An employer that ceases to contribute to a multiemployer pension plan is liable for its allocable share of any underfunding, called “withdrawal liability.” This withdrawal liability has become both prevalent and significant: The Pension Benefit Guaranty Corporation (PBGC)—the federal agency that enforces and regulates multiemployer pension plans—has estimated that approximately 10% of the 1,400 multiemployer pension plans in the U.S. face insolvency in the next 10 to 15 years. In light of the remedial policy of the withdrawal liability laws—the principal purpose of which is to protect the solvency of multiemployer pension plans—it is not surprising that the law has a strong pro-plan bias. A recent arbitration in which I represented the employer, however, illustrates one avenue that may be available to reduce an employer’s withdrawal liability.
The Pension Protection Act
Congress enacted the Pension Protection Act of 2006 (PPA) to address the looming multiemployer plan funding crisis. Under the PPA, multiemployer pension plan actuaries are required to annually certify a plan’s funding status, with plans classified in zones ranging from green to red. “Red zone,” or critical status, plans are required to adopt a PPA Rehabilitation Plan (Rehab Plan), a series of actions intended to facilitate the plan’s emergence from critical status. Employers obligated to contribute to critical status plans incur statutory contribution surcharges of 5% to 10% (PPA Surcharges) during the remaining term of the collective bargaining agreement (CBA) in effect when the plan entered critical status. If a Rehab Plan-compliant contribution schedule is not adopted within 180 days of the expiration of this collective bargaining agreement, the employer is obligated to pay the increases under the Rehab Plan’s default contribution schedule (Rehab Plan Increases), which is unilaterally implemented on the employer by the plan.
Withdrawal Liability Payment Rules
A multiemployer pension plan may not demand payment of withdrawal liability in a single lump sum. An employer is generally obligated to make annual payments determined by statutory formula. This Annual Payment Amount is equal to the product of: 1) the average “contribution base units”—i.e., the basis by which contributions are determined, such as hours worked, and 2) the “highest contribution rate”—i.e., the highest rate at which the employer had an obligation to contribute to the plan (Highest Contribution Rate).
Generally, absent a mass withdrawal or other catastrophic plan event, an employer is limited to 20 payments of the Annual Payment Amount. Accordingly, and as demonstrated by a recent arbitral decision involving the intersection of the PPA and withdrawal liability payment rules, any reduction in the Annual Payment Amount can drastically reduce an employer’s withdrawal liability.
See ERISA Sections 4219(c), 29 United States Code (USC) Section 1399(c) (Annual Payment Amount formula) and 4212(a), 29 USC Section 1392(a) (definition of obligation to contribute).