Employers who cease contributing to an ERISA multiemployer pension plan are liable for their allocable share of any underfunding, or “withdrawal liability.”

For a variety of reasons, withdrawal liability has become both prevalent and significant. Indeed, the Pension Benefit Guaranty Corporation (the federal agency tasked with the enforcement and regulation of the withdrawal liability rules) has estimated that approximately 10 percent of the 1,400 multiemployer pension plans face insolvency in the next 10 years to 15 years. Legislation to address this looming multiemployer pension plan crisis includes the Pension Protection Act of 2006 (“PPA”).

Pension Protection Act

Under the PPA, a multiemployer pension plan actuary must certify a plan’s funding status (ranging from red to green zones) annually. “Red zone” or critical status plans must adopt a PPA “Rehabilitation Plan” (essentially, a series of contribution schedules and other steps intended to allow the plan to emerge from critical status). This PPA Rehab Plan will result in contribution surcharges of 5 percent to 10 percent during the term of the collective bargaining agreement in effect when the plan enters critical status (referred to as “PPA Surcharges”). A default contribution schedule will be imposed unilaterally by the plan if a Rehab Plan-compliant contribution schedule is not adopted within 180 days after the current collective bargaining agreement expires (referred to as “Rehab Plan Increases”).

Withdrawal Liability Payment Rules

A multiemployer pension plan cannot demand that withdrawal liability be paid in a single lump sum. An employer generally must make annual payments determined by statutory formula and referred to as the “annual payment amount.” This annual payment amount is determined by multiplying the average “contribution base units” (the basis by which contributions are determined, such as hours worked) with the “highest contribution rate” (defined as the highest rate at which the employer had an “obligation to contribute” to the plan).

Absent a “mass withdrawal” or other catastrophic plan event, an employer generally is limited to 20 payments of the annual payment amount; any reduction in the annual payment amount thus can drastically reduce an employer’s withdrawal liability.

PPA Surcharges and Rehab Plan Increases Improperly Included

We assisted an employer in prevailing in an arbitration that involved a withdrawal liability payment and PPA funding rules. The employer was able to save approximately $15 million in payments over the 20-year payment period.

The arbitration involved an employer who, prior to December 30, 2012, was obligated to contribute to the PACE Industry Union-Management Pension Fund on behalf of bargaining unit employees at two facilities. The facilities were closed, and the employer completely withdrew from the Fund as of December 30, 2012. The occurrence of the complete withdrawal, as well as the more than $46 million withdrawal liability asserted by the Fund, was not in dispute. The sole dispute was the Fund’s calculation of the employer’s annual withdrawal liability installment payment amount.

In determining the “highest contribution rate” of $1.9093 per hour, the Fund included:

• the rate of $1.574 per hour, as set forth in a “participation agreement” between the Fund and the employer;

• 10 percent PPA Surcharges imposed by the Fund during the term of the collective bargaining agreement in effect when the plan entered PPA critical status; and

• non-bargained Rehab Plan Increases implemented under the Fund’s Rehab Plan following the expiration of the collective bargaining agreement.

The arbitrator found the Fund’s inclusion of the PPA Surcharges and the Rehab Plan Increases was improper and violated ERISA.

With respect to the PPA Surcharges, the arbitrator agreed with the holding of the federal appeals court in Philadelphia that the “highest contribution” rate for calculating the annual installments is the single highest contribution rate established under the employer’s relevant collective bargaining agreements, but the 10 percent surcharge applicable to plans in “critical status” is not included. Board of Trustees, IBT Local 863 Pension Fund v. C&S Wholesale Grocers, 802 F.3d 534 (3d Cir. 2015). As a result, the arbitrator held that the Fund’s inclusion of the PPA Surcharges in the highest contribution rate was improper and not authorized by the statutory scheme.

The Third Circuit did not decide whether the Rehab Plan Increases were improperly included in the highest contribution rate. This, therefore, was an issue of first impression before the arbitrator. The arbitrator found persuasive the employer’s argument that the plain and unambiguous language of the statute dictated that theRehab Plan Increases were improperly included in the highest contribution rate by the Fund. The arbitrator found the statutory provisions describing the rate as the highest rate at which the employer had an “obligation to contribute” and defining an obligation to contribute as one arising either under one or more collective bargaining (or related) agreements or “as a result of a duty under applicable labor-management relations law.” He found the Rehab Plan Increases, implemented unilaterally by the Fund under the Rehab Plan, clearly did not arise under a collective bargaining (or related) agreement.

The arbitrator further accepted the employer’s argument that the Rehab Plan Increasesdid not arise as a result of a duty under applicable labor-management relations law since the provision under which it arose (Section 305(e)(1) of ERISA) does not require an employer and a union to alter their collective bargaining agreement; indeed, it does not even directly regulate the relationship between the employer and the union.

Accordingly, the arbitrator ruled he “cannot find [Section 305(e)(1) of ERISA] is an applicable labor-management relations law.” The arbitrator therefore concluded the Fund violated ERISA when it included the Rehab Plan Increases in the highest contribution rate.

An employer faced with a demand for withdrawal liability has an uphill battle. However, as demonstrated by this arbitration, it is possible to obtain substantial reductions in the amount of withdrawal liability payments asserted by a multiemployer pension plan.