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