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Withdrawal Liability Basics

Tablet with financial reports next to man with briefcase.Given the pandemic and its effect on financial markets coupled with the loss of contribution hours in certain industries, such a construction, many defined benefit pension plans have become underfunded once again.  What may come as a surprise to contributing employers of multi-employer pension plans is the impact an underfunded pension plan can have on their business upon withdrawal from the plan.  Employers should be aware of withdrawal liability and how to minimize its financial consequences.

How did withdrawal liability come about?

In September 1980, Congress enacted the Multi-Employer Pension Plan Amendments Act (the “Act”) which, among other things, required plan trustees to collect a withdrawal liability from a multi-employer plan (“MPP”).  One of the rationales for the Act being if one employer of a ten-employer plan withdraws, that would leave nine remaining employers picking up the share of the withdrawing employer.

What triggers withdrawal liability?

Any significant reduction in an employer’s duty to contribute – including sale of business assets, layoffs, plant closures or changes in a collective bargaining agreement – can trigger a complete or partial withdrawal from a plan, resulting in withdrawal liability.

How is the amount of withdrawal liability calculated?

Generally, the amount of withdrawal liability is an employer’s share of the plan’s unfunded vested liabilities.  Unfunded vested benefit liabilities are measured by the difference between fund assets and the promises the fund has made to participants to pay for existing and future pension benefits.  The employer’s share is determined under a statutory formula.

After the amount is calculated what happens next?

After the Plan determines the amount of the liability, it notifies an employer of the amount, and collects the amount from the employer.  The amount can be startling to an employer.  In many cases, where employers seeking to sell their businesses through an asset sale or simply close down, withdrawal liability becomes an insurmountable obstacle.

What can be done to reduce the liability?

An employer who withdraws may be able to reduce the withdrawal liability depending upon what business valuation is used.  The Act recognizes that net book value reported on a company’s balance sheet rarely represents its liquidation value.  It is recommended a company facing such a liability obtain expert assistance in determining its liquidation value and calculating its withdrawal liability based on that value.

How should a company facing such an unexpected impediment to its business plan proceed?

Since the rules governing withdrawal liability are complicated, companies facing these issues should consult with their accountants and legal counsel having expertise in this area.

Henry J. Donner is of counsel to the firm. Henry’s professional network puts him in the forefront of multi-employer/union benefit plan practice which covers matters such as health cost containment and management of liability associated with employers’ contributions to pension plans.

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