presents Multi-Employer Pension Plans: Continued Participation or Withdrawal? Evaluating New Risks, Meeting Contribution Obligations, Minimizing Withdrawal Liability A Live 90-Minute Audio Conference with Interactive Q&A Today's panel features: James P. McElligott, Partner, McGuire Woods, Richmond, Va. Jani K. Rachelson, Partner, Cohen Weiss and Simon, New York Wednesday, August 26, 2009 The conference begins at: 1 pm Eastern 12 pm Central 11 am Mountain 10 am Pacific The audio portion of this conference will be accessible by telephone only. Please refer to the dial in instructions emailed to registrants to access the audio portion of the conference.
Challenges for Employers in Multi- Employer Pension Plans August 26, 2009 Jani K. Rachelson Cohen, Weiss and Simon LLP 330 West 42nd Street, 25th Floor New York, NY 10036-6976 (212) 356-0221 jrachelson@cwsny.com James P. McElligott, Jr. McGuireWoods LLP One James Center 901 East Cary Street Richmond, Virginia 23219 (804)775-4329 jmcelligott@mcguirewoods.com 1
Challenges in Funding 21 st Century Pensions. Declining multi-employer plan participation in some industries means shrinking assets for greater liabilities. Weak investment performance in 2008 compounds problem. Employers face greater contributions under the Pension Protection Act of 2006 ( PPA ). Plan trustees and plan documents (not just the Union) ultimately dictate the employer s obligations. 2
Employer Obligations to Multi- Employer Fund Employer s contribution obligation goes beyond the contribution amounts negotiated with the union. Withdrawal liability may arise upon layoff, sale, or plant closure, as well actual change in the CBA. New contribution obligation may also arise under PPA, which became effective beginning in 2008. Funds audit employers to be sure all proper contributions are being made. 3
Basis for the Employer s Legal Obligations. Employer s contribution obligation arises in its collective bargaining agreement. Many Trust Funds require a separate agreement between the employer and Trust. An employer s liability is determined by the bargaining agreement, any agreements with the Trust Fund, the Trust document and bylaws, Trust Agreements, and any other documents under which the Trust Fund operates. Employers may be unaware of the obligations imposed by these documents, unless employer obtains and reviews them. Agreements often bind the employer to rules that the employer has never seen. Union does not speak for and does not bind the Fund. 4
Fund is a Separate Entity Independent of the Union The Trust Fund is a separate legal entity and is not necessarily bound by agreements reached between the Union and the employer. The employer s obligations under Trust Fund rules may control over inconsistent terms in the bargaining agreement as to which employees are covered, what contribution rates apply, what hours of work are covered, and what compensation is the basis for contributions. In a collection action based on [ERISA] section 515, a multiemployer plan can enforce, as written, the contribution requirements found in the controlling documents. Bakery & Confectionary Workers Union Trust Fund v. Ralph s Grocery, 118 F.3d 1018 (4 th Cir. 1997). But Trustees may not be able to impose new, inconsistent bargaining obligations. See LaBarbera v. J.D. Collyer Equip. Corp., 337 F.3d 132 (2d Cir. 2003) 5
Withdrawal Liability A withdrawing employer is liable to the pension plan for employer s share of plan s unfunded vested benefits, if any; determination of UVBs depends on actuarial assumptions and methodologies. There are several different calculation methods. Withdrawal can be triggered by any significant reduction in the duty to contribute, including layoffs, plant closures, sales, or changes in the bargaining agreement. In an asset sale where the buyer assumes the seller s contribution obligation and complies with certain ERISA rules, the seller may avoid withdrawal liability. ERISA imposes no withdrawal liability with respect to welfare plans, but some welfare plans impose such liability by contract. Some pension Trust Funds impose contractual withdrawal liability in excess of the ERISA withdrawal liability. 6
Withdrawal Liability (cont d). ERISA defines complete withdrawal as a permanent cessation of an employer s obligation to contribute under the plan or a permanent cessation of an employer s covered operations under the plan. A partial withdrawal is a 70% decline in employer contributions over three plan years, a cessation of contribution obligation under one, but not all bargaining agreements, and continuation of work in CBA jurisdiction, or a transfer of such work to another location or another entity owned or controlled by employer, or a cessation of contribution obligation at one but not all facilities, and continuation of work at the facility of type for which contributions previously required. 7
Withdrawal Liability (cont d). ERISA provides that all trades or businesses which are under common control ( the controlled group ) are jointly and severally liable for withdrawal liability that incurred by any member. There are special rules for plans in certain industries, including construction, entertainment, retail food, trucking, and coal. 8
