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COVID-19: Considerations for U.S. Contributing Employers to Multiemployer Plans

The COVID-19 pandemic has had a significant financial impact on business and individuals around the globe, with global financial markets seeing significant drawbacks in March 2020 alone.  That impact has also been felt by U.S. employers who contribute to multiemployer pension plans, as well as the plans themselves.  Below are a few issues that U.S. contributing employers to multiemployer pension plans should keep in mind in these volatile times:

  1. Consequences of Changes in Funded Status. Even before the COVID-19 pandemic, many multiemployer pension plans were operating in critical or critical and declining funded status, and the market fluctuations as a result of the COVID-19 pandemic will only exacerbate those funding shortfalls.  Contributing employers should anticipate that those shortfalls may result in additional surcharges becoming payable on their monthly contributions (as a result of the Pension Protection Act of 2006) as well as increased estimates of potential withdrawal liability.
  2. Withdrawal Liability. With many contributing employers implementing layoffs or other workforce reductions, there may be questions as to whether such reductions may result in withdrawal liability under the applicable multiemployer pension plan.  Withdrawal liability is due upon a complete or partial withdrawal from a multiemployer pension plan.  A complete withdrawal occurs when a contributing employer permanently ceases all operations covered by the plan or no longer has an obligation to contribute under the plan.  Therefore, layoffs and/or temporary shutdowns should not trigger complete withdrawals unless and until those layoffs and shutdowns become permanent.  Partial withdrawal occurs upon a 70% contribution decline

Investment Plus Partnership-in-Fact = Withdrawal Liability

Org ChartPreviously, we wrote about the First Circuit decision that a private equity fund constituted a “trade or business” under ERISA as amended by the Multiemployer Pension Plan Amendments Act (“MPPAA”). That dry description is actually very significant since it would mean that private equity funds and their other portfolio companies could be responsible for withdrawal liability, potentially in the millions of dollars, when a portfolio company withdraws from a multiemployer plan. Based on a recent District Court case in that same dispute, it may be even harder for private equity funds and their portfolio companies to escape liability, which could have implications for those companies and the companies that buy them.

By way of background, multiemployer pension plans are pension plans into which (as the name implies) many employers contribute pursuant to collective bargaining agreements. If a multiemployer plan is underfunded, and an employer withdraws, the plan is allowed to assess liability on that employer pursuant to a formula to help make up the underfunding. As we detailed previously, MPPAA imposes liability on any “trade or business” that is under “common control” with the withdrawing employer. In prior iterations of this case, Sun Capital Partners had alleged that none of the three investing funds (Sun Fund IV, Sun Fund III, and Sun Fund III QP) was a trade or business since each was merely a

What we’ve got here is a failure to communicate

Unlike the 1967 film, Cool Hand Luke, where the prison warden delivers the above line shortly after giving a beating to prisoner Luke (Paul Newman) for making a sarcastic remark, employers may be worried about a beating from the IRS if they aren’t able to communicate with multiemployer health funds or staffing companies.

Under the Affordable Care Act (“ACA”), employers are required to report on the offers of coverage made to their common law employees. Employers have to provide statements to the employees on Form 1095-C and submit them to the IRS. The reporting includes data elements such as the months coverage was offered, the lowest cost premium for self-only coverage for each month, whether spouses and dependents are eligible, and confirmation that the plan is affordable and provides minimum value. The problem is this: if an offer of coverage is made on behalf of a staffing company or multiemployer plan, how will the employer have this information?

For employers participating in multiemployer plans, the rules allow the multiemployer plan to report on the employers behalf as described in Q&A-24 here. However, even if an employer goes this route, the fund will still need certain data elements from the employer, such as the employee’s compensation or the safe harbor that the employer is using to determine affordability under the ACA. So either way, communication is necessary. Additionally, there is no similar rule for staffing companies.

The key for employers is to work

2015 Qualified Plan Limits!

2015 Qualified Plan Limits!

October 24, 2014

Authored by: Julie Wagner and Lisa Van Fleet

They’re here!  The 2015 IRS plan limitations arrived a full week earlier than last year.  Most of the limitations have been adjusted upwards.  See the chart below (after the jump) to see the new limits as well as a summary of the limits over the preceding three years.

