If you use union employees in your projects, you may contribute to a multiemployer pension plan—perhaps a few cents or few dollars per hour worked. However, some employers are surprised to learn they could be assessed with “withdrawal liability” that greatly exceeds their negotiated contribution rates in certain circumstances. Here’s what you need to know about a special exemption that may help avoid large payments to a multiemployer plan following the cessation of negotiated contribution obligations.
Under the Employee Retirement Income Security Act of 1974 (ERISA), when an employer ceases to contribute to a multiemployer plan, that employer must generally pay “withdrawal liability.” The withdrawal liability rules under ERISA are designed to spread the unfunded pension liability across all participating employers—so that the employers that continue to contribute to the plan are not stuck footing the bill for those that previously exited. A withdrawal liability assessment can be very expensive; some of our clients have received initial assessments in the multimillions.
An employer might cease to contribute to a multiemployer plan for a variety of reasons: a project ended and union employees are no longer needed, operations in a local union’s jurisdiction ended, or an employer phased out its construction business to focus on other types of work. In the building and construction industry, frequent initiation and cessation of projects is the norm. Fortunately, Congress recognized that withdrawals by individual employers in the building and construction industry actually have a minimal effect on the contribution bases of multiemployer plans. This is because, once a project ends, employees often resume work with a different employer in the same area that continues to contribute to the plan. Due to this unique aspect of the building and construction industry, Congress provided for a special statutory exemption to complete withdrawal liability.
Let’s break down the statutory requirements for the special exemption:
- The employer must be a building and construction industry employer.
While there is no statutory definition of what it means to be a “building and construction industry” employer, courts and the Pension Benefit Guaranty Corporation (PBGC) generally look to the Labor Management Relations Act of 1947 (also known as the Taft-Hartley Act) for guidance. As interpreted under the Taft-Hartley Act, the term refers to work performed at the site of a building or other structure in connection with the erection or alteration of the building or other structure. Other activities fall outside that scope. For example, an employer that merely manufactures or transports construction materials that are then installed by other contractors on a worksite is likely not considered a building and construction industry employer.
While it is permitted for a building and construction industry employer to have employees who perform work in other industries, “substantially all” of the employees for whom the employer is obligated to contribute to the multiemployer plan must perform work in the building and construction industry. The PBGC has not defined “substantially all” for this purpose; however, court cases have found 85% to be “substantially all.”
- The multiemployer plan must be a building and construction industry plan.
A multiemployer plan is considered to be a building and construction industry plan when it primarily covers employees in the building and construction industry, or the plan is amended to provide that the construction industry exemption will apply to any building and construction industry employer that contributes to that plan. An employer may be able to verify this requirement is met by reviewing the multiemployer plan’s governing documents. Or, an employer could request confirmation from the multiemployer plan that it is a building and construction industry plan.
- Generally, the employer must cease all work performed in the jurisdiction of the collective bargaining agreement for which contributions were previously required for five years after the date it ceases to have an obligation to contribute to the multiemployer plan.
This means that employers that go out of business completely may be able to qualify for the building and construction exemption from withdrawal liability. But there is no requirement that the employer permanently cease operations. For employers that want to continue operating, this requirement could be met by working in one or more different jurisdictions not covered by the collective bargaining agreement for at least five years before operating in the area covered by the collective bargaining agreement. Whether and how work ceases for the exemption when selling a business requires expert analysis.
If an employer resumes work within five years in the jurisdiction of the collective bargaining agreement for which contributions were previously required, that employer might still avoid the imposition of withdrawal liability by renewing its obligation to contribute to the multiemployer plan at the time it resumes operations. Resuming ongoing contributions will almost always cost less than facing a withdrawal liability assessment.
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Understanding whether the special exemption to withdrawal liability applies can be crucial to your business strategy as a shield against substantial payments to multiemployer plans once a project ends. For more assistance in evaluating your obligations and options, contact us.