An employer that ceases to contribute to a multiemployer pension plan is liable for its allocable share of any underfunding, called “withdrawal liability.” This withdrawal liability has become both prevalent and significant: The Pension Benefit Guaranty Corporation (PBGC)—the federal agency that enforces and regulates multiemployer pension plans—has estimated that approximately 10% of the 1,400 multiemployer pension plans in the U.S. face insolvency in the next 10 to 15 years. In light of the remedial policy of the withdrawal liability laws—the principal purpose of which is to protect the solvency of multiemployer pension plans—it is not surprising that the law has a strong pro-plan bias. A recent arbitration in which I represented the employer, however, illustrates one avenue that may be available to reduce an employer’s withdrawal liability.
The Pension Protection Act
Congress enacted the Pension Protection Act of 2006 (PPA) to address the looming multiemployer plan funding crisis. Under the PPA, multiemployer pension plan actuaries are required to annually certify a plan’s funding status, with plans classified in zones ranging from green to red. “Red zone,” or critical status, plans are required to adopt a PPA Rehabilitation Plan (Rehab Plan), a series of actions intended to facilitate the plan’s emergence from critical status. Employers obligated to contribute to critical status plans incur statutory contribution surcharges of 5% to 10% (PPA Surcharges) during the remaining term of the collective bargaining agreement (CBA) in effect when the plan entered critical status. If a Rehab Plan-compliant contribution schedule is not adopted within 180 days of the expiration of this collective bargaining agreement, the employer is obligated to pay the increases under the Rehab Plan’s default contribution schedule (Rehab Plan Increases), which is unilaterally implemented on the employer by the plan.
Withdrawal Liability Payment Rules
A multiemployer pension plan may not demand payment of withdrawal liability in a single lump sum. An employer is generally obligated to make annual payments determined by statutory formula. This Annual Payment Amount is equal to the product of: 1) the average “contribution base units”—i.e., the basis by which contributions are determined, such as hours worked, and 2) the “highest contribution rate”—i.e., the highest rate at which the employer had an obligation to contribute to the plan (Highest Contribution Rate).Generally, absent a mass withdrawal or other catastrophic plan event, an employer is limited to 20 payments of the Annual Payment Amount. Accordingly, and as demonstrated by a recent arbitral decision involving the intersection of the PPA and withdrawal liability payment rules, any reduction in the Annual Payment Amount can drastically reduce an employer’s withdrawal liability.
See ERISA Sections 4219(c), 29 United States Code (USC) Section 1399(c) (Annual Payment Amount formula) and 4212(a), 29 USC Section 1392(a) (definition of obligation to contribute).
Arbitrator: PPA Surcharges and Rehab Plan Increases Were Improperly Included in Highest Contribution Rate
I recently represented an employer in a withdrawal liability arbitration that resulted in the employer saving approximately $15 million.
Prior to December 30, 2012, the employer was obligated to contribute to the PACE Industry Union-Management Pension Fund on behalf of bargaining unit employees. The employer completely withdrew from the fund as of that date. The occurrence of the complete withdrawal and the more than $46 million withdrawal liability amount asserted by the fund were not in dispute; at issue was the fund’s calculation of the Annual Payment Amount, more specifically, the Highest Contribution Rate.
In determining the Highest Contribution Rate of $1.9093 per hour, the fund included:
- The rate of $1.574 per hour, as set forth in a participation agreement between the fund and the employer;
- 10% PPA Surcharges that were imposed on the employer during the term of the collective bargaining agreement in effect when the plan entered PPA critical status; and
- Non-bargained Rehab Plan Increases unilaterally imposed on the employer 180 days after the expiration of the collective bargaining agreement.
The arbitrator found the fund’s inclusion of both the PPA Surcharges and Rehab Plan Increases in the Highest Contribution Rate wasHighest Contribution Rate was improper and violated the Employee Retirement Income Security Act (ERISA).
The arbitrator agreed with the 3rd U.S. Circuit Court of Appeals’ holding in Board of Trustees, IBT Local 863 Pension Fund v. C & S Wholesale Grocers that PPA Surcharges were not included in the Highest Contribution Rate. The arbitrator found this conclusion mandated by clear and unambiguous statutory provisions: 1) describing the Highest Contribution Rate as “the highest rate at which the employer had an obligation to contribute”, and 2) defining “obligation to contribute” as an obligation to contribute arising either “under one or more collective bargaining (or related) agreements” or “as a result of a duty under applicable labor-management relations law.”Agreeing with the 3rd Circuit, the arbitrator held that, to be included in the Highest Contribution Rate, the PPA Surcharges must arise “under either the CBA’s or an applicable labor-management relations law,” concluding that because “the surcharge does not arise under either,” the fund violated ERISA when it included the PPA Surcharges in the Highest Contribution Rate.
 ERISA Section 4219(c), 29 USC Section 1399(c).
 ERISA Section 4212(a), 29 USC Section 1392(a).
Board of Trustees, IBT Local 863 Pension Fund v. C & S Wholesale Grocers, 802 F.3d at 543.
Rehab Plan Increases
Unlike PPA Surcharges, the issue of whether Rehab Plan Increases are included in the Highest Contribution Rate was not before the 3rd Circuit in C & S Wholesale Grocers and therefore was one of first impression. The arbitrator similarly found that Sections 4212(a) and 4219(c) of ERISA dictated a finding that the Rehab Plan Increases were improperly included in the Highest Contribution Rate by the fund. The arbitrator found that:
- The Rehab Plan Increases, implemented unilaterally under the Rehab Plan, did not arise under a collective bargaining agreement but rather arose under a statute (Section 305(e)(1) of ERISA), and
- The Rehab Plan Increases did not arise as a result of a duty under applicable labor management relations law, because Section 305(e)(1) of ERISA does not directly regulate the relationship between the employer and the union and is therefore not an applicable labor-management relations law.
The arbitrator therefore concluded that the fund violated ERISA when it included the Rehab Plan Increases in the Highest Contribution Rate. As a remedy, the arbitrator ordered the fund to recalculate the Annual Payment Amount without including the PPA Surcharges and the Rehab Plan Increases in the Highest Contribution Rate. This reduced the Annual Payment Amount by more than $700,000 for each year of the employers’ 20-year payment schedule, reducing the employer’s total withdrawal liability payments by approximately $15 million.
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An employer faced with a demand for withdrawal liability has an uphill battle. However, as demonstrated by this arbitration, it is possible for an employer to obtain substantial reductions in the amount of withdrawal liability payments asserted by a multiemployer pension plan.
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Robert R. Perry is a principal in the New York City office of Jackson Lewis P.C. who focuses his practice on multiemployer pension plans and withdrawal liability disputes. He can be contacted at email@example.com.