What finishing contractors need to know about withdrawal liability
By Michael McNally
Withdrawal liability is a topic that isn’t well understood. It’s confusing, anxiety producing and commonly provokes agitation: ‘I paid every dollar I was supposed to, the pension fund audited me countless times to confirm, why do I owe more money?’
This article aims to offer a better understanding and provide some practical guidance.
What is withdrawal liability?
Multiemployer defined benefit pension funds are required to provide retired participants – union members – with benefits they earned, referred to as vested benefits. Many pension funds have less assets than they need to pay the vested benefit obligations. This difference between a pension fund’s vested benefit liabilities and assets is referred to as unfunded vested benefits, or UVBs. Vested benefits cannot be reduced or eliminated.
Currently, the PDC #30 Pension Fund is 127% funded. This means there is probably no unfunded pension liability. However, some contractors in PDC #30 have part of their pensions in the IUPAT Pension Fund, which is about 71% funded. Contractors may have unfunded liability.
Why are many pension funds underfunded? The list is long: Congressional policies, underperforming investments, market downturns, employer bankruptcies, benefit formulas not supported by high enough contribution rates, more retirees than active participants, and many, many other reasons.
Congress enacted the Multiemployer Pension Plan Amendments Act of 1980 (MPPAA) to address underfunded pensions. MPPAA is designed to protect retirees.
What circumstances give rise to withdrawal liability?
An ‘event of withdrawal’ occurs when an employer either 1) ceases to have an obligation to contribute to a plan (i.e., negotiates out of an obligation to contribute to a pension fund), or 2) ceases all covered operations (i.e. closes, either entirely or that portion of the business which had an obligation to contribute to a pension fund).
When an employer withdraws (closes their business or sells), a pension fund determines an employer’s allocable share of the fund’s UVBs. ‘Allocable share’ generally refers to the amount an employer contributed as a percentage of the contributions made by all other employers to the fund. In the construction industry, the pension fund determines for the 20 years preceding the year of withdrawal an employer’s allocable share of the change in UVBs for each of the 20 years. The sum of those 20 years is an employer’s withdrawal liability.
Withdrawal liability is payable according to a statutory formula. The annual payment is equal to the product of the employer’s highest average contribution hours in 3 consecutive years in the 10 year period preceding the withdrawal and the highest rate the employer contributed at.
Withdrawal liability is then paid out in quarterly, or monthly, payments over a period to amortize the liability.
What about the ‘contractor exemption?’
Congress recognized that the union construction industry is unique and created an exemption to withdrawal liability in certain circumstances.
For a building and construction industry employer, a withdrawal only occurs if the employer ceases to have an obligation to contribute to the plan, and within the 5-year period after the obligation to contribute ceased, performs work of the type for which contributions were required. That generally means the employer closes and doesn’t continue performing the same work ‘non-union.’
If an employer satisfies the building and construction industry exemption they have not withdrawn from a pension fund and owe no liability.
Although seemingly simple on its face, the exemption is layered.
The exemption covers an employer where “substantially all the employees with respect to whom the employer has [had] an obligation to contribute to the plan perform[ed] work in the building and construction industry.” The phrase “substantially all” is not defined in regulations or guidance from the Pension Benefit Guaranty Corporation (PBGC) but has been consistently interpreted to mean 85%.
What is the measurement period for 85%? The year before the withdrawal? The average over 5 years before the withdrawal? Is the 85% based on contribution hours? Bellybuttons? The answers to these questions aren’t well-settled.
The term “building and construction industry” is not defined in MPPAA and is given the same meaning in MPPAA as it has for purposes of the Taft-Hartley Act.
The National Labor Relations Board has generally defined the term as “subsum[ing] the provision of labor whereby materials and constituent parts may be combined on the building site to form, make[,] or build a structure.”
The cases have made clear that certain work, although involved in building or construction of a “structure,” does not fall within the exemption because it is not performed on the “building site.” For example, neither the fabrication of materials in a manufacturing shop nor the delivery of materials to a site would qualify for the exemption.
More plainly stated, building and construction industry work is jobsite work, whereas work not performed on a jobsite is not.
