Masonry Magazine April 1982 Page. 31
PENSION WITHDRAWAL LIABILITY
AND CONSTRUCTION CONTRACTORS
Condensed from a Presentation by Robert Tilove and Vincent O'Hara of Martin E. Segal Company, New York City, at MCAA's 32nd International Masonry Conference, February 12-17, 1982, Hyatt Orlando Hotel, Orlando, Florida
The Multiemployer Pension Plan Amendments Act of 1980 created possible liability for an employer that leaves a multiemployer pension plan. How does that affect a construction contractor?
The typical contractor has considered pension contributions to be part of the cost of his union contract, with no further costs or obligations attached. This new law says there may be something more in the way of a financial obligation, a liability if the employer withdraws from the plan.
What is withdrawal and how does it affect construction contractors?
There is a basic concept, a general definition of withdrawal, and a specific definition for a construction trade. The fundamental idea is that if an employer leaves a multiemployer pension plan that has defined benefits and the plan does not then have assets sufficient to pay off all of the earned pension entitlements, the withdrawing employer should help to complete the funding of those benefits.
The law's general definition of withdrawal is that the employer ceases to be obligated to contribute or ceases covered operations under the plan. The definition of withdrawal is much narrower for the construction industry. It was recognized that it would make no sense to impose liability on a construction contractor simply because it ceased to be active in a particular trade and locality.
A construction contractor is defined as withdrawing from a construction fund, if the contractor ceases to be obligated to contribute to the fund but continues to be active in the same trade and locality without contributing or within the succeeding 5 years resumes activity in the same trade and locality without contributing.
This means there is no withdrawal liability simply because the contractor retires, sells his business, sells his assets, or does not have any work in that trade and area jurisdiction. Neither is there withdrawal liability if a contractor ceases to do work in a trade and area in which he has been contributing and does work somewhere else without contributing to the negotiated pension plan in that other area. It all boils down to whether the employer switches from work on which he contributed to work in the same craft and area jurisdiction on which he does not contribute.
There are some further limitations. If a contractor withdraws, in the sense defined, it has withdrawal liability only if the plan then had a liability for vested benefits that was not completely funded. It is the plan's unfunded liability for vested benefits that forms the basis for a withdrawal liability change.
There are a great many plans that are fully funded for their vested benefits. Basically, in these plans, there is no basis for withdrawal liability.
If the plan does have an unfunded liability for the vested benefits, then the billing to the withdrawn employer is a prorated portion of that unfunded liability. The proration is based essentially on what percentage of total contributions to the plan the employer provided in the preceding 5 years.
The moderator for the panel program on ERISA was MCAA legal counsel George Plumb (at mike). Robert Tilove and Vincent O'Hara of Martin E. Segal Co., New York City, were participants.
There is a further provision-a deductible intended to wipe out liability by small contributors. It is $50,000 or 4 of 1% of the plan's unfunded vested liability, whichever is smaller. That deductible is arranged so that it gradually vanishes as the first calculated amount of withdrawal liability exceeds $100,000.
Why was withdrawal liability included in the 1980 Act?
The answer goes back to 1974. when ERISA (the pension and welfare reform act) was first enacted. Congress decided that defined benefit pension plans should be covered by termination insurance. Everybody was conscious of the Studebaker failure. The company had a respectable pension plan that was being respectably funded, but when operations shut down, workers who were in their 50s found that the well was dry. That sent a chill through millions of people who were counting on pensions for their retirement security. The reform act therefore included a system of termination insurance.
Most people connected with multiemployer plans did not think they needed it because their plans were not dependent on the fate of one company, but the Congressional leadership was firm that the Act would have to include all defined benefit pension plans.
So termination insurance was written to include multiemployer plans, but for the first three years it was to be on a discretionary basis, sort of as a trial period. The Pension Benefit Guaranty Corporation was to decide, case by case, whether a plan unable to pay its benefits was to be guaranteed. The whole arrangement was to become non-discretionary on January 1, 1978.
That discretionary period proved to be a wise precaution. It became fairly obvious that termination insurance for multiemployer plans would have to be recast if it was to prove workable.