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Some companies have labor contracts requiring contributions to a multi-employer pension plan. The Teamsters’ Central States Pension Plan is a widely recognized example. The underlying labor contract typically requires a fixed dollar contribution for each hour or week worked by a covered employee. Participation in the multi-employer plan can present significant potential problems for a financially troubled company, its officers, and shareholders.
Under the Multi-Employer Pension Plan Amendment Act, 29 USC 1381, et seq. (MPPAA), a company withdrawing from a multi-employer pension fund is responsible for its share of the "unfunded liability" the company's portion of the pension plan's vested benefits not adequately funded. Simply stated, the underfunded plan is committed to pay more than it currently has in assets. The valuation is almost always done as of the last day of the plan year preceding the date of the withdrawal and the unfunded liability determination is based on the plan's actuarial assumptions and mortality tables. In a troubled economic climate, these plans are plagued by poor investment performance. When the plan's investments have a projected lower rate of return, the unfunded liability will be increased and continue to increase unless and until the plan trustees either reduce the pension benefits or increase employer contributions. If the plan’s financial status reaches “critical status” under The Pension Protection Act of 2006, additional
charges and surcharges may apply.
As a general rule, shareholders and officers have no personal liability for withdrawal liability under MPPAA. Personal liability may be sought, however, if the corporate form has not been respected. These pension funds are vacuums for money. If the withdrawing company cannot pay the withdrawal liability, ERISA also allows the pension fund to seek collection of the withdrawal liability from "all...trades or businesses (whether or not incorporated) which are under common control [and which] shall be treated as...a single employer." 29
U.S.C. § 1301(b)(1). The common control test is used to determine whether multiple entities should be deemed a single employer for purposes of assessing which entities
are liable for unpaid withdrawal liability under MPPAA.
Unpaid withdrawal liability can have significant impact. For example, the Central States Plan was allowed to pursue commercial real estate owned by the sole shareholder
which was a trade or business. Deductions for advertising, utilities, repairs, and depreciation are “strong evidence” that real estate activities are a trade or business.
The “real estate activities rose to the level of a trade or business because they were continuous and regular and designed to produce income.” Not only are partnerships
holding the real estate subject to liability, but the liability can also run personally to the individual partners. The Sixth Circuit Court of Appeals has recognized that holding
shares of stock or bonds in publicly traded companies was a “personal investment”, not a trade or business.
ERISA also provides another potential attack on employer long-term planning actions. Section 1392(c) provides that, “if a principal purpose of any transaction is to evade or
avoid [withdrawal] liability…this part shall be applied (and liability shall be determined and collected) without regard to such transaction.” This statutory provision has been
invoked by multi-employer funds to invalidate asset transfers.
Courts have also considered breach of fiduciary duty claims against officers who have discretion to direct funds to be paid to other creditors instead of the fringe benefits
funds. Determination of fiduciary status may depend on fringe benefit plan language and status of contributions.
Under the Multi-Employer Pension Plan Amendment Act, 29 USC 1381, et seq. (MPPAA), a company withdrawing from a multi-employer pension fund is responsible for its share of the "unfunded liability" the company's portion of the pension plan's vested benefits not adequately funded. Simply stated, the underfunded plan is committed to pay more than it currently has in assets. The valuation is almost always done as of the last day of the plan year preceding the date of the withdrawal and the unfunded liability determination is based on the plan's actuarial assumptions and mortality tables. In a troubled economic climate, these plans are plagued by poor investment performance. When the plan's investments have a projected lower rate of return, the unfunded liability will be increased and continue to increase unless and until the plan trustees either reduce the pension benefits or increase employer contributions. If the plan’s financial status reaches “critical status” under The Pension Protection Act of 2006, additional
charges and surcharges may apply.
As a general rule, shareholders and officers have no personal liability for withdrawal liability under MPPAA. Personal liability may be sought, however, if the corporate form has not been respected. These pension funds are vacuums for money. If the withdrawing company cannot pay the withdrawal liability, ERISA also allows the pension fund to seek collection of the withdrawal liability from "all...trades or businesses (whether or not incorporated) which are under common control [and which] shall be treated as...a single employer." 29
U.S.C. § 1301(b)(1). The common control test is used to determine whether multiple entities should be deemed a single employer for purposes of assessing which entities
are liable for unpaid withdrawal liability under MPPAA.
Unpaid withdrawal liability can have significant impact. For example, the Central States Plan was allowed to pursue commercial real estate owned by the sole shareholder
which was a trade or business. Deductions for advertising, utilities, repairs, and depreciation are “strong evidence” that real estate activities are a trade or business.
The “real estate activities rose to the level of a trade or business because they were continuous and regular and designed to produce income.” Not only are partnerships
holding the real estate subject to liability, but the liability can also run personally to the individual partners. The Sixth Circuit Court of Appeals has recognized that holding
shares of stock or bonds in publicly traded companies was a “personal investment”, not a trade or business.
ERISA also provides another potential attack on employer long-term planning actions. Section 1392(c) provides that, “if a principal purpose of any transaction is to evade or
avoid [withdrawal] liability…this part shall be applied (and liability shall be determined and collected) without regard to such transaction.” This statutory provision has been
invoked by multi-employer funds to invalidate asset transfers.
Courts have also considered breach of fiduciary duty claims against officers who have discretion to direct funds to be paid to other creditors instead of the fringe benefits
funds. Determination of fiduciary status may depend on fringe benefit plan language and status of contributions.
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