Litigation + Valuation Perspectives

Demystifying Valuation, Economic Damages + Forensic Accounting

Can You Limit ERISA/Pension Fund Withdrawal Liability?

It’s no secret that pension plans around the country are in trouble. The financial crisis of recent years has not only affected the value of securities and other investments, but has contributed to the failure of key businesses, and has caused many pension plans to become underfunded. What may come as a surprise to contributing employers of multiemployer pension plans is how an underfunded pension plan could have a significant impact on their business upon withdrawal from the plan. Employers need to know what the withdrawal liability is and how to identify and potentially minimize its financial consequences.

In September 1980, Congress enacted the Multi-Employer Pension Plan Amendments Act (“MPPAA”) which, among other things, required plan trustees to collect a “withdrawal liability” from employers withdrawing from an MPP. Any significant reduction in the employer’s duty to contribute – including layoffs, plant closures, sales or changes in the collective bargaining agreement – can trigger a complete or partial withdrawal from a plan, resulting in a withdrawal liability.

In general, the amount of withdrawal liability is the employer’s proportionate share of the plan’s unfunded vested liabilities, as determined under a statutory formula. Upon withdrawal, the plan determines the amount of the liability, notifies the employer of the amount, and collects that amount from the employer. A withdrawing employer may be required to pay the liability even if its employees are not entitled to benefits, or even if employees are immediately hired by another contributing employer that will continue to fund their benefits.

While the withdrawal liability itself may not be avoidable, there are situations where the amount due can be significantly reduced. Under ERISA Section 4225, 29 U.S.C.A. § 1405, an employer who withdraws due to the sale of assets, or an insolvent employer undergoing liquidation or dissolution, can potentially limit the amount of unfunded vested benefits allocable to them.

An employer who withdraws may be able to reduce the withdrawal liability, and a major factor in calculating the maximum liability is the “liquidation or dissolution” value. However, the “net book value” or “equity” reported on a company’s balance sheet rarely represents its liquidation value. Various adjustments typically must be made to book value, including restating the book value of tangible and intangible assets to estimated realizable value in liquidation, reductions for the cost of liquidating inventory and other assets, reductions for uncollectible accounts receivable, consideration of ongoing expenses that will be incurred during the liquidation period, etc. Considering the potentially significant financial burden as a result of an employer’s withdrawal from an MPP, which possibly could extend to related entities as well, it is recommended that a company facing such a liability obtain expert assistance in determining its liquidation value and calculating its maximum withdrawal liability. And of course, since the rules governing withdrawal liability are complicated, companies with specific issues and concerns should consult with legal counsel.

By Ted Burr, CTP, CIRA