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Presenting a live 90-minute webinar with interactive Q&A
Multiemployer Pension Plan Withdrawal
Liability Under the 2014 MPRA:
An In-Depth Examination Minimizing Liability Resulting from Underfunding or
Corporate Transactions; Strategies for Challenging Assessments
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
THURSDAY, OCTOBER 1, 2015
Eric Douglas Field, Senior Counsel, Akin Gump Strauss Hauer & Feld, Washington, D.C.
Michael P. Kreps, Principal, Groom Law Group, Washington, D.C.
Joshua Shapiro, Senior Actuarial Advisor, Groom Law Group, Washington, D.C.
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6
Overview
Multiemployer plan participation
Collective bargaining agreement
Contribution amount
Negotiated rate
Employment units
Board of trustees
Plan funding level
Minimum funding standards
Impact of underfunding
7
Overview
Withdrawal from a plan
Closing a facility
Ceasing to perform work in an area
Bargaining out of plan
Ending relationship with union
Business closure
Bankruptcy
Sale of business
8
Overview
Withdrawal liability
Required by law
Share of underfunding (if any)
Actuarial assumptions
Allocation method
Industry specific rules
De minimis amount
PBGC oversight
9
Overview
Payment schedule
Highest contribution rate
Average employment units
Quarterly installments
Duration of payments
20-year cap
© 2015 Akin Gump Strauss Hauer & Feld LLP akingump.com
Eric Field
WITHDRAWAL LIABILITY SPECIAL RULES AND EXCEPTIONS
Controlled Group Liability - Generally
For purposes of ERISA, all trades or businesses in a controlled group are considered a single employer.
If the employer completely or partially withdraws from a multiemployer pension plan (“MEP”) that has unfunded vested benefits (“UVBs”) all members of the controlled group are jointly and severally liable for the withdrawal liability.
A MEP may seek payment from any member of the controlled group and notice to one member of withdrawal liability is considered notice to all.
11
Controlled Group Liability – Determining Controlled Group Member
A controlled group is two or more organizations that are “trades or businesses” and are under common control.
Common control determined under IRS Regulations, 29 C.F.R. § 1.414(c)-1, et. al. (Generally parent owning 80% of outstanding voting shares or value of subsidiary, or brother-sister organizations with five or fewer persons with 80% common ownership and 50% identical ownership).
A trade or business is an organization engaged in regular and continuous activity for profit, not a passive investor. But traditionally passive investor (e.g., private equity fund) can be trade or business if sufficient control over operating company.
12
Successor Liability Claims
More Circuit Courts of Appeals have been recognizing successor liability claims against the asset purchasers of employers that owed withdrawal liability relating to the purchased assets. The Ninth Circuit recently joined the Seventh Circuit and the Third Circuit in recognizing such a claim.
The test that has developed is whether the purchaser took over the business with notice of the liability and with continuity in the business operations between the seller and the purchaser.
Prior decisions recognized a critical factor being whether the purchaser retained substantially the same workforce and physical plant. The Ninth Circuit found the most critical factor being whether the purchaser has taken over the economically critical bulk of the seller’s customer base.
13
Successor Liability – Practical Considerations
In the typical successor liability case, the purchaser has had some prior connection to the seller, e.g., one or more members of a purchaser’s management team was with the management team of seller. But as this theory continues to develop it is conceivable that constructive notice may become sufficient (e.g., knowledge that purchaser contributed to an underfunded MEP and would be withdrawing may be sufficient notice).
Purchasing the assets of an employer that contributes to a MEP carries with it a substantial risk of being responsible for that seller’s liability if the seller does not pay it. And attempting to exclude such liability in the purchase agreement may not be sufficient.
Reasonable options to address such liability is to either negotiate a reduction in the purchase price or to establish an escrow for a period of years to cover any potential liability.
14
Withdrawal Liability – Industry Exceptions
The following industries have special rules in determining whether the cessation of a contribution obligation causes a withdrawal:
Construction
Entertainment
Trucking
Any other industry with similar characteristics of the above industries if approved by PBGC.
15
Withdrawal Liability – Construction Exception
A construction employer does not completely withdraw from a construction industry plan or a plan that adopted a construction rule amendment approved by PBGC, unless:
● the construction employer continues to perform work in the jurisdiction of the CBA for which contributions were required or resumes work within five years of when the employer’s contribution obligation ended (five years reduced to three if there is a mass withdrawal termination).
