With many union pension funds dangerously underfunded, withdrawal liability threatens the livelihood of employers contributing to those funds. Benefits attorney Shaylor Steele of Benesch law firm in Cleveland, Ohio, talked with EBA about this looming threat and how employers and their benefit advisers can address it.
EBA: Tell us about this issue of withdrawal liability. What sort of pension funds does it affect?
Steele: This notion of withdrawal liability only applies to employers that have a union workforce and, more specifically, those employers who contribute to a union pension fund. If the employer has a union workforce and is subject to a collective bargaining agreement that requires contributions to a union pension fund, withdrawal liability is probably one of the biggest threats to their business right now.
EBA: What is the dilemma presented by withdrawal liability for these employers?
Steele: Theres an actuarial level of benefits that have to be paid or liabilities that have to be paid over a defined period of time and an actuarial amount of assets. If the assets dont equal the liabilities you have a funding deficiency. Unlike for single employer plans, where the employer is liable itself for the underfunded amount, in this case, the contributing employers are liable for the underfunded amount and not the union. Many of these union funds, for varied reasons, are underfunded right now. Many are only 40%, 30% or 20% funded. The underfunded amount is often hundreds of millions of dollars and sometimes in the billions of dollars. Each employer is liable only for the pro rata potion based on its contributions. So, you can have a very small piece of the pie, but because that pie is so big right now, even having a very small piece of it can lead to really big withdrawal liabilities.
EBA: What else should benefit advisers be telling their employer clients about withdrawal liability?
Steele: The good news here is a withdrawal liability is only triggered by a withdrawal, hence the name. The bad news is that the worst funded plans have to put together a rehabilitation plan for the IRS telling the agency how it will get back to a normal funding level. These plans have certain benchmarks over time, and if the pension plan doesnt meet those benchmarks a penalty is assessed. The rehabilitation plans also almost always require the contributing employers to put more money into the pension plan than they originally bargained for.
EBA: What can employers do right now to manage this liability?
Steele: There are a ton of options for employers. There are three things that we see that are consistent across the board; and employers that do these three things usually end up with a much better situation than employers that dont.
Those three things are:
1) Get an annual withdrawal liability assessment. Employers should get this estimate on annual basis to understand how the liability is trending and what the threat is to the company.
2) Get a copy of the rehabilitation plan or funding improvement plan.
3) Talk to counsel. I know that sounds self-serving, but the earlier an employer talks to counsel the earlier the employer can understand the variety of ways this will impact them and other businesses they own. Once an employer understands the impact, a short-term, mid-term and long-term plan can be drafted to counter the liabilities.
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