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A Better Partnership


Sep 2013
September 24, 2013

A Few Pointers on Collectively Bargained Pension Plans

They say everyone likes surprises, but the pension to which you contribute for your union employees may come with a few surprises you won’t like.

Unions sometimes negotiate for their members’ retirement benefits to be provided through a multi-employer pension plan. Each payroll period, the participating employer contributes the negotiated amount to the pension fund. When the union employee retires, the pension fund pays the retirement benefit. But that is not the end of the story.

The first surprise may be additional liability. Even if a participating employer has made all of the required contributions to the plan,  the employer may still be required to contribute more.

Like many single-employer pension plans, many multi-employer pension plans today are underfunded. Although the calculations are complex, the concept is simple: the funds have promised more in benefits than they have currently funded. There are many factors that contribute to that result, including the decline in the number of unionized employees, participating employers that went bankrupt with outstanding liabilities and insufficient investment returns. When a participating employer withdraws from a multi-employer pension plan, the law provides that the withdrawing employer is liable for a portion of that underfunding.

Although there are limits on how much withdrawal liability may be imposed, the liability can be very significant, even for an employer with relatively few union employees.

Fortunately, the law requires that a multi-employer pension plan provide a participating employer with an estimate of potential withdrawal liability. If you have union employees participating in a multi-employer pension fund and have not previously requested an estimate of your potential withdrawal liability, we strongly suggest you do so. It is a vital piece of information for future planning. Also, asking for the number is a common practice and will not attract undue attention.

Another surprise is that withdrawal liability may not be limited to the company that employs the union employees. Withdrawal liability applies to all members of a group of companies that are closely related. A detailed discussion of those rules is beyond the scope of this article, but the rules can result in both parent and subsidiary companies and companies with substantially similar ownership becoming liable for withdrawal liability, just as if each company directly participated in the plan. Family-owned businesses are particularly at risk in this analysis because there are many “attribution” rules that deem one family member (e.g., the parent) to own stock held in the name of another family member (e.g., child) and the ownership of the businesses may have been the result of estate planning rather than reflecting combined business operations.

Another surprise is that if you break up a group of related companies before withdrawing from a multi-employer pension plan, the plan may claim you took that action in order to “evade or avoid” withdrawal liability. If the plan is able to establish that was the case, then withdrawal liability may also be imposed on the former members of the group.

Yet another surprise is that it isn’t just corporations, LLCs or other formal business entities that may be brought into the related group of companies. Anyone engaging in a trade or business may become part of such a group and be subject to withdrawal liability. That means if you own shares in a corporation that has potential withdrawal liability and you personally own a few rental homes, or perhaps the building in which the business operates, you may become personally liable for the withdrawal liability. If Aunt Mary owns stock and is also an artist who sells her work at art fairs, she may also become personally liable for withdrawal liability. That result may seem strange, but the law permits multi-employer pension plans to impose withdrawal liability on individuals who are conducting a trade or business. Most plans are extremely aggressive in pursuing any source of funds that may be available to them.

If you contribute to a multi-employer pension fund, planning for your potential withdrawal liability should be a primary business concern. We have assisted many employers in understanding these issues and in minimizing these unpleasant surprises.

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