Multiemployer Plans Pose Hidden Dangers for Employers
Although Taft-Hartley pension plans (THPs) are populated by union members, they are managed by boards of trustees, staffed with equal numbers of union and employer representatives: A typical 10-member THP fund board consists of five trustees who belong to the same union and five trustees who likely represent competing employers in the same industry.
Employer bankruptcies, fewer employees and stagnating union membership are some of the realities to take into account when determining entrance or continuation of participation in a THP.
Before making that step, potential entrants or current participating employers should:
- Understand the free-look offer for new participants. If you are considering entering a THP, you will most likely be offered a free-look period of five years in which to withdraw without incurring a withdrawal liability. Sounds appealing! But once participation has been negotiated, you will have to bargain to exit the plan and then develop a replacement program. How easy will it be to negotiate leaving a retirement plan?
- Assess potential withdrawal liabilities and net participant flows. As part of due diligence or ongoing monitoring, consider the size of the underfunding and the flow of new entrants, exiting employers and unemployed workers—aka “orphans.” The legislation was created to force employers in these plans to keep their pension promises: If one company went out of business, the remaining employers in the plan would have to pick up the pension contributions for the orphans. This law also requires an exiting employer to cover its liabilities before withdrawing from a THP.
- Understand the PBGC’s role and the differences from single-employer plans. The Employee Retirement Income Security Act of 1974 (ERISA) created the Pension Benefit Guaranty Corporation (PBGC) to protect pensions through an insurance program. The PBGC recently projected that it expects its insurance program for THPs to run out of money by 2025. As the demand for PBGC financial assistance for insolvent plans increases, this will further strain PBGC’s diminishing assets. However, THP sponsors have always paid much less into the PBGC, and the maximum benefit guarantees are, therefore, correspondingly lower.
- Comprehend the projection of the future funded status. A 2006 tax law change recognized that a current status snapshot was no longer adequate to determine funding levels. Therefore, THPs must project future liabilities and take remedial action to cover the future funding requirement. The zone status of yellow and red was intended to force trustees into action and inform participants of possible reductions in certain benefits—e.g., disability and early retirement benefits—or of the future benefit accrual rate.
- Review pending legislation. Congress has now convened a Joint Select Committee on Solvency of Multiemployer Pension Plans, to recommend a solution for the crisis faced by many of these plans, by the end of this year. A recent legislation change will allow trustees of financially troubled multiemployer pensions to apply for and potentially receive permission to reduce retiree benefits to prevent plan insolvency.
- Understand the role of a fiduciary. Fiduciary liability in connection with employee retirement plans is one of the most misunderstood exposures faced by directors, officers, employers and trustees. Many fiduciaries fail to appreciate that they can be held personally liable for a breach of fiduciary duty, even when the breach is unintentional. Plan fiduciaries are subject to the highest standard of care, even higher than the duty imposed on corporate directors and officers, without the benefit of corporate law’s business judgment rule. A careful review of the protections available must be completed in order to develop a thorough understanding of both corporate and personal liabilities.
Certainly not all Taft-Hartley plans are experiencing problems. The points reviewed above will help to distinguish a healthy THP from an unhealthy one, when considering entering or remaining in such a plan.
Elliot Dinkin is president and CEO at Cowden Associates, Inc. He provides leadership to position the company at the forefront of the industry. He earned his Master of Business Administration in finance and accounting from the University of Pittsburgh and a Bachelor of Arts in economics (cum laude) from Dickinson College.
This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Strategic Insight or its affiliates.
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