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Withdrawal Liability

Withdrawal Liability Proposed Rule

The Pension Benefit Guaranty Corporation (PBGC) is proposing a new regulation to provide interest rate assumptions in determining a withdrawing employer’s liability to a multiemployer pension plan. Read the press release for additional details.

Types of withdrawal

An employer that withdraws from participation in a multiemployer plan may do so either in a:

  1. complete withdrawal, or
  2. 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 of an employer

(ERISA Sec. 4203)

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 entertainment.)

If all or substantially all employers withdraw completely from a plan, the plan experiences a mass withdrawal. (See Mass withdrawal, below.)

Partial withdrawal of an employer

(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 could 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.

In the first test, a CBU is the unit by which the employer's contribution is measured (for example, hours worked, tons of coal mined, containers handled). The 70% decline is measured by a formula in ERISA that looks at the employer's CBUs over a period of time.

In the second test, the "partial cessation" 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, or
  2. A situation in which an 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 of all or substantially all employers

(ERISA Secs. 4041A, 4219 and 4281)

If all of the contributing employers withdraw, the plan is terminated in a mass withdrawal. If substantially all of the employers withdraw, there is a non-termination 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 describing the various administrative steps the plan must take if a mass withdrawal occurs.

Special rules for certain industries

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

In recognition of differing conditions in various industries, ERISA has a series of special industry rules. 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

In addition, in other industries not covered by the special statutory rules, Congress gave PBGC 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 PBGC's multiemployer insurance program.

Asset sales

(ERISA Secs. 4225 and 4204)

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

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 (ERISA Sec. 4204).

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 has various allocation formulas that a plan can use for determining an employer's withdrawal liability. In addition, other methods can be used, subject to PBGC approval. 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.

ERISA provides a direct attribution formula and three pro rata formulas.

The plan must determine the amount of withdrawal liability and demand 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; ERISA 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 payment 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 (a rule that generally reduces small withdrawal liability obligations);
  2. a 20-year payment cap;
  3. a credit for a prior partial withdrawal; and
  4. a limitation on liability under ERISA Sec. 4225.

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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