Construction employer is not liable for a partial withdrawal if the employer contributes to the MEP for more than an insubstantial amount of its work in the same craft and area jurisdiction for which contributions were previously made.
16
Withdrawal Liability – Entertainment Exception
Entertainment industry has the same complete withdrawal exception for employers working in the entertainment industry contributing to an entertainment industry plan except jurisdiction of the CBA is replaced by jurisdiction of the plan.
Employers working in the entertainment industry do not have liability for a partial withdrawal for an entertainment industry plan unless and until PBGC adopts regulations establishing rules for such liability.
17
Withdrawal Liability - Trucking Industry Exception
An employer in a plan that substantially covers participants in the trucking industry does not incur a withdrawal from a trucking industry plan unless:
● PBGC determines that the employer’s withdrawal substantially damaged the plan’s contribution base or
● The employer fails to post the required bond or escrow pending PBGC’s determination as to substantial damage (PBGC has 60 months from when employer’s obligation to contribute ended to make determination)
PBGC recognizes only a handful of MEPs as trucking industry plans (e.g., Central States is not a trucking industry plan)
18
Withdrawal Liability – Other Industry Exceptions
Plans covering participants in industries other than construction, entertainment and trucking may apply for a construction industry type rule.
Plan must demonstrate to PBGC’s satisfaction that when its contributing employers withdraw they are immediately replaced by a new employer (typically involves one employer losing a contract to another employer that will have the same obligation to contribute).
PBGC will require data for a significant number of years establishing that the plan’s contribution base has not been damaged by employer withdrawals (PBGC has approved such a rule for a plan in the service industry).
19
Withdrawal Liability – Sale of Assets Exception
Employer that sells substantially all of its assets in an arms-length transaction to an unrelated party does not partially or completely withdraw under the following rule if:
● The contract for sale makes the seller secondarily liable for the buyer’s withdrawal liability if the buyer partially or completely withdraws within five plan years of the sale;
● The buyer has an obligation to contribute for substantially the same number of contribution base units as the seller (not including any obligation to contribute that the buyer may already have notwithstanding the purchase); and
● The buyer posts a purchaser’s bond or requests a bond waiver before the end of the plan year.
If the buyer fails to request a bond waiver and fails to post a bond after the end of the plan year the MEP may assess withdrawal liability against seller.
The MEP or the PBGC may grant a bond waiver if the purchaser satisfies the net income or the net tangible assets test.
20
Withdrawal Liability – Buyer’s Practical Considerations for the Sale of Assets Rule
A buyer should carefully consider whether to agree to any purchase in which the sale of assets exception would apply unless doing so is completely unavoidable.
A buyer that agrees to the sale of assets exception is not only assuming a contribution obligation, but also is agreeing to assume the seller’s last five years of contribution history. Agreeing to this could subject buyer to substantial liability.
Even if buyer is already a contributor to the same MEP under a different CBA, it should carefully consider agreeing to have the sale comply with this exception because it would be increasing its withdrawal liability by increasing its contribution history and future obligation.
A better course of action if possible is to purchase the assets with no obligation to contribute to the fund, negotiate a purchase price reduction or escrow to address any potential successor liability claim, and replace the MEP with a defined contribution plan.
21
Withdrawal Liability – De Minimis (Small Employer) Rule
An employer whose allocable share of a MEP’s UVBs is less than $150,000 has its allocable share reduced by up to a maximum $50,000.
Under this rule, the reduction to an employer’s allocable share is $50,000 reduced dollar for dollar by the amount that the unreduced allocable share exceeded $100,000. If the unreduced allocable share was $150,000, the employer gets no reduction under the de minimis rule.
By amendment, a plan can change the statutory $50,000 to $100,000 and the statutory $100,000 to $150,000.
As a practical matter, given the significant increase in MEPs UVBs, the de minimis rule seldomly has any effect anymore and small employers are equally, if not more so, burdened with withdrawal liability.
22
24
Partial Withdrawals
Partial withdrawal triggers
70% decline in employment level
Partial cessation of contribution obligation
70% decline test
a) Highest year out of past 3 years
b) Average of highest 2 years in the 5-year period preceding the past 3 years
Partial withdrawal occurs if (a) is less than 30% of (b)
25
Partial Withdrawals
Year Hours of Employment
2010 100,000
2011 91,000
2012 98,000
2013 65,000
2014 42,000
2015 25,000
2016 21,000
2017 26,000
• Highest level between
2015 and 2017 is 26,000
• Highest 2 years between
2010 and 2014 are
100,000 and 98,000.
