Hidden Danger: How to Manage the Risk of Withdrawal Liability

Transcription

1 Hidden Danger: How to Manage the Risk of Withdrawal Liability Presented by Shaylor R. Steele Cleveland Columbus Indianapolis Philadelphia Shanghai White Plains Wilmington

2 What is Withdrawal Liability? Contributing Employers to a defined benefit multiemployer pension plan are jointly and severally liable for the unfunded vested benefits of the plan Today, most multiemployer plans are badly underfunded Each contributing employer is liable for its pro rata share of the liability based on contribution history Off Balance Sheet liability until triggered. 2

3 3 Triggering Withdrawal Liability Complete Withdrawal Based on contribution obligation Permanently ceases to have obligation Permanently ceases all covered operations under the plan Partial Withdrawal Based on contribution amounts If there is a 70% decline in contributions; or There is a partial cessation of the employer s contribution obligation Mass Withdrawal Withdrawal of all employers from a plan; or Withdrawal of substantially all employers pursuant to an agreement to withdraw.

4 4 Who Can Be Liable? Controlled-Group Members Trades or businesses under a common control Each becomes jointly/severally liable for the withdrawal liability of a withdrawing employer Alter Egos Entities or individuals who control an employer (ie, piercing the corporate veil) Successors An asset purchaser may assume a seller s withdrawal liability if sufficient evidence of: Continuity of operations; and Buyer s knowledge of seller s liability.

5 Construction Industry Exemption Building & Construction Industry Exemption Permits withdrawal w/o liability if: Substantially all employees of employer work in the building and construction industry; and Plan primarily covers employees in building and construction industry; or Plan is amended to provide for exemption; and the employer does not continue to perform the same or similar work in the jurisdiction of the CBA for 5 years. 5

6 Should an Employer Withdraw? Advantages: Avoid Rehab/Funding Improvement Plans Plans designed to lift a fund out of critical or endangered status Certainty Increased hourly pension costs Potential excise taxes/surcharges if benchmarks not achieved Risk of FASB rule changes 6

7 7 Should an Employer Withdraw? Disadvantages: Expensive Assessed a pro-rata share of the funding gap as liability for withdrawing Bank/Loan Covenants Funding gaps are considered an off balance sheet liability if the employer remains in the plan Thus, no negative effect on the balance sheet If an employer withdraws, the liability shifts onto the balance sheet Adding significant liability to balance sheet likely violates covenants.

8 8 Best Practices Awareness Request an annual withdrawal liability estimate from each fund to which you contribute Know Your Controlled Group Understand which companies are liable for your withdrawal liability, and vice versa Sun Capital PE Funds Pay Attention to Fund Activity Ensure that you are up to date on what the fund is doing, and what the strategy is to manage the liability

9 Assessed a Withdrawal Liability What now? Be Proactive Do not sit on the information. Time Limits to Preserve Rights Right of review of determination of liability Within 90 days of receipt of liability notice: Right to arbitrate a dispute with the plan s decision The earliest date of either: (1) 60 days following receipt of the sponsor s reviewing decision; or (2) 120 days following the request for the sponsor s review. Call Counsel Immediately 9

10 10 Strategies Reduce contribution hours Amount of Liability is based on contribution hours If possible, reduce number of hours contributed over time Careful not to trigger partial withdrawal Evade or Avoid Negotiate If voluntary withdrawal is a possibility: Present value discount Better loan terms

11 11 Questions or Comments?