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As pension shortfalls balloon and the number of companies contributing dwindles, those companies left standing may be surprised to find they are liable to pay a sizeable balance. So what are the warning signs and how can you minimize the impact of withdrawal liability? Shaylor Steele and Patrick Egan discuss.
More than 10 million people participate and receive retirement coverage under defined benefit multi-employer pension plans. Due to an environment of low interest rates and market declines, many of these plans are in severe financial trouble and the government has projected that a significant number of these plans will eventually fail and become insolvent. If you have a unionized workforce, you should be aware of the significant withdrawal liability that falls back on employers when these plans do fail. This is especially true in the manufacturing industry. Thus, business owners need to understand the threat withdrawal liability poses to your business. Often times, employers do not focus on withdrawal liability issues until they receive their first demand notice—a point where options are limited. Employers can minimize, or eliminate, the impact of withdrawal liability on their businesses by planning in advance. This article will explain withdrawal liability, highlight warning signs that you may have a withdrawal liability problem, and suggest some best practices to manage withdrawal liability issues to safeguard your business going forward.
The Basics of Withdrawal Liability
In essence, withdrawal liability is an exit fee triggered when an employer completely stops contributing to a union pension plan – known as a multi-employer pension plan – or when an employer reduces its contributions beyond certain percentages over time. Withdrawal liability is an employer’s pro rata share of the unfunded benefits of a defined benefit multi-employer pension fund, and does not apply to defined contribution plans, such as 401(k) plans, or to welfare plans. It is important to note that withdrawal liability is a creation of statute and subject to strict enforcement, meaning there is very little subjective application to the process. Withdrawal liability assessments are typically significant and frequently exceed the million-dollar threshold, regardless of the fact that an employer may only contribute on behalf of a small number of union members.
Most employers do not realize the many ways withdrawal liability assessments can be triggered. Common transactions, such as closing a facility, selling a business, or laying off employees, can trigger the assessment of withdrawal liability. Withdrawal liability assessments can also be triggered from a “mass withdrawal,” which occurs when substantially all of the contributing employers to a multiemployer pension plan withdraw at the same time. An employer could be part of a mass withdrawal just by simply serving as a signatory to a collective bargaining agreement (CBA) that is maintained by an employer association. Even worse, if a third party is the master bargaining party that controls the terms of the CBA, that party does not need the consent of the employers and can initiate a mass withdrawal without the other employers even knowing. Mass withdrawals have been historically uncommon, but are recently on the rise and serve as a genuine threat to union employers because of the higher than normal withdrawal liabilities they carry. Potential withdrawal liability is another threat and has become increasingly recognized by creditors, sureties and accounting auditors over the years. Without receiving any withdrawal liability assessments, your cost of capital, ability to secure bonding and your company’s accounting records may be negatively impacted. Potential withdrawal liability is only considered “off balance sheet” now, but it is likely regulations may soon require employers to start booking these liabilities.
How to Control Your Control Group Liability
Too often, many employers are under the impression that withdrawal liability can only impact the business to which the assessment was triggered upon. This is a very common misconception. Withdrawal liability extends to trades and businesses under common control, known as a “control group.” Each trade or business in the control group with an employer contributing to a multi-employer plan is jointly and severally liable, along with that employer, for the employer’s withdrawal liability. Even if the trades and businesses are unrelated, as long as there is common ownership, they are part of the control group. This applies to stock ownership with a common parent (parent-subsidiary corporations), corporations owned by five or less stockholders (brother-sister corporations), and combined groups of corporations that are members of a parent-subsidiary or brother-sister controlled group. Even entities that are under common ownership, though not corporations, can be subject to control group liability and held jointly and severally liable for the withdrawing employer’s action. Although rare, it is possible that individual stockholders or officers of a corporation may also be considered part of a control group, subjecting them to personal liability under the concept of “piecing the corporate veil.”
So, what should you do? The first step is to educate yourself on withdrawal liability and understand where assessments could come from and the potential amounts of such liability. This should be done by consulting an expert on withdrawal liability to help you develop a short-term, mid-term and longterm strategy to minimize, or in some cases eliminate your company’s risks of withdrawal liability. As noted above, even if you do not participate in a multi-employer pension plan, you may still be at risk of a withdrawal liability assessment because of control group rules. If you answer “yes’ to any of the following questions, you may face potential exposure to a withdrawal liability assessment and should be proactive in developing a strategy to protect your company from liability if, and when, it is assessed:
1. Do you currently contribute to a multi-employer (union) pension plan?
2. Have you contributed to a multi-employer pension fund, at any time, during the past six years?
3. Do any of the owners of your company also have an interest in a company that is contributing, or has contributed, to a multi-employer plan?
4. Has your company acquired the stock, or assets, of a company that contributed to a multi-employer plan?
5. Does your company have a close business relationship with a company that contributes to, or has contributed to, a multi-employer plan?
For more information or to discuss any concerns you may have regarding the possible impact of withdrawal liability on your company, please contact Shaylor Steele at email@example.com or 216.363.4495 or Patrick Egan at firstname.lastname@example.org or 216.363.4433.