• Average of those years is
99,000
• 26,000 is below 30% of
99,000
• Partial withdrawal occurs
in 2017
26
Partial Withdrawals
Partial cessation of obligation
No minimum % threshold
Continue to perform covered work:
Without contributing to plan
In same jurisdiction or facility
Can be triggered when a unit:
Bargains out of plan
Ceases to be represented by union
Is replaced with non-union workers
27
Partial Withdrawals
70% decline in consecutive years
Consequence of multi-year test
Credit applied in subsequent years
Payment schedule ignores credit
Can be very big issue
Multiple partial withdrawals can result in larger assessment than single complete withdrawal
Likely unintended consequence of law
29
Background PPA Sunset
Roughly 150 plans facing insolvency
Covering 1.2 – 1.5 million participants
Measures taken to improve funding
Increased employer contributions Reduced future accruals and ancillary benefits Despite these measures, insolvency still likely
PBGC and participants at risk
Low guarantee Insufficient resources
30
MPRA
Multiemployer Pension Reform Act
Passed in December 2014
New Tools for Trustees
Benefit Suspensions
New Partition Provision
PBGC premium increase
From $13 to $26 per participant
Technical corrections & enhancements
Repeal of PPA sunset
Changes to withdrawal liability
Other technical changes
31
Critical and Declining Plans
New status on top of existing PPA statuses
Actuary projects plan will exhaust assets Generally within 20 years
Annual certification
Participant notification Expected date of insolvency
Impact of insolvency on benefits
Actions plan has taken to improve funding
Plans facing serious funding distress are now subject to greater
participant disclosure requirements than under prior law.
32
Benefit Suspensions
Voluntary tool for trustees
Applies to retired and non-retired participants
Permitted to reduce accrued benefits if: Reductions necessary to avoid insolvency
Benefits remain at least 10% above PBGC guarantee
After reductions, plan is projected to remain solvent
Reductions not more than is necessary to save plan
Plan has taken “all reasonable measures” to recover
For some plans, modest benefit sacrifices today have the potential to
prevent far more dramatic benefit losses in the future.
33
All Reasonable Measures
Current and past contribution levels
Current and past benefit accrual levels
Prior benefit reductions (e.g., ancillary benefits and past suspensions)
Compensation level of participants
Economic factors facing employers
Need to retain support of active participants
Other factors chosen by trustees
Although “all reasonable measures” remains a subjective determination,
the statute provides guidance on what issues plans should consider.
34
Other Suspension Conditions Protected categories
Disabled participants Participants over age 80 (phased in over age 75)
Approval from Treasury Department Participant vote
Majority of all participants need to vote against to override trustee decision
Retirees must share in future benefit improvements
Suspensions disregarded for calculating withdrawal liability for 10 years following suspension
MPRA includes many provisions and restrictions that are intended to
ensure benefit suspension authority is not misused.
35
New Partition Provision
PBGC assistance prior to plan insolvency
Previous provisions
Limited to employees of bankrupt employers
Only used 3 times
New provisions available more broadly
Must reduce PBGC liability
All benefits reduced to 110% of PBGC guarantee
For withdrawal within 10 years of partition, partitioned liabilities included in assessment
Recent discussions with PBGC have indicated that it is not yet clear how
extensively the agency will utilize the partition provisions.
36
PBGC Premium Increases
From $13 per participant to $26 per participant
Increase is effective in 2015
Premium level is indexed to inflation
Unlikely to solve long-term PBGC funding challenge
Together with the partition changes, the increased PBGC premiums are
intended to help improve the PBGC’s rapidly expanding deficit.
37
Withdrawal Liability Changes Contribution increases required for plans in
“endangered” or “critical” funding status are ignored for withdrawal liability purposes Only if the increases do not earn benefit accrual Once plan emerges from endangered or critical status,
contribution increases taken into account but not in determining high contribution rate for years where plan was in endangered or critical status
Surcharge applicable to multiemployer plans in critical status disregarded when determining annual payment
Changes apply prospectively only Past withdrawals not affected Only impacts increases effective in 2015 and later
Under MPRA, increasing the contribution rate no longer increases an
employer’s potential withdrawal liability assessment.
