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Beware potential liabilities of multiemployer pension plans

It’s no secret that defined-benefit pension plans have struggled with funding issues over the past several years.  Lower-than-anticipated investment returns and extremely low interest rates, combined with demographic shifts resulting from retirees living longer and workers holding off on retirement, have left many defined-benefit pension plans with fewer assets than are needed to meet their accrued obligations.  Perhaps no group of benefit plans has suffered more from these issues than multiemployer pension plans.

Multiemployer pension plans (sometimes referred to as Taft-Hartley plans) cover collectively-bargained employees and are defined-benefit retirement plans jointly sponsored by representatives of the union and participating employers.  Under federal rules passed in 2006, multiemployer pension plans experiencing funding issues or problems with liquidity must notify participants and companies of this status.  If a multiemployer pension plan is in critical status under these rules, it may be forced to reduce benefits and discontinue lump-sum distributions (to the extent permitted under the plan).  Plans in critical and endangered status must also adopt programs, which may include requiring employers to increase contributions, to restore financial health.

Underfunded multiemployer plans present a significant legal liability if the plan terminates (commonly referred to as a “mass withdrawal”) or a participating employer terminates or reduces its participation below a permitted level (resulting in a “partial withdrawal” or a “complete withdrawal”).  This so-called withdrawal liability is based on a pro-rata portion of the plans’ unfunded liability.  Many multiemployer plans are in such bad shape that the potential withdrawal liability can be significant.  Further problems arise because the liability is jointly and severally shared by the participating company and its affiliates.

So, what can you do to protect your company?  If your company or one of its affiliates participates in a multiemployer plan, you should immediately obtain information regarding the present funding status of the plan and your potential withdrawal liability so that you can consider your available options.  Even if you have received notice from your multiemployer plan that it is in critical or endangered status, there may still be steps that you can take now before withdrawal liability is incurred to reduce your exposure.