Date of Withdrawal The date of valuation is usually the last day of the plan year preceding the date of withdrawal. For withdrawal from calendar year plan in 2009, the valuation date will be December 31, 2008. ERISA 4203(e) defines the date of an employer s complete withdrawal as the date of cessation of the obligation to contribute or the cessation of covered operations. ERISA 4205(a) defines the date of an employer s partial withdrawal as the last day of the plan year in which such partial withdrawal occurs. The determination of the date of withdrawal liability is fact dependent and subject to determination of the arbitrator. 9
Challenging the Calculation of Withdrawal Liability In general, when an employer withdraws from a multiemployer pension plan, it is compelled to make withdrawal liability payments pursuant to a payment schedule determined by the Plan, as provided in ERISA, that is designed to replicate the employer s recent contribution history to the plan. A challenge to the Fund s withdrawal liability calculation does not excuse the employer from making required payments while the dispute is being resolved and arbitrated: 29 U.S.C. 1399(c) (1)(E)(2). ERISA provides detailed dispute resolution procedures, including mandatory arbitration. 29 U.S.C. 1399 and 1401. If errors are found in the original computation, these may be corrected by the arbitrator, 29 U.S.C. 1401(d), or by judicial review, 29 U.S.C. 1401(b)(2). Marvin Hayes Lines, Inc. v. Central States, Southeast & Southwest Areas Pension Fund, 814 F.2d 297, 299 (6th Cir. 1987) 10
Allocation Formula ERISA 4211 permits the Fund to select one of four allocation methods or to develop its own allocation method subject to PBGC approval. The allocation method must be spelled out in the Fund s trust documents or the statutory presumptive, 20-pool method will apply. Once adopted, the method must be followed by the Fund. Disputes over application of the allocation are subject to mandatory arbitration under the dispute procedures. 11
Actuarial Assumptions and Methods Actuarial assumptions greatly affect the amount of withdrawal liability,. A small change in the interest rate used to discount the Fund s future benefit obligations can have a major impact on the Fund s vested benefits. The UVBs are determined by the Fund s actuary, who must make that determination based on assumptions and methods which, in the aggregate, are reasonable (taking into account the experience of the plan and reasonable expectations) and which, in combination, offer the actuary s best estimate of anticipated experience. ERISA 4213(b)(1). In Concrete Pipe, Inc. v. Construction Laborers Pension Trust, 508 U.S. 602, 635 (1993), the Supreme Court found that the plan actuary, rather than the plan trustees, must select the assumptions and methods and calculate withdrawal liability. Challenges to actuarial methods and assumptions have rarely succeeded, other than on grounds that they were improperly adopted. Disputes over actuarial assumptions must be brought in arbitration. The Fund must provide employers, upon request, copies of all arbitration decisions involving the Fund. 29 C.F.R. 4221.8(g). 12
Procedure for Disputing Withdrawal Liability Once the Fund determines that a withdrawal has occurred, it must notify the employer as soon as practicable of the withdrawal liability and the schedule of payments. Courts have ruled that notice to any member of the controlled group constitutes notice to all controlled group members. I.A.M. Nat'l Pension Fund, Plan A. v. Slyman Industries, Inc., 284 U.S. App. D.C. 21, 901 F.2d 127, 129 (D.C. Cir. 1990) (holding that notice to a bankrupt member of a controlled group also constituted constructive notice to the other members of the group); McDonald v. Centra, Inc., 946 F.2d 1059 (4th Cir. 1991). The employer (including any controlled group members) has 90 days to ask the Fund to review any matter relating to the determination of the withdrawal liability and the schedule of payments. An employer must notify the Fund within 90 days of receipt of a notice for partial or complete withdrawal liability to request a review of the liability either to dispute the imposition of liability or the calculation of liability. The Fund must then conduct a reasonable review based on the employer s request and notify the employer of its decision. 13
Arbitration Arbitration may be initiated by either the employer or the fund within 60 days after the earlier of (i) the date the Fund denies the employer s request for a review or (ii) 120 after the employer s request for review of the initial notice. Any further dispute regarding withdrawal liability must be resolved through arbitration. If the employer fails to timely request arbitration, the employer is precluded from challenging the assessment or determination of amount of withdrawal liability. The majority of courts have ruled that disputes over whether an entity was ever a member of the controlled group - and thus an "employer" under MPPAA - are for the court to determine. See Rheem Mfg. Co. v. Central States, 63 F.2d; Connors v. Incoal, Inc., 995 F.2d 245, 250-51 & n.6 (DC Cir. 1993); Central States Pension Fund v. Personnel, Inc., 974 F.2d 789, 794 (7th Cir. 1992); Central States Fund v. Slotky, 956 F.2d 1369,1374 (7th Cir. 1992). By contrast, the issue of whether or not an entity ceased to be an employer by reason of a transaction or otherwise must be resolved in arbitration. Galgay v. Beaverbrook Coal Co., 105 F.3d 137, 141 (3d Cir. 1997); Trucking Empls. of N. Jersey Welfare Fund, Inc. v. Bellezza Co., 57 Fed. Appx. 972, 974 (3d Cir. 2003). Where a party against whom withdrawal liability is being asserted is certainly a part of the controlled group of an employer subject to MPPAA at some point in time, and where the issues in dispute fall within the purview of MPPAA provisions that are explicitly designed for arbitration, the Act's dispute resolution procedures must be followed. Bellezza, 57 Fed. Appx. at 974 ; see also Flying Tiger Line v. Teamsters Pension Trust Fund, 830 F.2d 1241, 1247 (3rd Cir. 1987). 14