38
Other Technical Changes Ability to opt into critical status
“Do nothing” funding improvement plans
Plan mergers and PBGC assistance
PPA default schedules when CBA expires
Expanded disclosure requirements
PBGC coverage for pre-retirement survivor benefits
© 2015 Akin Gump Strauss Hauer & Feld LLP akingump.com
Eric Field
STRATEGIES FOR MINIMIZING WITHDRAWAL LIABILITY AND
CHALLENGING ASSESSMENTS
Collective Bargaining
If an employer is not in a MEP, it may be best to avoid getting into a MEP, and instead provide a defined contribution plan.
The risk of defined benefit plans in general, and MEPs specifically, should make this a priority of collective bargaining.
If an employer is already in a MEP, it needs to carefully analyze whether withdrawal is the most prudent option, and if so, when is the best time to withdraw.
40
Strategy for Collective Bargaining
After evaluating all the previous information, determine if and when withdrawal makes the most economic sense.
If withdrawal is necessary, do not agree to a replacement plan until withdrawal liability is paid or offset through other concessions.
Use collective bargaining as a means of persuading the MEPs to take advantage of the tools provided by MPRA or risk a mass withdrawal.
Make argument to union that if a MEP will not take action to save itself it is not in the interest of its members to have contributions continue that will never provide a benefit.
41
Collective Bargaining – Carefully Review Pension Provisions
MEPs have added provisions that will have substantial impact on employers.
One plan added a provision in its rehabilitation plan requiring withdrawing employers to pay share of accumulated funding deficiency in addition to withdrawal liability, then required language in CBAs stating that employers agree to abide by all terms of rehabilitation plan.
● Employers probably assumed they were just agreeing to abide by the rehabilitation plan’s contribution rates and never read the amended rehabilitation plan.
● If permissible, this could have a dramatic impact on an employer’s liability. Some plans have accumulated funding deficiencies approaching a $1 billion or more. This provision would add another $100 million to a 10% contributor’s liability. And unlike withdrawal liability, it would be due in a lump sum.
When bargaining on the pension provision, all documents must be read carefully especially those incorporated by reference specifically trust agreements and rehabilitation and funding improvement plans.
42
Considerations in Determining Whether and When to Withdraw from a Multiemployer Pension Plan
What is the amount of employer’s estimated withdrawal liability and when was the last estimate requested from the MEP? ● Employers should find out extent of contingent withdrawal liability before negotiations.
Has the MEP had a recent change in actuary that may result in a change of assumptions used in determining the amount of UVBs. ● A MEP’s actuary determines the assumptions. Real life example of a plan’s actuary changing
assumptions resulting in an increase in an employer’s contingent withdrawal liability from $170 million to $480 million. Employers need to stay informed on changes that may be occurring.
If employer withdrew would its annual payments be subject to the 20-year cap or would an increase in the plan’s UVBs expose it to greater liability?
● If employer’s annual payment would already be limited by the 20-year cap, it may not matter (outside of a mass withdrawal) whether the assessed amount of liability increases.
● If employer would not yet hit 20-year cap, plan’s increasing UVBs would have an impact.
What method does the MEP use to calculate withdrawal liability? ● Depending on the method, more or less of an employer’s contribution history is included in the
calculation of an employer’s allocable share of UVBs. This information is important in determining when and if to withdraw.
43
Considerations in Determining Whether to Withdraw from a Multiemployer Pension Plan (Continued)
Is the MEP likely to go insolvent and/or have a mass withdrawal?
● When a MEP runs out of contributing employers or is running out of assets to pay benefits, a risk exists that the plan will try to terminate thereby causing the involuntary withdrawal of the remaining employers and the assessment of mass withdrawal liability (which includes the assessment of even greater liability and the loss of the 20-year cap on payment of benefits).
Is the MEP operating under a rehabilitation plan or funding improvement plan?
● Current law requires poorly funded MEPs to adopt a strategy to improve the funding which will often include contribution rate increases. If such is the case, employers will face higher contributions or a 5% then 10% surcharge if employer does not agree to rates.
44
Considerations in Determining Whether to Withdraw from a Multiemployer Pension Plan (Continued)
Is the annual withdrawal liability payment expected to increase or decrease in future years?
● Has the number of contributory hours been significantly declining?
■ Annual payment determined by 10 years of contribution history.
