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Withdrawal Liability

Types of withdrawal

An employer that withdraws from participation in a multiemployer plan may do so either in a complete or partial withdrawal. If the plan has unfunded vested benefits allocable to the employer, the plan will assess withdrawal liability. The plan determines the amount of liability, notifies the employer of the amount, and collects it from the employer.

Complete withdrawal

(ERISA Secs. 4203, 4207 and 4218 )

A "complete withdrawal" occurs when the employer (including all controlled group members) permanently ceases to have an obligation to contribute to the plan or permanently ceases all covered operations under the plan. (Special withdrawal liability rules apply to plans and employers in certain industries, such as construction, or less frequently, trucking.)

The law offers protection to an employer that temporarily suspends contributions during a labor dispute with the employer's employees (generally strikes and lockouts).

Partial withdrawal

(ERISA Secs. 4205, 4206 and 4208 )

To ensure that employers who gradually reduce their contributions to a multiemployer plan do not escape withdrawal liability, ERISA has rules under which a partial cessation of the employer's obligation to contribute would trigger liability.

A partial withdrawal occurs when there is:

  1. A decline of 70% or more in the employer's "contribution base units" (CBUs), or
  2. A partial cessation of the employer's obligation to contribute.

A CBU is the unit by which the employer's contribution is measured (e.g., hours worked, tons of coal mined, containers handled). The 70% decline is measured through a formula in ERISA that looks at the employer's CBU's over a period of time.

The "partial cessation" test is designed to capture such things as:

  1. A situation in which an employer is obligated to contribute to the plan under more than one bargaining agreement, and one of the agreements expires, but the employer continues to perform work in the jurisdiction of the agreement without making contributions for the work, and
  2. A situation in which the employer ceases to contribute for one or more of its facilities but continues to perform work at the facility for which the obligation ceased.

The amount of liability for a partial withdrawal is based on the liability for a complete withdrawal liability, calculated under a formula in the law.

Mass withdrawal

(ERISA Secs. 4041, 4219 and 4281)

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 discussed below (such as the de minimis reduction or the 20-year cap) would apply.Also, certain benefit reductions and suspensions 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. PBGC has issued regulations concerning the various administrative steps the plan must go through if a mass withdrawal occurs.

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Special rules for certain industries

(ERISA Secs. 4203, 4205, 4211, 4216, 4219 and 4220 )

In recognition of differing conditions in various industries, a series of special industry rules are in operation. These rules modify the conditions under which a complete withdrawal occurs or when the employer is liable in the case of a partial withdrawal.

Special industry rules are provided for the following industries:

  • Building and construction
  • Entertainment
  • Trucking, household goods moving, and public warehousing
  • Retail food (Sec. 4205(c)) - for partial withdrawal

In addition, in other industries not covered by the special statutory rules, PBGC is given the authority to craft rules comparable to the construction and entertainment industry rules if the industry has "construction-like" characteristics and if these rules do not pose a significant risk to the multiemployer insurance system.

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Asset sales

(ERISA Secs. 4225 and 4204)

Withdrawal liability of employers who sell all or substantially all of their operating assets or are insolvent is limited by Sec. 4225 of the law.

In the case of an asset sale, a graduated statutory schedule limits the employer's liability to 30% if the dissolution or liquidation value is $2 million or less, with a maximum of 80% if the value is over $10 million. In order to qualify for the net worth limitation the sale must be a bona fide sale to an unrelated party in an arm's length transaction.

A withdrawal does not occur because of a cessation of contributions that results from a sale of assets to another employer, provided the sale meets certain conditions (Sec. 4204).

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Calculation and payment of withdrawal liability

(ERISA Secs. 4201, 4202, 4206, 4209, 4211 and 4219)

An employer's share of withdrawal liability is based on its allocated share of the plan's unfunded vested benefits (UVBs). The amount of the share will depend on the date or dates that the plan's assets and liabilities are valued, the actuarial assumptions and methods used to value the assets and benefits, and the allocation method chosen by the plan.

The law sets out various allocation formulas that a plan can use for determining an employer's withdrawal liability. In addition, other methods can be approved by the PBGC. The two basic types of allocation methods described in the law are:

  • The direct attribution method, which requires tracing of the UVBs attributable to the employer's employees, and
  • The pro rata method, which allocates liability in proportion to the employer's share of the contributions over a specified period.

The statute provides three pro rata formulas and a direct attribution formula.

The plan must determine the amount of withdrawal liability and make a demand for payment as soon as practicable after a withdrawal occurs. Sometimes it is not easy to determine whether the employer has withdrawn or is merely delinquent in making its contributions; the statute permits a plan to request information from the employer to determine if a withdrawal has occurred. The employer must begin paying its withdrawal liability within 60 days after receiving a demand for payment from the plan. This liability is payable quarterly, unless the plan adopts another period.

The law contains a number of special relief provisions to soften the impact of withdrawal liability. Among them are:

  1. a de minimis reduction (basically a rule that reduces small withdrawal liability obligations);
  2. a 20-year payment cap;
  3. a sale of assets rule;
  4. a net worth rule;
  5. a sole proprietor rule; and
  6. insolvent employer limitations.

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Arbitration of withdrawal liability disputes

(ERISA Sec. 4221)

Any dispute between an employer and a multiemployer plan involving withdrawal liability must be submitted to arbitration, and the law sets up a procedure under which the arbitration must be conducted.

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