Withdrawal liability is mounting for multiemployer pension plans

There are approximately 1,400 multiemployer pension plans and nearly 10% are projected to become insolvent within the next 15 years. Plan insolvency will trigger a termination and the assessment of withdrawal liability.

Collectively, these plans have more than $30 billion in unfunded liabilities. These plans are now being designated as "critical and declining status" and have the authority to reduce benefits under the changes to the law made in 2014. While those benefit cuts, which require regulatory approval, may forestall insolvency for a while, they are not going to reduce any withdrawal liability over the next 10 years.

As these plans become more desperate financially, some are seeking to discourage additional withdrawals and to maximize the withdrawal liability of the employers that do exit the plan. At least four plans, through their actuaries, have dramatically reduced the interest rate assumption to calculate withdrawal liability.

Rather than using the plan's assumed rate of return, typically 7-8%, they have adopted the PBGC long term interest rate of slightly more than 3% to calculate the unfunded vest benefit liabilities and, hence, withdrawal liability. These interest rate changes are increasing the amount of withdrawal liability by 200-400% depending on the methodology used to calculate withdrawal liability.

One plan even made the change retroactive to an employer that already had incurred a complete withdrawal which is unlawful. Unfortunately, the plans are not required to give any advance notice of the interest rate changes so it is important companies monitor their liability by annually requesting an estimate of liability. Companies can and should consider contesting rate changes if unreasonable based on past plan experience and projected experience.

Government contractors are also experiencing a rise in withdrawal liability when they are required under the contract and collective bargaining agreement to participate in the SEIU National Pension Plan or the IUE-CWA plan — both of which have been in critical status for many years. Unfortunately, if the government does not renew the contract a withdrawal will occur and liability will be assessed.

That liability can accumulate rapidly to $500,000 or more with only 20 workers — wiping out any expected profits from the contract and placing the company in financial jeopardy. Contractors are advised, therefore, to assess their potential liability before bidding on these contracts and joining these plans.

Alternatives should be explored. Some multiemployer plans also offer 401(k) plans or hybrid direct attribution plans than can avoid or limit this risk.

Employers in critical plans need to understand and manage this mounting withdrawal liability before it becomes so great that it exceeds the net worth of a company. There are methods under the law to reduce the liability and to avoid controlled group liability.

If your company is in such a plan, it is always better to assess the situation before a withdrawal occurs. For those companies considering joining such plans to obtain government work or new business, you need to know the true cost of doing business that is associated with this pension liability and consider other options as well.

Pension liability risk management is now more critical than ever. If your company triggers a withdrawal, you need to act within 90 days to preserve your legal rights.

Williams, a partner at FordHarrison, focuses his practice on pension and transportation law. The information in this legal alert is for educational purposes only and should not be taken as specific legal advice.

Source: Employee Benefit News