■ If number of contributory hours were significantly less 10 years ago then their current level remaining in the plan until the high years are out of the calculation will reduce annual payment for a withdrawal in a future year.
■ Especially important where employer’s annual payment is already limited by the 20-year cap. In such cases, reductions to annual payment significantly reduce present value of total liability.
● Under MPRA contribution rate increases required by a rehabilitation plan not included in calculating employer’s annual withdrawal liability payment.
■ CBA needs to be clear that any rate increase that goes into effect is a requirement of the rehabilitation plan, otherwise plan may argue that it should be included in calculating annual withdrawal liability payment in event of future withdrawal.
45 DRAFT - Attorney client communication Privileged and Confidential
Considerations in Determining Whether to Withdraw from a Multiemployer Pension Plan (Continued)
Is the MEP eligible and likely to take remedial measures provided for under the Multiemployer Pension Reform Act of 2014?
● Legislation allows certain poorly funded plans to reduce benefits in order to avoid insolvency. If plan takes these steps, an employer that remains in the plan for 10 years following benefit cuts will have significantly reduced withdrawal liability. Not all plans are eligible and even those that are may not take the necessary steps.
Is the MEP eligible for a PBGC partition?
● The MPRA expanded the number of MEPs that will be eligible for a PBGC partition. If a plan is partitioned, PBGC funds a portion of the liabilities and after 10 years those liabilities would not be included in allocation of unfunded vested benefits.
Is Union likely to accept a withdrawal with a replacement 401(k) at a lower contribution rate?
● How likely will employer be at offsetting withdrawal liability through contract concessions including low employer contribution to 401(k)?
46
Withdrawal Liability Arbitrations
The deck is stacked against you as an employer. The MEP’s determinations are presumed correct unless overcome by a preponderance of the evidence.
Before even getting to arbitration, be careful of the dates and make sure requests for review and arbitration demands are filed timely. If dates are missed, it is nearly impossible to challenge the assessment except in very limited circumstances.
Issues to raise in arbitration:
● Question the accuracy of the assets and liabilities used in determining unfunded vested benefits
■ Are outstanding withdrawal liability claims properly included as assets of the plan?
■ Are only vested benefits included in the liabilities?
● Question the assumptions used by the actuary
■ Do they represent the actuary’s best estimate of future experience or were they selected for some other purpose (to maximize withdrawal liability?)
■ Did the Trustees improperly have a role in selecting the assumptions?
● For a critical status plan has it properly followed the rules of operation?
■ Critical status plans are prohibited from increasing benefits in most instances. Has the MEP improperly increased benefits and have such increases been included in the unfunded vested benefits.
● Has the MEP properly applied the previously discussed special rules?
● Has the MEP improperly included any surcharges in the annual payment calculation?
47
Settlement Strategies
Some MEPs are willing to accept discounts for lump sum payments and others insist on the full assessment.
Employers have an unconditional right to pre-pay, the dispute is what is full payment for employers subject to the 20-year cap.
Employers that are subject to the 20-year cap have a strong argument that their maximum pre-payment is the present value of their 20 annual payments, which would be less than the total assessment. The argument is typically over the appropriate discount rate, with plans often insisting on the PBGC rate and employers demanding the funding rate.
48
Settlement Strategies (Cont.)
The larger issue is settlement with the overhanging threat of additional liability in the event a mass withdrawal termination occurs. If such occurs within two plan years following the plan year of employer’s withdrawal, employer will owe reallocation liability.
But even if it occurs more than 2 plan years after employers withdrawal, PBGC has taken the position that an employer would owe redetermination liability which is the liability that was waived because of the 20-year cap. Redetermination liability is owed in such events under the statute and PBGC has taken a rather strained interpretation of the language to conclude that even though there is a three-year claw-back limitation to reallocation liability there is no such limitation for redetermination liability.
49
Settlement Strategies (Cont.)
The settlement question has been whether a MEP can provide an employer a waiver from potential mass withdrawal liability in exchange for a lump-sum payment of initial withdrawal liability.
The risk has been than such a waiver could be a prohibited transaction as it could be viewed as a plan’s giving plan assets to a party in interest. But either intentionally or not, MPRA excludes all withdrawal liability arrangements from the prohibited transaction rules. A plan may still have some general fiduciary concerns for granting such a release, but if the Trustees reasonably determine that such a waiver in exchange for a lump-sum payment is in plan’s best interest it may be permissible.
50
