Labor: The 4 “W”s of withdrawal liability

How to avoid being surprised by an unexpected assessment

Employers who contribute to multi-employer pension plans are occasionally surprised to learn of the existence of withdrawal liability. Even those familiar with the possibility of withdrawal liability are often unaware of the substantial amount the withdrawal liability could be. Below is a discussion of what withdrawal liability is, business activity that can trigger it and actions that can make a business owner personally liable for the liability. Also provided are steps employers can take to avoid being surprised by a withdrawal liability assessment or the amount of that assessment.

What is withdrawal liability?

In general terms, an employer’s withdrawal liability is the amount of the employer’s proportionate share of a multi-employer pension plan’s unfunded vested liabilities. The amount is determined under a statutory formula and calculated as of the last day of the plan year before the year in which the employer withdraws. A withdrawing employer may be required to pay withdrawal liability even if its employees are not entitled to benefits from the plan or do not form any part of the plan’s unfunded liabilities. In addition, the withdrawing employer may be liable even if its former employees are immediately hired by another contributing employer that will continue to fund their benefits. Currently, many employers face a potential withdrawal liability that exceeds the amount of contributions they have made to the plan.

The calculation of an employer’s liability is also subject to the terms of the collective bargaining agreement, the participation agreement with the plan’s trust fund, the trust agreement and any other documents under which the trust fund operates. An employer may be unaware of the terms in these documents, which often bind the employer to obligations that the employer has never seen.

When is withdrawal liability triggered?

Withdrawal liability is a contingent liability for all employers who contribute to multi-employer pension plans that are underfunded. At times, because of unique timing issues in the statute, a pension fund can assess employer withdrawal liability even when the funding policy of the plan is adequate to fully fund all benefits. Withdrawal liability results when an employer contributing to an underfunded multi-employer pension plan either no longer has an obligation to contribute to the plan or ceases all covered operations. In addition, an employer can affect a partial withdrawal and incur liability when it either contributes less than 30 percent of contributions during a three year testing period continues to do work for which it previously made contributions but no longer has an obligation to contribute at one or more, but not all, locations covered by the plan.

Thus, withdrawal liability can be triggered when an employer shuts down or has a substantial reduction in its business operations. This is true even if financial considerations are the reason for closing. In addition, pension funds can assess withdrawal liability when employees vote to decertify a union or vote for a change in bargaining representation. 

Who is responsible to pay the withdrawal liability assessment?

For purposes of withdrawal liability, all trades or businesses “under common control” are treated as a single employer. This standard is applicable when determining whether a withdrawal has been triggered and also applies to determining what entity or person is required to pay the liability. Controlled group members are jointly and severally liable for withdrawal liability. Partners and parties to joint ventures can also be jointly and severally liable for the withdrawal liability. Under certain circumstances, parent-subsidiary and brother-sister groups can also be jointly and severally liable for the withdrawal liability. Significantly, the discharge of a controlled group member’s withdrawal liability in bankruptcy does not discharge the other controlled group members’ withdrawal liability obligations. 

Individual business owners can also be found to be personally liable for the withdrawal liability. This happens when the individual business owner is engaged in other activities, such as leasing property to the withdrawing company and is found to be conducting a “trade or business” under common control with the withdrawing entity. In addition, in recent years, developing case law has expanded the definition of successor employer. In certain circumstances, companies that purchase inventory or assets and continue in the same business as the withdrawn employer have been found liable for the liability.

What can you do to avoid being surprised by an assessment?

If your company contributes to a multi-employer pension plan, the amount of withdrawal liability may be out of your control, but you can take steps to have a better sense of the potential amount and any changes to the amount of that liability. In addition, by being aware of the potential for successor liability and for individual liability, you can make informed decisions with respect to other business activities, including the purchase of assets from other entities.

Employers may want to do the following:

  1. Annually request an estimate of the withdrawal liability that would be imposed if the company withdrew from the plan.
  2. Request copies of the plan document, any amendments, and the trust agreement.
  3. Carefully review the pension provisions of the collective bargaining agreement.
  4. Review the applicable plan participation agreement.
  5. Request and review the plan’s actuarial valuation and, if separate, its withdrawal liability report.
  6. Address the issue of contributions to multi-employer plans when purchasing the inventory or assets of another entity.
  7. If you are a business owner, avoid engaging in activities that would make you personally a “trade or business” and part of the controlled group.

Contributing Author

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Angela Marie Hubbell

Angela Marie Hubbell is a partner at Quarles & Brady in the Employee Benefits & Executive Compensation Group. Her practice involves counseling and representing employers...

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