Multiemployer withdrawal liability: what employers owe and when

An employer that contributes to a multiemployer pension plan under a collective bargaining agreement has an exposure that does not appear on its balance sheet until it is triggered: its share of the plan's unfunded vested benefits, payable if the employer stops contributing. For a company that sells a division, closes a facility, moves work out of the bargaining unit or is acquired, that exposure can be the largest single number in the transaction, and it is frequently discovered late.

What triggers it

A complete withdrawal occurs when the employer permanently ceases to have an obligation to contribute or permanently ceases all covered operations. A partial withdrawal occurs when contribution base units decline by 70 percent over a three-year testing period, when the employer stops contributing under one of several agreements but continues work of the type covered, or when the employer stops contributing for a facility but continues the same work there. Partial withdrawals are assessed on a pro rata basis and are easy to trigger by accident, particularly during restructurings.

Liability attaches to the whole controlled group, not only the entity that signed the agreement. A parent that never employed a union member can be assessed for a subsidiary's withdrawal.

How the assessment is calculated

The plan's actuary allocates the plan's unfunded vested benefits among contributing employers using one of the statutory methods. Most plans use the presumptive method, which allocates each year's change in unfunded vested benefits to employers in proportion to their contributions over the preceding five years, with each year's layer amortized over 15 years. The modified presumptive, rolling-five and direct attribution methods allocate differently, and the plan document says which one applies. The result is the employer's allocable share as of the end of the plan year before the withdrawal.

The actuarial assumptions used to measure unfunded vested benefits, above all the interest rate, drive the result. A plan measuring its liability at its funding rate will produce a far lower assessment than one measuring at rates closer to annuity purchase pricing. The PBGC has finalized a rule under Section 4213 permitting plans to use interest assumptions ranging from the plan's funding rate to the PBGC's Section 4044 rates or a blend of the two, and plans that received special financial assistance under the American Rescue Plan Act are subject to specific assumption requirements for a period after receiving it. Employers should ask which assumptions the plan uses before any transaction, not after the demand arrives.

A de minimis rule reduces small assessments: the lesser of $50,000 or three-quarters of one percent of the plan's unfunded vested benefits is excluded, with the reduction phased out as the assessment rises above $100,000 and eliminated at $150,000. Plans may adopt higher de minimis amounts. The building and construction industry has its own rules, under which a withdrawal generally occurs only if the employer continues the same work in the same jurisdiction without contributing. A sale of assets can be structured to shift the liability to the buyer under Section 4204 if the buyer assumes the contribution obligation and provides a bond, and the seller remains secondarily liable for five years.

How it is paid

The assessment is not due in a lump sum. The statute sets an annual payment equal to the employer's highest contribution rate in the ten plan years ending with the withdrawal, multiplied by the average of the three highest consecutive years of contribution base units in that period. The employer pays that amount each year until the assessment, with interest, is retired, subject to a 20-year cap. Because of the cap, an employer whose allocable share is large relative to its contribution history may pay substantially less than the assessed amount. The cap does not apply in a mass withdrawal, when the plan terminates by withdrawal of all employers, and in that case the liability is also recalculated without the de minimis reduction and on a more conservative basis.

Plans and employers often negotiate a lump sum settlement at a discount to the payment stream, and the plan's willingness to do so depends on its own funded position and cash needs.

The deadlines

The procedure rewards attention. After the plan issues its demand, the employer has 90 days to request a review of the calculation and to identify any inaccuracies. If the dispute is not resolved, the employer has 60 days after the plan's response (or 120 days after its own request, if the plan does not respond) to initiate arbitration. Missing the arbitration deadline generally means the assessment stands as issued. Throughout, the employer must begin making the scheduled payments within 60 days of the demand and continue them during any dispute. The rule is pay now, argue later.

Knowing the number before you need it

An employer may request from the plan, once in any twelve-month period, an estimate of its withdrawal liability as if it withdrew on the last day of the prior plan year, together with an explanation of the calculation. The plan must respond, though it may charge a reasonable fee. We recommend that every contributing employer request this estimate annually, review the assumptions behind it and carry the figure in its planning. In a sale, the estimate should be in the data room, and the buyer's advisors will ask for it.

Our approach

We review the plan's assessment or estimate, test the allocation method and assumptions against the plan document and the statute, recalculate where the figures do not reconcile and model the payment schedule and settlement alternatives. For transactions, we quantify the exposure under each deal structure, including Section 4204 and partial withdrawal scenarios, and work with the employer's counsel on the review and arbitration timetable.

This article is general information about the topics discussed and is not actuarial, legal or tax advice for any specific plan or employer.