Mar 27, 2012

Trust ExpertsOnce upon a time--actually not so long ago--most multiemployer pension fund trustees didn’t have to understand how and why withdrawal liability worked. In those idyllic days, the majority of multiemployer pension plans were fully funded. In fact, the trustees’ biggest challenge was not overfunding the plan in violation of Employee Retirement Income Security Act of 1974 (ERISA). After several years of declining contribution hours, and diminished investment returns, the big bad wolf (a.k.a. withdrawal liability) reared its ugly head as a real issue to be faced.

Trustees of multiemployer pension plans have a fiduciary obligation to understand and collect withdrawal liability. The rules and regulations applicable to withdrawal liability are a challenge for even the seasoned ERISA specialist to understand. Nonetheless, it is your job as a trustee to oversee and monitor your fund’s service providers who perform the liability calculations and who collect monies owed for withdrawal liability on behalf of the fund. It is beyond this blog’s capabilities to teach the intricacies of the withdrawal liability law--as it is as deep and dark as the enchanted forest. The next few blog posts in coming weeks are meant to provide the basic information on withdrawal liability that every pension trustee should know.

To truly understand withdrawal liability you must understand why it exists. When ERISA was enacted in 1974, there was no provision for withdrawal liability. Contributing employers could walk away with no financial consequences as long as the fund continued to operate for five years following the withdrawal. As a result, employers withdrew at the “first” sign of financial trouble for the plans. The resulting instability of pension plans was bad for the employers who remained in the plans (or just weren’t quick enough on the withdrawal) as well as the workers who were owed pensions under the plan.

As a result of this instability, the Multiemployer Pension Plan Amendments Act of 1980 (MPPAA) was enacted. The theory behind the MPPAA was to allocate unfunded vested benefits equitably to withdrawing employers by calculating their fair share of the unfunded liability on the date of withdrawal. This approach was meant to guarantee workers would receive the pension they were promised by the plan as well as not burden employers who stayed in the plan with liability attributable to another employer’s participation. (Whether the MPPAA really achieved its purpose is a whole other story, perhaps for the comment section of this blog.)

Nonetheless, under the MPPAA, employers that completely or partially withdraw are required to contribute to the plan a proportionate share of the unfunded vested benefits and liabilities. The result is an employer who withdraws from an underfunded plan, even though they have made all required contributions under the collective bargaining agreement, may still owe the fund additional monies and have to continue payments until its liability is paid. The amount of many employers’ withdrawal liability has them looking around for a goose laying golden eggs.

Over the next several blog posts, we’ll take a closer look at the four steps of withdrawal liability process:

  1. Determining when an employer has withdrawn
  2. Calculating the employer’s share of unfunded liability
  3. Notifying the employer of its withdrawal liability
  4. Collecting the withdrawal liability