Withdrawal liability may be viewed by many contractors as highway robbery, but for underfunded pensions plans it’s a necessary “evil” that they are charged with enforcing.
Trustees need to understand when withdrawal liability occurs so that they can ensure that the proper procedures are in place to timely capture a withdrawal and begin the collection process. This blog post addresses what constitutes a withdrawal.
The basic rules for when a withdrawal occurs are pretty straight forward. A contractor is considered to have withdrawn from a multiemployer defined benefit plan in the following circumstances:
A complete withdrawal occurs when a contractor either:
- Permanently ceases to have an obligation to contribute, or
- Permanently ceases all covered operations under the plan.
A partial withdrawal occurs when there is a:
- 70 percent contribution decline measured over a three-year period; or
- Partial cessation of the employer’s contributions to the plan under one or more, but not all collective bargaining agreements, requiring contributions to the plan and the employer continues to perform work in the jurisdiction or transfers such work to another location; or
- Permanent cessation of an obligation to contribute with respect to work performed at one or more, but not all facilities, but continues to perform work at the facility of the type for which contributions were previously required.
If all of the contributing employers withdraw, the plan is terminated under the law in a mass withdrawal. Liability for employers withdrawing within the plan year in which a mass withdrawal occurs will be calculated under the normal rules, except none of the relief provisions we’ll discuss in a later post (such as the de minimis reduction or the 20-year cap) would apply.
In addition, employers who withdrew during the three years prior to the mass withdrawal are presumed to be part of the arrangement or agreement and are treated as if they had withdrawn in a mass withdrawal.
EXCEPTIONS TO WITHDRAWAL LIABILITY
There are a number of exceptions to the withdrawal liability rules. Here are some of the most common ones within our industry:
Sale of Stock
The sale of stock does not constitute a withdrawal from a multiemployer pension plan, and if stock is sold, there need be no accommodation for withdrawal liability as part of the sale transaction. This exception in comparison to a sale of assets is described in some detail in the paper Withdrawal Liability and The Sale of a Business prepared by William Ecklund of Felhaber Larson Fenlon & Vogt which is available on the SMACNA website under the Labor Relations, Benefit Funds section. Accordingly, we won’t go into greater detail here.
Construction Industry Exemption
Plans covering primarily building and construction industry employees may be subject to the construction industry exception. Contractors are considered construction industry employers if substantially all (85 percent or more) of its employees for which it has a contribution obligation to the plan work in the building and construction industry. Under this rule, a withdrawal occurs only if the employer ceases its obligation to contribute to the plan, but continues to work within the jurisdiction of the collective bargaining agreement, or returns to do the same type of work in the jurisdiction within five years, without in either case resuming contribution obligations to the plan.
Also, under the construction industry exception, a partial withdrawal occurs only if the contractor’s obligation to contribute under the plan is continued for no more than an insubstantial portion of the potentially covered work which the employer performs in the craft and area jurisdiction of the collective bargaining agreement. This has been interpreted to mean that a partial withdrawal occurs only when a contractor has substantially shifted its work mix in the jurisdiction so that only an insubstantial part of such work in the jurisdiction is covered.
However, with the basic understanding of when withdrawal liability exists and most frequent exceptions to it, trustees should be able to put in proper safeguards to ensure that employers who may have withdrawn are flagged for further investigation and if necessary, collection of their withdrawal liability. Just as with the collection of delinquencies, successful collection of withdrawal liability depends on the fund taking timely action before assets are fully liquidated (and difficult to trace), paperwork is lost or destroyed, and principles have disappeared. Ideally not only will your administrative office have the ability to spot signs of a potential withdrawal but will have a good working relationship with the union so that information on withdrawing employers is shared with the trustee on a timely basis.
Next time we’ll look at what latitude trustees have in defining the construction industry exception through their trust agreement.