Employer May Withdraw From Multi-Employer Plan in Critical Status

August 22, 2012 (PLANSPONSOR.com) - The Pension Protection Act (PPA) does not bar an employer from withdrawing from a multi-employer pension plan that is in critical status, a court has ruled.

The 2nd U.S. Circuit Court of Appeals noted that about this issue, the PPA itself is silent, so it turned to the question of “congressional intent.” Writing for the majority, Circuit Judge John M. Walker, Jr. said the statute appears to assume withdrawals in these circumstances by revising the calculation of withdrawal liability where the pension plan withdrawn from is in critical status.   

Specifically, the PPA provides that calculations of an employer’s withdrawal liability should not take into account 1) contribution surcharges imposed automatically once a pension plan enters critical status, or 2) benefit reductions required by a rehabilitation plan.   

According to the court opinion, in enacting the PPA, Congress also amended other portions of the Employee Retirement Income Security Act (ERISA) dealing with withdrawal and withdrawal liability without the slightest indication that it intended to abrogate employers’ ability to withdraw from pension plans in critical status.

The court found further support of its ruling external to the statute’s text. In its interpretation of the PPA, the Pension Benefit Guaranty Corporation (PBGC) has adopted regulations for calculating employer liability for withdrawal from plans in critical status.  

In addition, the court pointed out that the trustees of the Local 138 Pension Trust Fund contemplated the possibility of “voluntary” withdrawals in its rehabilitation plan. The plan explained that it did not contain only the high-contribution schedules necessary for the fund to emerge from critical status because such contribution rates “would undoubtedly drive employers to withdraw from the [fund],” given the trustees’ “reasonable assumption that employers would be unwilling to continue to participate in the [fund] if the cost of doing so were to exceed the cost of withdrawing.”   

“[W]e are reassured by the plaintiffs’ own expressed understanding that voluntary withdrawal was permissible notwithstanding the operation of the PPA’s mechanism for dealing with pension plans in critical status,” Walker wrote.  

In March 2008, the trustees announced the fund was in critical status as defined by the PPA. In November of that year they finalized a rehabilitation plan, which, as required by the PPA, set forth several new schedules of reduced benefits and increased contributions.

With the rehabilitation plan finalized, participating employer F.W. Honerkamp Co. and its employee union proceeded to negotiate successor collective bargaining agreements (CBAs) to those that were set to expire. They considered the rehabilitation plan’s schedules as well as the possibility of Honerkamp’s withdrawal from the fund. As part of that consideration, Honerkamp requested and the trustees provided an estimate of Honerkamp’s withdrawal liability under the Multiemployer Pension Plan Amendments Act of 1980 (MPPAA).   

On July 22, 2009, Honerkamp sent the union a “Last, Best and Final Offer” for each facility. Both offers provided that, as of August 1 of that year, Honerkamp would withdraw from the fund and create instead a 401(k) retirement plan for the company’s employees.  

The trustees of the Local 138 Pension Trust Fund sued, seeking to compel Honerkamp to make retroactive and prospective contributions under the rehabilitation plan’s default schedule. A district court granted summary judgment to Honerkamp, which the 2nd Circuit affirmed.  

The opinion in Trustees of the Local 138 Pension Trust Fund v. F.W. Honerkamp Co. Inc. is here.