Is there withdrawal liability and how much? Prior to WRERA, employer could request withdrawal liability estimate under ERISA 4221(e). Under PPA, requests must be made under ERISA 101(l), although ambiguity exists regarding the year as of which fund must provide estimate and whether fund can charge for estimate. Fund must respond to request under 101(l) within 180 days. 15
What other information can I get about plan? Funding status information can be obtained from Form 5500s. The PPA expands multiemployer plan Form 5500 disclosures to include the following and requires summaries of new information to be provided to employers: number of contributing employers employers who contributed more than 5% of the total contributions for the year number of participants on whose behalf no employer contributions were made for the current year and two preceding years whether the plan received an amortization extension and if so, the resulting reduction in contributions whether the plan was in critical or endangered status and if so, a summary of the funding improvement or rehabilitation plan and the plans funded percentage number of employer withdrawals and total withdrawal liability assessed PPA also gives employers access to periodic actuarial reports and investment reports.. 16
New PPA Obligations For Multi- Employer Plans Effective for plan years after 2007, new requirements for multiemployer plans Trustees must annually monitor funding and take certain corrective actions, including possible surcharges on employers and plan redesign reducing benefits Endangered ( yellow-zone ) and critical ( redzone ) status plans must adopt Funding Improvement Plans or Rehabilitation Plans, to which employers collective bargaining agreements must conform. 17
Critical Plans under PPA Critical plans must adopt a Rehabilitation Plan designed to emerge from critical status in 10 years, or if not reasonable, to forestall insolvency. In general, a multiemployer plan is critical if its funded percentage is less than 65% and the plan projects 1) an inability to pay benefits within seven years, 2) a funding deficiency within four years, or fails to meet certain other solvency or funding tests. Regardless of contribution limits in existing collective bargaining agreements, employers participating in critical plans may face surcharges on their contributions and other contribution increases, as well as possible reductions to their employees future benefit accruals and adjustable benefits. WRERA permits election to extend rehabilitation period by 3 years. 18
Endangered Plans under PPA Endangered plans must adopt a Funding Improvement Plan to improve funding by 1/3 of difference between funded percentage and 100% over 10-year period (1/5 of difference over 15 years for seriously endangered plans.) In general, a plan is endangered if the plan is not in critical status, but the plan s funded percentage is 1) less than 80%,or 2) the plan has an accumulated funding deficiency for the plan year or a projected deficiency for any of the next 6 plan years. A plan meeting both 1) and 2) is seriously endangered. WRERA permits election to extend funding improvement period by 3 years. 19
Certification and Notice of Endangered or Critical Status. Within 90 days of start of each plan year the plan s actuary must certify to the Department of the Treasury and the plan trustees whether the plan is in endangered or critical status. If the plan has a Funding Improvement Plan or Rehabilitation Plan, the actuary must certify whether the plan is meeting the requirements of the Funding Improvement Plan or Rehabilitation Plan. Failure of the actuary to certify the status of the plan by the due date will result in a penalty of up to $1,100.00 per day. 20
Certification and Notice of Endangered or Critical Status (cont d). Within 30 days after certification of endangered or critical status, the plan s trustees must provide notice of endangered or critical status to (1) participants and beneficiaries, (2) participating employers and their unions, (3) the PBGC and (4) the DOL. Within 30 days of an employer receiving notice that a plan is in critical status, the employer must begin paying a surcharge on the contribution otherwise due to the multiemployer plan. Surcharge is equal to 5% of required annual contributions for the first plan year; 10% for subsequent years until new CBA with approved schedule under Rehabilitation Plan. 21