But the law is less settled about specific nature of the work, and what constitutes a “building site.”
The finishing industry has a wide jurisdiction. Whether the work an employer performed constitutes work in the “building and construction industry” is fact sensitive, and not always well-settled under the law.
Painting new drywall, in a new office tower, is clearly work in the building and construction industry. But painting/repairing imperfections on wall surfaces in a casino, for example, likely is not work in the building and construction industry.
Between those two examples are a myriad of other fact patterns. A tenant improvement project where the walls are removed, reconfigured and painted is likely work in the building and construction industry. But a tenant improvement project where simply the carpet is replaced and the walls are painted may not be.
What other factors may be relevant: Was the work contracted through a general or prime contractor, or was it direct to client/owner? Are separate work orders issued or was the work contracted under a service/maintenance agreement? Was there a permit issued for the project? Are there other trades involved in the project? Was the work continuous and ongoing, performed by the same employees? Was the surface painted a new surface or an existing one? These and others would be considered.
How does this all get sorted out?
If an employer closes its’ business, a pension fund will stop getting contribution reports from that employer, which will cause a pension fund to consider whether an employer has withdrawn and should be assessed liability.
A pension fund may do some investigation into an employer’s operations to determine whether they satisfy the building and construction industry exemption. They may send a questionnaire – referred to as a statement of business affairs – asking about the nature of the work performed. They may speak to local union representatives, former employees, or even more simply look at an employer’s website to see past projects to get a general understanding of the nature of the work.
More commonly though a pension fund just doesn’t know what an employer did, and how could they? Under the law, a pension may assume that an employer doesn’t satisfy the exemption and put the burden on the employer to disprove that assumption. Then it becomes incumbent on the employer to rebut the pension fund’s assumption through documentary evidence – contracts, work orders, time cards, etc – that more than 85% of the employees performed work in the building and construction industry.
An employer that receives an assessment has a 90 day period following receipt to contest the assessment, referred to as a request for review. The pension fund then considers the employer’s evidence and arguments. If the pension fund agrees the assessment is rescinded. If the pension fund disagrees the employer can demand arbitration, where an arbitrator decides issues.
What are two other things a finishing contractor should know about withdrawal liability?
- Understand your controlled group
‘The pension fund assessed $1M in withdrawal liability. I don’t think we qualify for the exemption. But the business checking account only has $1,000. They can have it, not worth fighting over, right?’
MPPAA provides that it is not just the contractor – the contributing employer – that is liable. It is all ‘trades or businesses under common control.’ That means, in general, any businesses that are commonly owned. The businesses do not have been related to the finishing contractor – an ice cream stand, a doggy daycare, etc. – any business that is commonly owned.
The most common examples are a real estate holding company that owns the building where the business operates and other real estate (rental properties, vacation homes that are rented out (e.g. VRBO)).
If a contractor doesn’t qualify for the exemption, even if the contractor has insufficient assets to satisfy the liability, a pension fund can collect from other businesses that have common ownership
- Crunch down
‘The pension fund assessed $1M in withdrawal liability. We don’t qualify for the exemption, and I don’t own any other businesses. After I collect all the retention, auction off the tools and trucks, the business should have around $1M. I have to pay all of that to the pension fund? That was supposed to be my retirement.’
If a contractor doesn’t qualify for the exemption, and there are no other controlled group members that a pension fund can collect from, the liability can be limited to 30% of the contractor’s liquidation/dissolution value.
If the pension fund assesses $1M in liability, and after all the retention is collected and the final bills paid the contractor $1M in the bank account, the liability is limited to $300,000.
If you are ready to retire, sell your business or considering closing your doors:
Do not do anything quickly. Gather information regarding your imminent departure and company selling or closing. Talk with your accountant, attorneys, other contractors who may have gone through this. Get with your FCA of Illinois Association and ask for help in gathering information. The Association is here to help you.
Withdrawal liability is technical. And this is just an overview. But hopefully after reading you have a better understanding.
Questions? mmcnally@foxrothschild.com / (612) 607-7094
