The Association of Union Constructors (TAUC) DEMYSTIFYING WITHDRAWAL LIABILITY November 29, 2017 Tammy Dixon, FSA, MAAA, EA Vice President and Actuary Josh Kaplan, FSA, MAAA, EA Vice President and Actuary Copyright 2017 by The Segal Group, Inc. All rights reserved.
History Withdrawal liability established under the Multiemployer Pension Plan Amendments Act of 1980 (MPPAA) An employer that leaves a multiemployer pension plan is assessed a share of the plan s unfunded vested benefits, to be paid off after contributions stop 1
Withdrawal Liability May Add to plan funding, could forestall need for increased contributions by remaining employers Deter employers from pulling out Impede organizing new employers Make benefit increases more difficult Cause auditor concerns (FASB) Not an obligation unless the employer withdraws. 2
Withdrawal Defined Withdrawal occurs when the employer: Permanently ceases operations covered by the plan, or Permanently ceases to have an obligation to contribute Employer = the whole controlled group of commonly-owned businesses 3
Events That Trigger A Withdrawal Employer goes out of business Employer no longer has employees covered by the CBA, and permanently ceases to have an obligation to contribute to the plan CBA renewed but contributions are directed to another plan Sale of assets (unless certain conditions are met) 4
Events That Do Not Trigger A Withdrawal CBA ends but employer continues to contribute during good faith negotiations Change in name or reorganization by employer Contributions disrupted by strike, even if employer is not obligated to contribute during strike 5
Withdrawal Defined: Construction Industry Rule Withdrawal occurs only if the employer: Permanently ceases to have an obligation to contribute to the plan, but Continues (or within five years resumes) the same type of work in the area covered by the plan, without again agreeing to contribute Rule applies to employers that primarily contribute for construction work, to a construction-industry plan 6
Withdrawal Defined: Construction Industry Rule Legal Counsel and Board of Trustees Must Interpret Double-breasted contractor completes its union project in the area, continues non-union work through a separate subsidiary withdrawal Electrical contractor retires, does a little carpentry work on occasion no withdrawal Contractor retires, sells the physical assets of his business to a competitor who works non-union no withdrawal Joint venture two employers form a new company to perform a project Withdrawal? Outsourcing work to a non-union subcontractor No withdrawal? 7
Partial Withdrawal Decline in an employer s contribution base units (e.g., hours worked) that persists over a sustained period of time 70 % An 8-year period must elapse Sharp declines usually either become complete withdrawals, or recover, before a partial withdrawal occurs 8
Partial Withdrawal continued Cessation of obligation to contribute under less than all of the CBAs related to the plan But work previously covered by that CBA continues Cessation of obligation for work at a facility But work continues at that facility Special Construction Industry Rule Partial withdrawal if employer contributing only for an insubstantial portion of its continuing work in the area Reduction of contribution rates is not a partial withdrawal 9
Withdrawal Liability Process Determine that employer has withdrawn Compute withdrawn employer s share of plan s unfunded vested benefits $$$$$ Apply de minimis deductible, if applicable Notify employer of amount owed Collect amount owed 10
Unfunded Vested Benefits (UVBs) Vested benefits include all nonforfeitable (vested) benefits earned by the date of the valuation UVB Actuarial value of vested benefits = - Value of plan assets 11
Unfunded Vested Benefits Polling Question An employer will have no withdrawal liability if: A. The Plan s Unfunded Vested Benefits equal zero B. The Plan is Green and has a PPA Funded Ratio of 100% C. Both A and B D. Neither A nor B 12
Employer Requests for Information An employer has the right to request an estimate of their withdrawal liability as if the employer withdrew in the plan year before the date of the request The plan sponsor may require the employer to pay the reasonable cost of making such estimate or providing such information 13
Assumptions and Methodology MPPAA stipulates that PBGC may promulgate regulations regarding the determination of UVB 38 years later-no regulations Actuary s best estimate applies Funding assumptions used by many actuaries Easy Ties withdrawal liability to minimum funding assumptions 14
Segal Blend Recognizes that Withdrawal Liability is a settlement of the withdrawing employer s obligation All risks are transferred from the withdrawing employer to continuing employers Uses a blend of PBGC interest factors and long-term valuation discount rate Has withstood all challenges to date 15
Allocating Liability to Employers Core Principle: UVBs are allocated in proportion to a withdrawn employer s participation in the plan Either the employer s share of the plan s 5-year contribution history or The unfunded vested liabilities directly attributable to service with that employer All unfunded vested liabilities are allocated, regardless of the method used 16
Allocating Liability to Employers: Statutory Methods Presumptive Method: Mandated for construction-industry plans Allocates each year s change in UVBs (up or down) only among employers contributing that year Used automatically unless another method chosen Rolling-five (one-pool) method Direct attribution 17
