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OP-ED: Prepare For Withdrawal Liability Before Selling a Company or Buying One

Daily Journal of Commerce

September 16, 2022

Overview

Multiemployer pension plan (MEPP) withdrawal liability often costs millions of dollars, ‎even for small employers. People weighing whether to buy or sell a construction company (or its ‎assets) will want to be aware of any potential withdrawal liability that may be assessed.‎

Employers that withdraw from an underfunded MEPP are subject to withdrawal liability ‎under the Employee Retirement Income Security Act of 1974 (ERISA). An MEPP is a pension ‎plan to which two or more unrelated employers contribute pursuant to a contract with a union. ‎An MEPP is underfunded when its assets are insufficient to pay all the vested benefits already ‎earned by its participants. An employer withdraws from an underfunded MEPP (and incurs ‎liability) when it ceases to have an obligation to contribute to the MEPP. The obligation to ‎contribute to an underfunded MEPP is key – union employers that contribute to an MEPP are ‎obviously at risk. Nonunion employers also carry a risk if they have contributed to a union ‎pension plan under a project labor agreement or similar arrangement.‎

A business is typically sold as either an equity (e.g., sale of stock or membership interests) ‎or asset. Although an equity sale does not automatically terminate an obligation to contribute to ‎an MEPP, a savvy buyer will consider the potential liability it is taking on and adjust the sale ‎price accordingly. On the other hand, an asset sale often triggers withdrawal liability because the ‎seller typically terminates its employees in conjunction with the sale and discontinues all MEPP ‎contributions. Withdrawal liability can be expensive relative to the sale price.‎

Construction companies at risk of withdrawal liability may wish to consider the ‎following:‎

ERISA entitles employers to request and receive (from the MEPP’s sponsor) annual ‎withdrawal liability estimates. Employers can ask for information upon which the liability was ‎calculated, including the actuarial assumptions used to calculate the estimate; of particular ‎importance is the interest rate used to calculate the estimated liability. A change to this interest ‎rate, by itself, can result in a dramatic change to the amount of liability. I have seen the estimated ‎liability increase from approximately $1 million to $5 million in a single year due almost entirely ‎to the selection of a smaller interest rate for this purpose (it is counterintuitive, but smaller interest ‎rates for this purpose result in larger withdrawal liability). Employers can get estimates each year ‎to see how the liability is trending (i.e., shrinking, staying relatively level, or growing rapidly).‎

Determine whether an MEPP is receiving special financial assistance

Severely underfunded MEPPs may receive a portion of more than $86 billion in special ‎financial assistance (SFA) from the federal government. Although any SFA received is added to ‎an MEPP’s assets over time for purposes of calculating withdrawal liability (which would, by ‎itself, tend to reduce withdrawal liability), any MEPP receiving SFA must use interest rates that ‎have been historically low in recent years to calculate withdrawal liability. As noted earlier, in a ‎withdrawal liability context, reduced interest rates produce larger liabilities. Employers can ‎determine whether an MEPP is receiving SFA or the status of an SFA application (if one has ‎been submitted) by visiting the Pension Benefit Guaranty Corporation’s website.‎

Negotiate certain terms with an asset buyer to avoid triggering liability

As noted above, an asset sale typically results in withdrawal liability because the seller ‎terminates its employees and discontinues making contributions to any MEPPs. However, ‎ERISA § 4204 provides that no withdrawal occurs as a result of an asset sale where certain ‎conditions are met, including: (i) buyer is obligated to make contributions to the MEPP at ‎substantially the same rate that the seller made prior to the sale; (ii) buyer posts a bond for five ‎years to guarantee payment of a portion of withdrawal liability in the event that buyer withdraws ‎during the five-year period; and (iii) seller agrees to pay any remaining amount of withdrawal ‎liability that buyer does not pay.‎

Take advantage of the construction industry exception

A construction industry employer can avoid withdrawal liability if, for a period of at least ‎five years, it stops performing the type of work in the jurisdiction of the collective bargaining ‎agreement for which it had been obligated to contribute to the MEPP. An employer is a ‎construction industry employer, for this purpose, only if substantially all its employees for whom ‎it must contribute to the MEPP perform work in the building and construction industry.‎

Be aware that years may pass before an assessment is made

An MEPP’s trustees are not under a strict time limit to assess liability following ‎withdrawal. I have seen MEPP trustees assess liability more than 13 years after an employer ‎completely discontinued making contributions to the MEPP. So, the issue for a buyer in a stock ‎sale is whether the seller (or any member of a controlled group, including the seller) ever had an ‎obligation to contribute to an MEPP and, if so, whether the buyer has any risk of liability even if ‎the contributions stopped many years ago.‎

Negotiate a reduction of the liability assessed

Where withdrawal liability cannot be avoided, an employer may be able to settle the ‎liability for a smaller amount. ERISA gives employers an option to pay the withdrawal liability in ‎a lump sum or make installment payments (typically made quarterly) over a period that does not ‎usually exceed 20 years. MEPP trustees are often motivated to accept a smaller lump sum ‎payment able to be invested to earn a larger amount of money over time than would be received ‎in installments. MEPP trustees may be particularly motivated for this purpose when an ‎employer’s financial situation is such that it might be unable to make installment payments over ‎time.‎

The sale or acquisition of a construction company (or its assets) is a multifaceted ‎transaction. The risk from an MEPP can be minimized by working with legal counsel to address ‎issues.‎

This article summarizes aspects of the law and does not constitute legal advice. For legal advice ‎for your situation, you should contact an attorney.‎

Column first appeared in the Oregon Daily Journal of Commerce on September 16, 2022.

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