Funding Improvement Plans and Rehabilitation Plans. The Funding Improvement Plan and Rehabilitation Plan consist of the actions that the plan trustees propose to the employers and union to meet the multiemployer plan s required funding benchmarks. Within 30 days after the adoption of the Funding Improvement Plan or Rehabilitation Plan, the plan s trustees must provide the union and employers with one or more schedules showing revised benefits structures, revised contribution structures, or both, which, if adopted, would be expected to meet the benchmarks of the Funding Improvement Plan or Rehabilitation Plan. For critical plans, only one schedule (the default schedule ) is required, which must provide for reductions in the amount of future benefit accruals necessary to achieve the benchmarks of the Funding Improvement Plan or Rehabilitation Plan, assuming no increase in contributions other than increases necessary to achieve the benchmarks after amendments have reduced future benefit accruals to the maximum extent permitted by law For endangered plans, a second schedule is also required providing for increases in contributions necessary to achieve the applicable benchmarks, assuming no amendments reducing future benefit accruals. Endangered and critical plans may face substantial excise taxes and civil money penalties if they fail to adopt or comply with Funding Improvement Plans or Rehabilitation Plans. 22
Surcharges on Employer Contributions to Critical Plans. Thirty days after first receiving notice that a plan is in critical status and surcharges are in effect, employers must pay a 5% surcharge on the contribution otherwise due in the plan. The surcharge increases to 10% of contributions otherwise required in succeeding plan years if the plan continues in critical status. Surcharges are due and payable on the same schedule as the contributions on which the surcharges are based. Unpaid surcharge contributions are treated as delinquent contributions. Surcharges end once employer signs a collective bargaining agreement that complies with a Rehabilitation Plan schedule. Surcharges are not counted in withdrawal liability calculations. 23
Impact on Collective Bargaining. If employer s collective bargaining expires, and the employer has received schedules under a Funding Improvement Plan or Rehabilitation Plan, employer and union must adopt appropriate changes to employer contribution and benefits or the trustees must implement the default schedule. Generally, the trustees must implement the default schedule 180 days after the date on which the collective bargaining agreement expires. If the Funding Improvement Plan or Rehabilitation Plan schedule requires additional employer contributions, an excise tax in the amount of the unpaid contribution is imposed on an employer who fails to make timely contributions. 24
Reductions in Adjustable Benefits. Critical plan trustees may reduce adjustable benefits, such as early retirement subsidies, including, possibly, those that have already accrued, notwithstanding ERISA s anticutback rule. A notice of any reduction of adjustable benefits must be provided at least 30 days before the general effective date to plan participants, beneficiaries, unions and employers. Benefits for participants who retire after notice may also be cut. Withdrawal liability calculations do not reflect reduced benefits. 25
James P. McElligott, Jr. Mr. McElligott is a partner in the Richmond, Virginia office of McGuireWoods LLP. He handles employee benefits, executive compensation, and labor relations matters for employers and fiduciaries, and has an active litigation and arbitration practice. He is a Fellow of the College of Labor and Employment Attorneys, and is listed in Chambers USA, Best Lawyers in America, and SuperLawyers under both Employee Benefits and Labor and Employment. He is a member of the Employee Benefits Committees of the ABA Sections of Labor and Employment Law and Taxation, a member of the US Chamber of Commerce Employee Benefits Committee, former President of the Federal Bar Association, Richmond Chapter, and former president of the Central Virginia Employee Benefits Council. Mr. McElligott is a Phi Beta Kappa graduate of the University of Illinois and received his law degree, cum laude, from Harvard Law School, where he served as Note Editor on the Harvard Journal on Legislation.
Jani K. Rachelson Ms. Rachelson, a partner with Cohen, Weiss and Simon LLP in New York, is the partner in charge of the firm's employee benefits practice group. She represents multi-employer and Taft- Hartley pension and welfare plans. as well as single and multiple employer plans covering employees of unions and plans. She advises clients with respect to plan design and drafting, plan and benefit administration, withdrawal liability and PPA compliance, fiduciary matters, HIPAA, and COBRA. She served as Union Co-Chair, 2002-2005, of the ABA Section of Labor and Employment Law Committee on Employee Benefits, is a member of the Senior Board of Editors, ABA, Section of Labor and Employment Law, and BNA, Employee Benefits Law, 2 Ed. Cumulative Supplements, and is a Charter Fellow of the American College of Employee Benefits Counsel. Ms. Rachelson received her undergraduate degree from Yale University and her law degree from Harvard Law School.