Supreme Court Clarifies Effect of Motions for Attorney’s Fees on Finality

January 29, 2014

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In a decision issued on January 15, the Supreme Court clarified that a pending motion for attorney’s fees does not prevent a judgment on the merits from becoming final for appellate purposes under 28 U.S.C. §1291, even when those fees are contractually provided for.

Ray Haluch Gravel Co. v. Central Pension Fund of the International Union of Operating Engineers & Participating Employers involved the timeliness of an appeal of a judgment against an employer in an ERISA case. The employer was sued by a union for failing to make contributions, required under a collective bargaining agreement, to various benefit funds. The agreement included a provision requiring the employer to pay any attorney’s fees incurred by the union in collecting payments owed to the benefit funds.

The district court entered judgment on the merits, awarding the union far less than it had requested, and more than a month later issued another order awarding attorney’s fees pursuant to the agreement. The union appealed the judgment on the merits, but waited until after the district court entered its fee award to do so.

On appeal to the First Circuit, the employer contended that the union’s appeal was untimely, as it had not filed its notice of appeal until almost two months after the entry of the merits judgment. Although the Supreme Court had held in Budinich v. Becton Dickinson & Co., 486 U.S. 196 (1988), that outstanding petitions for attorney’s fees do not prevent judgments from becoming

IRS Adopts State of Celebration Rule – If Valid Where Performed, You are Married for Federal Tax Purposes

In Revenue Ruling 2013-17, the Internal Revenue Service provided clear guidance to define “spouse” for all purposes under the Internal Revenue Code. A “spouse” includes a same-sex spouse whose marriage is recognized by the state in which the marriage occurred. Use of this “state of celebration” rule will greatly simplify employee benefit plan administration for employers. However, the IRS indicated in this guidance that it will provide more direction on the impact of this definition on employee benefit plans.

How Did the IRS Define the State of Celebration Rule?

These are the bottom line holdings from the IRS guidance, which apply for all purposes under the Internal Revenue Code:

  • The terms “spouse,” “husband and wife,” “husband,” and “wife” include an individual married to a person of the same sex if the individuals are lawfully married under state law, and the term “marriage” includes a marriage between individuals of the same sex.
  • A marriage of same-sex individuals that was validly entered into in a state whose laws authorize the marriage of two individuals of the same sex will be recognized for Federal tax law purposes even if the married couple is domiciled in a state that does not recognize the validity of same-sex marriages. For example, same-sex marriage is not recognized in Missouri. However, a same-sex couple that marries in Iowa but lives in Missouri will be considered married for Federal tax purposes because the marriage is valid in Iowa where the

Piercing the Veil: Private Equity Fund Found to be “Trade or Business” Under MPPAA

On July 24, 2013, in a case of first impression (Sun Capital Partners III LP vs. New England Teamsters & Trucking Indus. Pension Fund, No.12-2312), the First Circuit held that a private equity fund was a “trade or business” under ERISA as amended by the Multiemployer Pension Plan Amendment Act (“MPPAA”), and thus potentially liable for withdrawal liability incurred by its portfolio company if that company was under common control with the fund.* The court applied an “investment plus” test and found that the private equity fund was not merely a “passive investor” but had sufficient management and operational involvement with its portfolio company so as to make it a trade or business.

Sun Fund IV and Sun Fund III (collectively, the “Sun Funds”) are two funds held by private equity firm Sun Capital Advisors, Inc. Together, the Sun Funds held 100% of the interests of Scott Brass, Inc. and planned to turn around the struggling company within two to five years and sell it. Scott Brass contributed to a multiemployer pension plan. When declining copper prices created a credit crisis about a year and half after its purchase by the Sun Funds, Scott Brass ceased making its required contributions to the pension plan, and was forced into Chapter 11 bankruptcy. Withdrawal liability for Scott Brass was assessed in the amount of $4.5 million, and the pension fund demanded payment from the Sun Funds, which prompted the Sun Funds to seek a declaratory judgment

Single-Employer Defined Benefit Pension Plans: Minimum Funding Requirements Revised Again

Among many other things, the MOVING AHEAD FOR PROGRESS IN THE TWENTY-FIRST CENTURY ACT (“MAP – 21”), which became law last month, changes the minimum funding rules for single-employer defined benefit pension plans. Your actuary can help to determine the effect of  these changes on your company in the short and long run.