Presumptive Method Simplified Example Year 1 Pool $100 Year 2 Pool $50 Year 3 Pool ($70) Employer L 10% = $10 10% = $5 10% = ($7) Employer M 10% = $5 10% = ($7) Allocation For A Year 4 Withdrawal Employer L = $10 + 5 + (7) = $8 Employer M = $5 + (7) = $0 18
Allocating Liability to Employers Presumptive and Direct Attribution methods are complex, but aim to protect new employers from pre-existing plan liabilities In deciding on an allocation method, trustees should weigh the likelihood of attracting new employers against the administrative demands of the more complex methods Plans can also adopt self-designed methods and variations, subject to PBGC approval Not available to construction industry plans 19
De Minimis Deductible Withdrawal liability is waived if employer s UVB allocation is less than the lower of: 0.75% of plan s UVB, or $50,000 If the allocation is between $50,000 $150,000, withdrawal liability is reduced Plan may increase these amounts to $100,000 and $250,000, respectively 20
De Minimis De Minimis No Assessment Deduction From Assessment $0 $0 $50,000 $100,000 $150,000 21
Estimates How large must an employer be to exceed the de minimis deductible? If level employment patterns and relative size of each employer is stable Allocation of UVB to withdrawing employer roughly that employer s contributions divided by total plan contributions 22
New Rules If plan in critical status (PPA 06) Benefit reductions disregarded for purposes of determining withdrawal liability Surcharges disregarded in determining allocation of UVBs (except if using attributable method) PBGC simplified method in Technical Update 10-3 Essentially, add the employer s share of unamortized (over 15 years) balance of benefit reductions back into calculation MPRA provides that contribution increases required to meet terms of a Funding Improvement Plan or a Rehabilitation Plan that go into effect after December 31, 2014 are disregarded in: Allocating the UVB and Determining the highest contribution rate for the payment schedule 23
Withdrawal Liability Payment Terms Payable in quarterly installments Required liability payments are comparable to recent contribution payments (except as modified by MPRA) Highest Contribution Rate x Highest 3-year Average Contribution Base Paid until the liability is amortized, but for no more than 20 years Employer has the right to prepay without penalty 24
Important Principle Liabilities Never Escape Deductibles, uncollectible withdrawal liability, amounts forgiven due to 20-year payment cap remain as unfunded and must be reallocated to remaining employers Each of the liability allocation formulas includes a formal reallocation process Deductibles Unfunded Liability Uncollectible 25
Payment and Collection Employer must start paying while contesting the bill Refund, with interest, if employer wins Disputes first go to arbitration, in which the plan is presumed correct Withdrawal liability payments are tax deductible, accounted for in the funding standard account like plan contributions 26
Abatement of Withdrawal Liability If contributions resume or return to prior levels, the employer s outstanding liability for a previous complete or partial withdrawal is abated, per complex PBGC regulations. 27
Business Reorganization A change in the employer s formal identity because of a merger, sale of stock or change in business structure is not a withdrawal, if the obligation to contribute continues Sale of assets is technically a withdrawal because the employer no longer has covered operations Not an issue for construction, where cessation of covered operations is not a withdrawal 28
Sale of Assets Rules Seller can avoid liability if buyer has a comparable obligation to contribute Voluntary between the parties If invoked, buyer inherits 5 years of seller s contribution history and allocated liability Buyer must put up a bond or escrow for 5 years, equal to one year s contribution Seller secondarily liable if buyer withdraws within 5 years and defaults Seller must post a bond if it liquidates* * In a sale of all assets, amount of liability is limited. 29
Insolvent Employers If an insolvent employer is liquidating, the allocated liability is, in effect, cut in half Insolvency: employer s liabilities, including withdrawal liability, exceed its assets Bankruptcy or Chapter XI is not, by itself, a withdrawal Withdrawal liability does not have a priority in bankruptcy 30
Plan Transactions Withdrawal liability in the first year after a merger is determined as if the merger had not occurred Withdrawal liability can be satisfied by transferring a comparable amount of benefit liability to a single employer plan that the employer will fund 31
Free Look Optional tool to help recruit new employers Allows an employer that contributes no more than 5 years (or vesting period, if shorter) to withdraw without liability, if: Assets to benefit payments = 8:1 when it joined Employer s contributions were less than 2% of the total each year Plan provides for cancellation of pre-participation benefit credit on withdrawal 32
Mass Withdrawal Every employer withdraws or terminates its contribution obligation If substantially all employers leave over a 3-year period, they may be treated as part of a mass withdrawal Withdrawal liability recalculated under PBGC rules and without deductibles, etc. Annual special valuations, PBGC reporting required 33
Thank you 34