Background. Since 2001, the IRS has published rates for determining minimum contributions for each month.  These rates are based on the prior month’s current short-, medium- and long-term corporate bond yields.  Until enactment of MAP-21, a plan could either apply the current month’s full yield curve or use a smoothing technique that blends the rates published over the prior 24 months. In the current low interest rate environment, these rules require very high minimum contributions. This has been mitigated so far by means of short-term patches.

What MAP-21 does. MAP-21 gives longer-term relief by permitting use of rates based on 25-year averaging. There is no change in the plan sponsor’s overall funding obligation, but now the obligation can be spread over a longer time period.

How the new rules work. A plan can still use the IRS’ current yield curve with no averaging.  For plans that use the averaged rates, MAP-21 creates a collar for the minimum and maximum rate in each range (short, medium and long), based on a 25-year average of the IRS published rates, as follows:

2012 90%-110%

2013 85%-115%

2014 80%-120%

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Multiemployer Withdrawal Liability “Insurance”

Multiemployer Withdrawal Liability “Insurance”

April 11, 2012

Authored by: benefitsbclp

In a recent decision, the Sixth Circuit Court of Appeals upheld an indemnification of multiemployer plan withdrawal liability in an collective bargaining agreement.

In the case, the employer and labor union had bargained that the union would indemnify the employer for any withdrawal liability from the multiemployer plan. The union, however, subsequently disclaimed its representation of the employees. As a result of that disclaimer, the union was no longer the exclusive bargaining representative of the affected employees and the collective bargaining agreement terminated. As a result, the employer effected a withdrawal from the multiemployer pension to which it had been obligated to contribute and incurred a substantial withdrawal liability.

It so happened that the pension fund in question was the Central States Southeast and Southwest Areas Pension Fund, which is known to have had funding problems for some time. When the pension fund assessed withdrawal liability on the employer, the employer sought indemnification from the union. Upon a challenge on the enforceability of that indemnification provision, the court upheld the provision reasoning that it was analogous to purchasing fiduciary liability insurance, which is expressly permitted under ERISA Section 410.

While this case may be unique on its facts, it may prove helpful to contributing employers to multiemployer pension plans who wish to have the labor union they are negotiating with share some or all of the pain of a withdrawal liability from a multiemployer plan. The holding could also potentially be used to support passing along surcharges or

Are Unpaid Employer Contributions Considered Plan Assets?

Are Unpaid Employer Contributions Considered Plan Assets?

December 8, 2011

Authored by: benefitsbclp

Department of Labor regulations provide that deductions for an employee’s wages are assets of an ERISA fund as soon as these amounts can be segregated from the employer’s general assets. While no similar regulations exist regarding unpaid employer contributions, a recent district court case concluded that case law has developed the following general rule in the context of a multiemployer plan: “unpaid employer contributions are not assets of a fund unless the agreement between the fund and the employer specifically and clearly declares otherwise.” West Virginia Laborers’ Pension Trust Fund v. Owens Pipeline Service LLC, S.D.W.Va., No. 2:10-cv-00131, Nov. 18, 2011 (citing ITPE Pension Fund v. Hall, 334 F.3d 1011, 1013 (11th Cir. 2003)).

In the Owens case, the defendant, the company president and sole shareholder of the corporation, decided to make payments on a piece of equipment instead of making contributions to four multiemployer pension plans. Four pension trust funds sued claiming he was a fiduciary and personally liable for the missed contributions, which the funds argued were plan assets. The pension trust agreement stated that contributions “due and owing” to the fund were considered to be plan assets. While the defendant argued otherwise, the judge found the “due and owing” language mirrored several similar district court decisions in which the unpaid contributions were deemed to be plan assets. The judge held the agreement clearly provided “that once the various contributions were ‘due’ to the funds based upon the number of hours worked by union

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